

What Hasn’t Changed: The Internet Keeps Getting Bigger - ssclafani
http://500hats.com/what-hasnt-changed

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tomasien
For background: Dave believes in companies with straightforward revenue
strategies with measurable traction that could hockey-stick but haven't yet.
He believes in a lage and talented mentor pool to find the design, data,
and/or distribution problems standing in the way of accelerated customer/user
growth to add the value needed to get to the next level. He looks for
companies that could exit 20mm-500mm but wants MORE exits rather than larger
ones. Kind of the opposite of how YC seeks to grow it's portfolio through a
few huge winners.

THEN he believes in doubling down when the signs of that "next leveling"
emerge.

I feel like there's a lot of misunderstanding of 500 Startups on HN so I
wanted to try to get that out of the way. In my opinion there is room for 500
and YC to both grow without getting in each other's way, perhaps actually
helping each other on the few companies they agree strongly on.

~~~
davemc500hats
thanks, that's a good summary of our approach.

however, we will also invest in a few stories without clear path to revenue if
growth is strong. but admittedly this isn't our favorite strategy. we
certainly prefer strong business model over none, even with a small base of
customers.

~~~
tomasien
Thanks for the addendum! I'm aware of that corollary but it's harder to
explain as a coherent thesis. Paul always made it very clear to me that "there
are starving startups in India than more traction than you" and "10mm users is
the new 1mm users" so I've never been clear where that line was for you guys.
As such, I usually leave it out of my explanations of my understanding of the
500 thesis.

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dave1619
Fred Wilson's specialty is with larger consumer/enterprise investments
(<http://www.usv.com/investments/>) vs Dave McClure's speciality is in smaller
investments and also international.

According to Dave, it seems like there's so slowing of momentum for growth
with the smaller (base hits) he sees both domestically and internationally.
And I appreciate his blog post that champions the consumer web.

But I wonder with Fred's observations if people might need to be a bit more
wise with consumer internet plays if raising funds might be more difficult
than previously. I also wonder when you combine both Fred and Dave's
observations that maybe you see an opportunity for bootstrapped ventures to
start out a lot smaller, maybe even w/o outside funds.

~~~
csel
I think what both Dave and Fred echoed is something that that everyone here
came to a realization few years ago (the time for startups without any revenue
model is over).

But that said, there is nothing stopping the next Instagram or the next
Pinterest from becoming really successful. Both these sites (I am sure I can
think of more) broke out during the very same period VC's kept claiming they
are not going to fund startups without any revenue model or whose model is
based on ads (or ads related).

So personally, I don't think what Fred said (or Dave) is anything to be
sweating about. Just keep pushing products out, that is what I think.

~~~
jacquesm
The viewpoint of an investor is by nature skewed by their portfolio and those
that they interact with. Those are all parties that have already somehow 'made
it'.

The dark horses don't drop in frequency but as the size of the market
increases your chances of interacting with one as an investor during the time
when they are still small enough that you could get a relatively large slice
of the pie for a good price are decreasing.

That's one of the genius elements in YC, they have made a focal point for such
companies at the time when investment is at its cheapest. All it takes is one
or two successes for this strategy to pay off wildly.

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AndrewKemendo
Perhaps I am mistaken however no one is calling anything dead, they are simply
switching strategies. In my opinion B2B wins hands down when the product could
be used equally by businesses and consumers at a minimum.

When I started VisiDraft a year and a half ago, my strategy was B2B because my
clientele would be using the product for work. I could as easily have
structured my plan to have a consumer facing application but based on what I
encountered it was a no brainer.

Microsoft, Apple, HP, IBM all of these name makers started as B2B companies.
Why? Several reasons. You only have to sell to a few people, making your
traction and revenues immediately positive. In addition, it allows a much more
intimate feedback loop for iterations when you actually work hand in hand with
another business designing solutions for them. you are basically getting
another partner with domain expertise - you don't get that with B2C. It allows
you to grow without losing a huge chunk of your business - in my experience
most companies don't want anything to do with owning a chunk of a start up.

I am quite confident that no one is saying that B2C is over, and in fact a
good number of software developments don't fit into a B2B model. Where there
is equal ability to face consumers or other businesses, I will always opt to
the business.

The last thing I will say is: Businesses around the world are sitting on +2T
in cash right now. VC's aren't anywhere close to that and they rely on
consumers to go buy things, which is looking pretty flat currently at least in
the US. Go where the money is.

~~~
davemc500hats
both areas have tons of opportunity.

however, there is plenty of growth in consumer spending and particularly in
online ecommerce all over the world. while I won't disagree corporations are
also sitting on lots of cash, it's certainly not the case that consumer online
spending is flat, even in the US (& absolutely not around the world).

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AznHisoka
"The number of recent internet services that have grown from nothing to
hundreds of millions of users is frankly rather astonishing – Pinterest,
Instagram, Groupon, Zynga"

Ok.. and... who else? I wouldn't call a few handful or even 20-30 astonishing.

"Almost every possible internet distribution channel has MORE users than ever
before – whether it be search, social, mobile, video, local, SMS, email, chat,
etc."

And every channel has also been saturated with tons of competition. Search =
millions of pages indexed everyday, and tons of old brands ranking before you.
Social? Good luck getting your new content noticed when you have 0 followers.

"it’s certainly MUCH cheaper & faster to build product than ever before"

Cheaper and faster? When you have to build multiple products for iPhone,
Android, Windows, and for: search, social, mobile, video, local, SMS, email,
chat...

"that just means less competition for those of us ready to really dig in and
invest at scale in all the millions of new “small” businesses that will emerge
and dominate the globe in coming years."

It's not small vs. big. It's enterprise vs consumer internet. There are tons
of small enterprise companies out there.

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sami36
The enterprise market wil be a tougher nut to crack for startups for simple
reasons :

1- Inelasticity of demand : Just look at windows, Word,...etc many companies
"waste" hundred of millions of $ in software that's loathed by their
employees, yet they still force feed it in the name of standardization. The
users don't get to vote on the products they use unlike their consumer mkt
counterparts (with their wallets or attention.) so change is very very slow.

2- procurement process lack of transparency : Yup, it's still an old boys club
out there & the company that gets a signature on the dotted line is not always
the one with the best products. Relationships & brand name matter enormously,
esp if you're a clueless CIO who's climbed to the top mostly on your corporate
politicking talents.

I stil think that the best way to approach the enterprise market is to have an
acqhire exit in mind. grow big enough to attract the attention of IBM, Oracle
& Microsoft. (Yammer stands as a recent example, but IBM made dozens of
acquisitions in the 100~500 Mil $ range.)

