Monday, January 20, 2014

The Easiest Path to Online Riches Is Good Ol’ Buying and Selling

Cash register

The Easiest Path to Online Riches Is Good Ol’ Buying and Selling
by Marcus Wholsen

So you want to start a billion-dollar internet company. What do you do?

a) Build a search engine that aggregates the accumulated intelligence of the entire human race and then sell ads against the results.

b) Design a social network that draws together one-seventh of the human population and sell ads tailored to the valuable personal information they give away for free.

c) Sell people some stuff.

If you picked “c,” congratulations! You may actually have a chance at succeeding. Because while Google and Facebook might be transformative internet technologies that mint their inventors money, your consumer internet startup is more likely to hit that billion-dollar mark if it’s tied to plain old buying and selling.

James Slavet, a venture capitalist at Greylock Partners, recently examined what he says are the twenty-four U.S. publicly traded consumer internet companies worth $1 billion or more to find out what kind of online businesses get big.

First, he rightly notes just how small that number is: twenty-four companies, or little more than one per year since the web took off in the mid-90s. Of those, he finds that the most iconic businesses associated with the web’s ascendance and dominance, such as Google, Yahoo and Facebook, are the outliers along the smoothest path to internet success. Out of the twenty-four, Slavet finds that a full two-thirds are in the business of digital transactions—that is, selling people something, or at least connecting people who want to sell with people who want to buy.

The most obvious examples are Amazon and eBay. They’re the two biggest in this digital transactions category in terms of market cap, and they both practice e-commerce in the most traditional sense (if anything in an industry less than 20 years old can be called traditional).

Other companies on the list have succeeded by selling in a niche, such as Shutterfly (photos) and VistaPrint (business cards).

Still others veer into selling less tangible goods: Netflix (streaming video); Priceline, Expedia, TripAdvisor, HomeAway (travel); Ancestry (genealogy, recently sold for $1.6 billion); Bankrate (mortgages); and OpenTable (restaurant reservations).

The remaining companies—Yelp, Zillow, Groupon and—stretch Slavet’s point the furthest, since none offers buying or selling in any straightforward way. Instead, they’re services that connect people looking to make a transaction (emotional rather than monetary in the case of Match).

Despite their differences, Slavet says that all of these successful digital transaction companies have at least one thing in common: the rise of mobile technologies will only make them more successful. He argues that smartphones and other mobile devices offer a smoother transacting experience and a ubiquitous opportunity to transact that PCs can’t match.

“The mobile form factor drives a habit-inducing simplicity that will grab and take hold of more spending,” Slavet says. “The mobile-first consumer will plan and buy at the last second with high confidence.” Since their credit cards will already be on file, he says, “consumers will book with addictive ease.”

Of course, Facebook is addictive, too. But it takes a special kind of cunning to invent a new kind of compulsion. For the rest of us non-Zuckerbergs, Slavet’s analysis suggests that the easier path to follow to online success is the one paved by our consumer culture’s most time-honored certainty: Too much is never enough.

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