Editor’s Note: Alexander Haislip is a marketing executive with cloud-based server automation startup ScaleXtreme and the author of Essentials of Venture Capital. Follow him on Twitter @ahaislip.
Dear Non-Instagramers,
Sorry that you didn’t get bought out for $1 billion last week. That’s got to be a bummer. Kevin Systrom just made enough money to buy a boat big enough to make Larry Ellison jealous and you’re still living in a studio apartment.
Instagram is a one-off. A fluke. An anecdote that many entrepreneurs will mistake for data. Please don’t be one of them.
This happens about every half a decade. The first mover in a space gets taken out in record time with a ridiculous valuation and the founders look like epic geniuses. Do you remember YouTube? Sure you do. But what about Revver, Metacafe, Guba and Veoh? I didn’t think so.
I know you’re smart and could probably program Instagram yourself in less than a week. Because let’s face it, how hard could it be? It’s just a few filters put onto the iPhone’s camera with some sharing features skinned to appeal to hipsters. There’s just not that much technology involved. Instagram’s competitive advantage comes from being first.
First is important. It’s important in defining functionality, setting expectations and capturing mindshare. It’s important to corporate buyers. Now that Facebook has already made its acquisition it’s unlikely that your consumer tech product, if it’s in any way close to Instagram, will also be bought. It’s a classic winner-take-all scenario. Google doesn’t know what to do with the products it has. Yahoo just purged another 2,000 people. News Corp? Barry Diller? AOL? Please.
And that’s assuming that there even is a market for your consumer technology startup’s product or service. Let’s suppose that you do get Instagram-level breakout and collect 30 million users. That’s great, but only if you (or your potential acquirers) see a viable path to monetize those users. Users aren’t customers. The people who are pissed that Facebook now owns Instagram ultimately have one major concern: that Facebook will find a creepy way to make money off the service.
That’s the thing about consumer technology: it’s easy to rip off, hard to sell to strategic acquirers and monetization is often a mystery.
Compare that to the enterprise technology market, which is typically characterized by real intellectual property, obvious monetization and a plethora of cash-rich potential acquirers. It’s a place to build companies, not just products. Consider a single example. When Nand Mulchandani recruited me to ScaleXtreme his pitch was simple. “My cofounder spent five years building the technology to deliver cloud and server management functionality from the cloud. We’re attacking an $8-billion a year server management market. We’re providing functionality that BMC, CA, HP and IBM can’t at a price the incumbents won’t. You want in?”
Enterprise technology companies are consistent winners. As Quentin Hardy pointed out earlier this year, a bunch of enterprise tech companies have gone public recently and they’re pretty much all trading up from their offering prices. They’re regularly acquired too. It’s easy for corporate buyers to see value in a company that has customers. Success here goes to a wider number of winners.
The thing about customers is that once you’ve got ‘em, they tend to stay with you. That’s important. They’ve not just given you their money. They’ve invested their time considering the competitive landscape and chosen you. There’s real cost in switching.
The Instagramers were lucky. That’s not to diminish what they accomplished. Systrom found someone willing to put out serious money for his startup. It’s every founder’s dream, but the reality for too few in the consumer space.
Enterprise technology has minted many more millionaires. Instead of hoping to score with some new awkward digital tribadism—think Instagram meets Pintrest, optimized for Google Glass—try building a company to solve a real problem with real innovation and serious intellectual property. One that attracts customers, not just users. One that will employ people, make money and maybe even pay income taxes.
Yours truly,
Alex
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