The first law of the internet: Everything you love on the internet will eventually die a lonely death. Remember when Facebook was a simple site that let you find and keep in touch with your old friends? or when Gmail was a streamlined web-mail client that didn’t trick you into opting into various social networks, chat, and phone services, or when Evite didn’t send you through 5 screens of ads when your RSVPed?
What happened to these services – and countless other web products that people loved and have now disappeared. I’m not saying that people don’t love the new Facebook timeline, or the memory-hogging Gmail. The point is that some people did like the old stuff, and if they want that experience again, where can they go? Nowhere – that’s where.
Why does this happen? If a significant amount of people want a service, why doesn’t it persist? Unsurprisingly, the answer is money. The trend with web companies is to start with little to no money, and make a really simple product that people love (it has to be simple, because you have no money to build something complicated). Then you get traction and thousands – or even millions – of people use your service. Now you (and investors) get excited and you paint rosy pictures of ad revenue, lead generation, and affiliate sales. You raise millions of dollars and expand.
As a side note, lets do a calculation here. You raise a fairly modest sum of $3 Million and give the VC’s 30% of the company, for a roughly $10M post-money valuation (also not immodest). VC’s want at least the potential for a 10-20x return, so you are shooting for a $100M exit if you don’t raise any more money (which you probably will).
Now you look back on your simple, fun-loving social network – or bookmarking tool – or news reader – and you realize, you need to do something different to make these returns. Suddenly, it’s slightly less important that people love your company and more important that they spend time on your site and click ads and buy things. At the beginning, your interests were very much aligned with your users. You wanted them to use your widget, so you made the best damn widget you knew how to make. Now, you want to make money, and it becomes more about dollars and less about widgets.
Now there is actually nothing wrong with this process. It turns out it works really (really) well in lots of cases. The web services are still useful, and people still like them, and everyone gets rich! The problem is not every web service fits this model. The ones that don’t tend to get massaged into larger services or disappear altogether.
Let me draw an analogy. I love watermelon. It’s delicious. It’s sweet, it cools and hydrates you on a hot day, and it gives you a socially acceptable excuse to spit. Now, these days I find that I get my watermelons from Safeway – or even Walmart – because I’m already there, it’s convenient and it’s pretty cheap. However, I also can get watermelons from the farmer dudes selling them on the side of the road. It may not be as cheap, it’s certainly less convenient (I don’t exactly live close to any farm roads), and they are hard to find. However, those watermelons are so much better! All these guys do is grow watermelons, and they sell more if the watermelons are more delicious – so believe me, they are good. Well, lucky for me I have this option – as inconvenient as it may be – because the farmers have figured out how to make it work for them.
Unfortunately, on the web, it is pretty rare to see this. We are often stuck with the Walmarts and Safeways of the internet. They can usually do the job, but sometimes I miss that focused, special experience. Well, just like the farms and mom-and-pop shops in the real world, there is a place for specialty web services. However, like the corner stores, they require a different business model than the big corporate internets. These services are not targeted at a mass audience, but at a niche group of devout followers. They can afford to charge a little bit of a premium to provide this service.
Once they start charging for their service, something amazing happens. Like the mom-and-pop stores, the foremost priority is once again making the customer happy. Instead of finding ways to trick the user into spending money, they site can focus on maintaining itself in the way that the users want.
This sounds great, but a couple of things have to happen to make this work. The sites have to raise little or no VC money. If you are focusing on a niche market with a low value product, you can’t reach the valuation that you need if you raise millions of dollars. Also, the need has to be specific and difficult enough that it won’t be fulfilled by a larger site. If the Safeway scientists engineer the worlds most perfect watermelon, the farmers are probably SOL.
The main issue, though, is you have to get people to pay for this stuff. Unfortunately, users are conditioned against paying for things on the internet. However, that doesn’t meant that they can’t afford it, or even that they mind paying for trivial, unnecessary things (heck, people pay $4 for a latte and $.99 for a fart app). This is one of the great unsolved problems of the web today. Many things have been tried to simplify the online payment process: having websites store your credit card number, paypal/google checkout accounts, even having your browser save your credit card information. Unfortunately, none of these solutions are very good.
In the mean time, I still think there is ample space for mom-and-pop (also known as cash-flow) startups, and there are certainly lots of people out there wanting them, especially in the wake of killed products and startups.
There are a fair number of payment startups out there, so hopefully someone will solve this problem, because I could really use my fresh internet watermelon.