Scalability - Union Square Ventures: A New York Venture Capital Fund Focused on Early Stage & Startup Investing

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Brad Burnham 11 August 2006 3 Comments

One of the common concerns about IT enabled services generally and web services specifically is that they do not have the potential to scale. When the focus of venture capital was on IT infrastructure, this criticism was often voiced as " that's a feature not a company". Today, a lot of the most interesting web services do seem to do one thing well - think Google, YouTube, or Skype. There have also been a number of recent s that could lead one to the conclusion that the major web players will buy up all the neat "features" and integrate them into a more "complete" offering. Many would offer Flickr and del.icio.us as examples. The consolidation of the enterprise software business and the portalization of the web in the late 90s are historical examples that suggest that consumers want to simplify their commercial and media relationships and that only comprehensive services providers can compete our business. But users today seem to be more willing to visit many places on the web. It is not clear that a compelling service will only get traction if it is on the AOL or Yahoo home page. Search, social networks, and word of mouth have leveled that playing field. We are not afraid of investing in a web service that does one thing well. If anything, we are more skeptical of a young company that claims to do many things well. When a young company presents a matrix that shows them doing everything that well established competitors do only better, we rarely ask them back. On the other hand, we get very excited when we meet a company like del.icio.us or Indeed that does one thing well enough to have generated a large and growing base of loyal users. We believe that these and other businesses that serve users by doing one thing well can become large and important parts of the web ecosystem. Google achieved enormous scale by doing search well and despite the release of a slew of new products still gets the vast majority of their revenue from search. But Google did not create that scale within the existing structure of that industry. They did it by introducing a disruptive new model that enabled them to aggregate audiences and then advertisers around two new value propositions (finding things and reaching people who are looking for things). Because we are betting on disruption, we do not expect a start up to make convincing argument for how it will achieve scale within the existing market structure. Rather, look for companies that can disrupt the existing market structure by doing one thing well and then we work with those companies to discover novel ways to scale in the restructured market. Because I have used Google several times in this series as an example, I should address the risk that Google is the new market structure and that they will dominate web services the way Microsoft came to dominate PC software. It would be silly to pretend they are not a huge factor in web services but despite all of their talent and reach, it is not clear to us that their platform gives them the leverage to dominate social networking, user generated content and services, or vertical search to cite just a few current opportunities. We believe it is way too early to call this race. No one we know

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Scalability - Union Square Ventures: A New York Venture Capital Fund Focused on Early Stage & Startup Investing

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has a clear understanding of exactly how data will be used by web services like Google to create barriers to entry much less how new companies will try to break down those barriers. We also don't fully appreciate the impact of the net on the structure of the market for web services - will it favor aggregated or dissagregated services, or timing of market cycles - will they be faster or slower? We do not pretend to understand all of the drivers that will shape the opportunity for start up web services. We do believe that successful services will do one thing very well. We do not believe that means these services are "features not companies". We believe that these companies can scale, and that how they will scale is not always predictable.
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Community Jim Peterson

7 years ago

Brad, I really enjoyed your articles this week. This web business is fun stuff! We focus on "one thing". The more we look into our logs and conversions- the more we see what people want...and the cycle continues.We can be better and better at our "one thing." Thanks
Share EP
7 years ago

It seems that many internet companies consider themselves "scalable", simply because they are web-enabled and thus able to server a wide geographic area. This in naive in my opinion, because true scalability requires not just a website, but a business complete with the infrastructure (sales team, customer service...) necessary to serve diverse geographies...and many times by doing just that, and building out the business, you loose the efficiencies you once had in a confined goegraphy. The same applies to scalability in numbers, as handling 10,000 users is infinitely easier and less complex than 1,000,000 users.
Share evbart
7 years ago

I know this is a bit over-used, but I think what you were saying about "only comprehensive services providers can compete our business. But users today seem to be more willing to visit many places on the web." Is really addressed by some of the Long Tail concepts.
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Scalability - Union Square Ventures: A New York Venture Capital Fund Focused on Early Stage & Startup Investing

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Listing services (listible, digg, emily chang's ehub, etc) help match consumers with the sites and services that they want to use. All these tiny little services target more and more niche markets, that might not make them interesting services to be purchased by Yahoo and integrated with a massive portal page, but as long as some "acceptable critical mass" of consumers can find the site or service, then they might be more viable. As to the quote about "thats a feature not a company" I see this as becoming a very fine line. Some companies are pulling it off, while other companies are truely trying to commercialize one feature that won't stand on its on. I guess what makes are breaks these companies is the value that can be generated by this one feature, and the potential for their target market to adopt this one feature.
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