~~~
davemc500hats
while there are recent examples of large-scale adoption of enterprise
solutions (Yammer, Box), most enterprise sw requires well-trained expensive
people to do direct sales. this is certainly doable with the right people, but
they are not in limitless supply. scaling enterprise sales is usually people-
bound, and hard. this is often the limiting factor in scaling enterprise
business, and requires experienced and well-financed teams.

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rohamg
Framed through Naval's vision of individuals as micro-enterprises, Dave and
Fred's perspectives line up pretty nicely together. The line between consumer
and enterprise is blurring in more ways than one.

~~~
rohamg
for the record i think Dave is absolutely right it's easier than ever to build
a consumer audience (albeit at times a niche one = time to pivot). at the same
time, i think Fred's point is focused on the fundraising prospects for each
type of business, and in this i think he's right: the "powers that be" (aka
the later stage investors who, as Dave rightly points out, sometimes don't
know whose tail they're chasing) are demanding enterprise deals right now. in
response to Dave's point on the difficulty of scaling sales in enterprise, two
trends are making that easier: a) BigCo interest in startups from every angle
is very high and b) individual interest by traditional "enterprise types"
(mba's, executives, etc) to get in on the startup pie is increasing as well.
not necessarily a good thing on the macro level, but paired with a killer
product it can make scaling more straightforward.

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rizzom5000
Pinterest, Instagram, Groupon, Zynga, and "in some cases billions of revenue"?
Unless I'm looking in the wrong places, that is a factual error.

While getting hundreds of millions of users is great, it's not quite the same
as getting to profitability. If you're using Zynga and Groupon as success
stories, your business model might very well consist of, "looking for the next
big fad and hoping to find a way to monetize before it fizzles".

~~~
davemc500hats
"some" in this case was Groupon & Zynga, not Pinterest or Instagram. while
perhaps not the best cases of getting to sustainable profitability,
nevertheless both Groupon & Zynga did phenomenally well in customer
acquisition and revenue... what they have failed at is long-term retention.

regardless, the argument Fred seemed to be making was that distribution and
customer acquisition is getting "harder"... this is not the case.

~~~
cmccabe
If the number of people on the internet isn't growing (and it has pretty much
plateaued in the US, at least), and there are more competitors, then yes, I
would say consumer is "getting harder." Good ideas will always buck the trend,
of course, but I think there is going to be some consolidation in this space.

~~~
davemcclure
check the stats for both time online & online spend -- I'm sure both are still
growing; even in the US. then add in the # of young / old people on smart
phones and tablets that weren't online 3-5 years ago, and you could say that
even raw # users in US is also growing.

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w3pm
If it's "REALLY EASY" and "cheaper & faster" to build an internet or mobile
business that can potentially gain millions of users, this begs the question,
is this valuable?

Every app or service which attains a million users reduces the impact and
worth of attaining a million users on the next app or service.

Where is the value today?

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olalonde
> it’s taken for granted you can pay online and have goods delivered to your
> door. While this isn’t the case yet in many big markets in Asia

Just nitpicking here but I found this comment a bit strange. eCommerce is HUGE
at least in China. Taobao for example generated 3 billions US$ in sales in 24
hours recently.

~~~
marcosdumay
Everything is huge in China. That doesn't mean that most chineese can order
something online and receive it at their door.

(I don't know if they can. But your comment is a non-sequitour.)

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johnrob
I agree with Dave's conclusion, but my rational is different: the trend
towards enterprise is precisely what will open up the consumer space. It's the
same force that has left enterprise relatively uncrowded in recent years.

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sbierwagen
Not sure how seriously I'd take anything said by a guy who invested in 9gag.

~~~
callmevlad
YCombinator invested in 9gag as well. That has absolutely no bearing on Paul
Graham's insight into the current investment climate.

~~~
sbierwagen
I didn't know that. This significantly alters my opinion of YC.

~~~
braco_alva
Why? I know that 9gag is not the most serious business out there, but don't
you think it could be a viable and sustainable business?

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unimpressive
I think it's because 9gag is the site that redditors like to mock.

I'm not sure I blame them.

<https://9gag.com/gag/5553078>

<https://9gag.com/gag/5920690>

~~~
davemc500hats
you guys feel free to mock 9GAG, 500, & YC.

9GAG has grown to tens of millions of users and billions of page views per
month in less than 2 years. the company was generating single-digit millions
with a team of less than 10 people.

in short, it's a great business that has tremendous scale, and you haters can
all go put a sock in it.

~~~
braco_alva
That was my point, it might not have the best content on the internet,but it
clearly has a huge user base, and a very active one. I don't get why it
wouldn't be a good investment decision.

