Andrew Chen Archives

Subscribe · Featured · Recent · The Cold Start Problem 📘
Dear readers, I have moved to Substack and I will be writing here from now on:
👉 andrewchen.substack.com
In the meantime, I will leave andrewchen.com up for posterity. Enjoy!

Need a solid Web 2.0 business idea? Go upstream from a proven model

Need a solid business idea?
I’ve recently been asked by a couple people who don’t have solid business ideas that they want to work with. In fact, maybe they have something fun and entertaining, but they don’t know how to shift it into a model that works.

For all those folks out there, here’s the blog for you. Here’s a template for how to find a good business concept quickly, using many analogies that are already out there.

Before jumping into this, here are a couple older, related posts that I’d encourage you to read:

Proven transactional models are everywhere
When the Web 1.0 bubble collapsed, some of the only companies left standing were "transactional" sites that weren’t dependent on advertising. You could see them everywhere:

  • Retail (Amazon, Buy, etc)
  • Travel (Expedia, Travelocity, etc)
  • Dating (Match, eHarmony, etc)
  • Jobs (Dice, Monster, CareerBuilder, etc)

Even these days, you’re seeing an entirely new generation of companies focused on tickets, like StubHub, or advertising networks like RightMedia. All of these businesses are real money machines.

How categories have matured, and the battle over users
The only concern for most of these companies, as they scale up, is that their proven business models end up stagnating as other competitors enter the market. Because it’s very hard for most of these companies to develop relationships with customers, they end up in a lead generation knife fight.

This means their growth and/or margins whittle down as they engage in ever-competitive user acquisition battles.

Here’s some numbers:

The U.S. online dating industry is expected to climb 9 percent
year-over-year with revenues of $516 million in 2005 coming from
consumer subscriptions alone, said Nate Elliott, an analyst at Jupiter
Research. That’s slower than the 19 percent growth in 2004. And when
compared with a 77 percent jump in 2003, the latest revenue trends seem
cause for real concern. (Source)

Online corporate sales will climb
to $37 billion. In spite of those numbers, the US online travel market
is maturing and growth is slowing down.
(Source)

In fact, one of my favorite blogs, Jeremy Liew from Lightspeed Ventures, recently wrote an article on the deterioration of margins within the lead generation industry. (Think online education, insurance, car quotes, etc.)

Where can social media companies fit in?
Given that the real leverage point within these transactional industries is user acquisition, I’ve come to believe that you can apply social media techniques to build solid businesses that are upstream from the transactions.

The advantages of Web 2.0 sites over the transactional sites are:

  • Viral, organic growth in traffic, versus paid user acquisition
  • Sticky traffic that can be converted to transactional, versus one-time user visits
  • Upstream position from several mature sites means "auction" dynamics

I think the first two are pretty obvious, but let me explain the third one: If you built a site that everyone would visit before they went onto the job sites (for example, a professional social network), then you can "funnel" users to the transactional sites. In fact, you could do one of the following:

  • Auction the user off to the highest bidder
  • Auction the user off MULTIPLE times, like to the three highest bidders

The latter case is pretty interesting, since if you are able to establish those dynamics, you will have a stable place relative to your downstream partners. They won’t be able to pay as much as you can to acquire a user, since obviously Monster would never sell one of their users to CareerBuilder.

Focus on the right social applications
Of course, no one wants to do a social network about jobs, or insurance. Instead, you have to focus on high-interest mass market topics that are upstream to them. For example:

  • Retail-> Celebrity gossip and fashion (like PerezHilton)
  • Dating -> Hanging out (like MySpace)
  • Jobs -> Professional contacts (like LinkedIn)

In each of these cases, you end up with more daily traffic, more unique users, but fewer % of people who are "transacting" at any given time. The idea, of course, is to build a large enough user base that you can a large absolute number of people who are in the transaction stage.

In conclusion, this is a quick way of brainstorming a bunch of interesting social applications that have solid revenue potential. Just look at any transaction that people make over time – be it services, or big ticket items like cars or real estate. Each one of these transactions should have a larger social application to tie them together upstream. By using viral growth techniques, paid advertising, and sticky content, you can engineer a lead generation machine that throws off actual revenue.

PS. Get new updates/analysis on tech and startups

I write a high-quality, weekly newsletter covering what's happening in Silicon Valley, focused on startups, marketing, and mobile.

Views expressed in “content” (including posts, podcasts, videos) linked on this website or posted in social media and other platforms (collectively, “content distribution outlets”) are my own and are not the views of AH Capital Management, L.L.C. (“a16z”) or its respective affiliates. AH Capital Management is an investment adviser registered with the Securities and Exchange Commission. Registration as an investment adviser does not imply any special skill or training. The posts are not directed to any investors or potential investors, and do not constitute an offer to sell -- or a solicitation of an offer to buy -- any securities, and may not be used or relied upon in evaluating the merits of any investment.

The content should not be construed as or relied upon in any manner as investment, legal, tax, or other advice. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment. Any projections, estimates, forecasts, targets, prospects and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Any charts provided here are for informational purposes only, and should not be relied upon when making any investment decision. Certain information contained in here has been obtained from third-party sources. While taken from sources believed to be reliable, I have not independently verified such information and makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. The content speaks only as of the date indicated.

Under no circumstances should any posts or other information provided on this website -- or on associated content distribution outlets -- be construed as an offer soliciting the purchase or sale of any security or interest in any pooled investment vehicle sponsored, discussed, or mentioned by a16z personnel. Nor should it be construed as an offer to provide investment advisory services; an offer to invest in an a16z-managed pooled investment vehicle will be made separately and only by means of the confidential offering documents of the specific pooled investment vehicles -- which should be read in their entirety, and only to those who, among other requirements, meet certain qualifications under federal securities laws. Such investors, defined as accredited investors and qualified purchasers, are generally deemed capable of evaluating the merits and risks of prospective investments and financial matters. There can be no assurances that a16z’s investment objectives will be achieved or investment strategies will be successful. Any investment in a vehicle managed by a16z involves a high degree of risk including the risk that the entire amount invested is lost. Any investments or portfolio companies mentioned, referred to, or described are not representative of all investments in vehicles managed by a16z and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results. A list of investments made by funds managed by a16z is available at https://a16z.com/investments/. Excluded from this list are investments for which the issuer has not provided permission for a16z to disclose publicly as well as unannounced investments in publicly traded digital assets. Past results of Andreessen Horowitz’s investments, pooled investment vehicles, or investment strategies are not necessarily indicative of future results. Please see https://a16z.com/disclosures for additional important information.