Web2.0 Businesses, Adam Lambert, pizza parlors, Google

Posted by Brad on March 24th, 2010

There is no doubt that the Web 2.0 ecosystem has dramatically shrunk the development time to launch a web-based business. My friend Robin Chase has written several blog posts (Web 2.0 is like Yeast: Rampant Growth Possible) recently about just how easy it is to create these businesses. So, my question is, how do investors and entrepreneurs think about Web 2.0 business models? What kind of investor is right for your business?

I see three buckets of businesses:
1) The American Idol businesses. Investing in the next face book app, iphone app or web 2.0 idea that takes less than 6 months to develop and has no differentiation other then it is a cool idea. The entrepreneur is hoping for rapid viral adoption like www.fiverr.com. Investing in these businesses is no different than being a talent agent or a record producer. You are betting that the entrepreneur has talent and a hope that you have the next great singer under contract. You can make a lot of money this way, but it is really hard. There are lots of one hit or no hit wonders out there so you need to keep your investments low in each performer and spread it around among many potential stars. Not the traditional model for most East Coast investors. There is also a trap for many naïve entrepreneurs. Once you get your site launched or app running, the cost of acquiring customers -unless you are truly viral- often exceeds the potential revenue per customer.
2) The Pizza Parlor businesses – This is the class of businesses that I find most interesting, and I believe has the highest probability for success. These businesses have moderate development times (one half to one man years), but they have a well-defined business model that use Web2.0 tools to change the paradigm for an existing industry. I am currently working with a Pizza Parlor like company called Careful Products (www.carefulproducts.com) that is using high definition web based video conferencing tools to change the face of the home health care agency business. Why is this a Pizza Parlor business? When you start a pizza parlor, you need a little bit of capital, a good recipe and some secret sauce. The business takes a little while to make money, but you can operate a single store and make money. Then again, you can open 150 or so stores like Bertucci’s, or you can have 8000 stores like Dominos. The Pizza Parlor Web2.0 businesses require some industry knowledge, some secret sauce, but they are businesses that can be replicated by others with relatively little investment. These businesses require minimal up front capital, can be profitable at different scales, and investments can be metered out over time. The Pizza Parlor businesses tend to be highly capital efficient and are well aligned to the investment style of many early stage investors these days.
3) The Google Businesses- We all know these business plans. Game changing businesses that are inventing something that is truly new or truly better (as in Google’s case). They require lots of development time and big up front capital. Web2.0 makes these businesses easier, and less capital intensive, but they are still high risk, high reward businesses best suited for large established VCs. It is not my intention to advocate that one style of business is superior to another, but much more to help entrepreneurs think about the businesses they are building. Once you figure out if you are the next Eric Lambert, Upper Crust Pizza or Google you will have a much easier time aligning yourself to the right set of investors.