Editors Note: This is a guest post written by Geoff McQueen, the cofounder of AffinityLive, a business management platform for professional services. McQueen recently moved to San Francisco from Australia.
Who doesn’t get excited about the consumer web? Google, Facebook, Twitter, Zynga, Foursquare. Billions in revenue, Hollywood movies, overturning indistries, and curing boredom. So it is natural then as a startup entrepreneur that you’d first think about doing a consumer web product. But as someone who’s been a tech entrepreneur for a decade outside the Valley, the one thing we’re not told is that unless you’re in one of four or five places on the planet, you’re almost certainly doomed to fail in the consumer web.
Why? Because consumer web plays, for all their allure, require two ingredients you’re not going to find in Sydney, Vancouver, London, Johannesburg, or pretty much anywhere else: they need big markets and big money.
In the United States, if you want to reach a million users in a consumer play, you need to convince one in 260 people to use your product. In China, you’ve got to get just under one in 400 people to get on board. But if your startup is pitching to users in the UK, you’ve got to achieve more than 5 times the penetration of the US. The same goes for France—it might be close to the UK, but as a market it might as well be in another galaxy. Germany is only slightly better. And in my homeland, Australia, you’ve got to achieve almost 20 times the penetration as in the US—to get to a million users, you need to be able to convince 5 people on that bus you caught to the city to use your product—profitably, and scalable across the entire market.
Given that the economics of most consumer web plays are based on selling access to an audience, if you’re not in a big market, you’re pretty much screwed. Which is why unless you are in Silicon Valley, New York, Shanghai, Mumbai or perhaps São Paulo the deck is stacked very much against you.
If the consumer web requires big scale, achieving scale requires big money. Sure, the cloud and lean startup principles have cut the capital requirements a lot, but to succeed you need to get to millions of users, with dozens or hundreds of staff, with little to no real income (since your users aren’t paying you).
Most venture money isn’t dumb, so if you want to raise consumer web funds, you’ll need to head to one of the handful of places in the world to get it. This isn’t a bad thing—it is just reality. Entrepreneurs all over the world bemoan how hard it is to raise capital, yet we are reading constantly about the bubble.
Of course there’s an exception here if you were to create the next Facebook, Twitter or Foursquare and grow it virally, but that’s really a one in a million shot on its own, and even those companies required serious levels of funding to scale before they were able to pull in revenue.
Of course, the most obvious solution to this problem is to move to one of the few places in the world where you stand a chance of building a consumer web business. But it isn’t possible for every entrepreneur in the world to do that, and places like Silicon Valley have their own pitfalls, like trying to hire an engineering team when Google, Facebook and others are waging a war for talent.
If you’re thinking about what to do for your next venture, my opinion is that you are better off looking to businesses as your users. Here’s why.
Businesses Spend Money
The biggest reason why business customers make a great market for your startup is that they have money, and aren’t afraid to spend it to solve a real problem. There are lots of unsolved problems in business today in areas such as sales, marketing, finance, operations, management and more where technology can be disruptive and highly valuable.
As we all know, consumers have pretty tough expectations of value when it comes to parting with money—one of my favorite consumer services, TripIt, costs less for a year than the price of the cab to the airport for one flight, and still a very small minority of people pay.
On the other hand, businesses have a stronger ‘investment’ mentality when it comes to their decision making. The nexus between money spent and value received is still largely intact, and if a business finds an online product or service valuable and starts to rely on it, not paying for it can make them worry that it is unreliable or going to disappear on them without notice.
A target market with problems that need solving and a willingness to pay doesn’t necessarily mean there’s an opportunity for startups. Tech giants like Microsoft, Oracle, HP, Adobe and many others have massive advantages of incumbency over new, smaller, emerging players. But changes in the expectations of businesses—thanks ironically to the consumer web—are making it much easier for a startup to take on the big boys.
While the power of incumbency and size might be true for the big corporates, in the small and medium segment—which is a much bigger market—there’s an opportunity to run circles around the big guys. With the possible exception of SalesForce, almost all of the incumbents are hamstrung by bloated and high-cost sales models, monolithic, bureaucratic product development and release cycles, and in many cases the innovators dilemma.
While saying they can’t move as fast as a startup is a truism, what matters is whether their customers want them to move faster. And in my experience, they absolutely do.
Business people are consumers too, and they’re being spoiled by the pace of innovation they’re experiencing in their personal lives. The smartphone wielding-CEO, who adopted Facebook without “training” and “change management”, and who uses Skype to talk to his travelling daughter, is the norm, even if he or she still types with two fingers. Business people like this aren’t happy to wait 18-24 months for the next major release from Microsoft or Oracle to catch up with personal tech they’ve been using for a couple of years already.
These new expectations about the pace of innovation are making it much easier for startups to compete.
New Distribution Platforms
All of this sounds good, but aren’t business web plays expensive too? You’ve got to build sales, marketing and distribution, which surely costs a ton, right? Not necessarily. There are an increasing number of emerging platforms for the business web which are helping startups scale without the traditional enterprise sales and marketing costs.
The Google App Marketplace and Salesforce App Exchange as distribution platforms are making it easier for developers and startups to connect to markets in the same way the mobile markets do. They make going to market at scale more affordable than ever.
Additionally, the disruptive effect of the Cloud technology and SaaS business model has meant value added resellers (VARs) around the world are having to rethink their business models. Smart ones are basing their businesses on consulting, support, and training rather than just selling licenses at a margin; the lower prices and subscription revenue model means VARs can’t survive just by clipping the ticket on a sale.
The smart VARs are actively looking to develop partnerships with startups so they can offer their solutions to clients. For a startup, this provides the opportunity to distribute their services and cultivate the kind of face-to-face sales and support network many businesses want in a very fast, capital efficient way.
What about mobile?
In some ways, mobile apps have more in common with business web plays even though they’re mostly targeted at consumers. Users are conditioned to pay for apps. Often they’re solving a problem, whether it be productive or entertaining. Mobile of course has built-in distribution, which is why we’re seeing so many successful mobile plays from outside the traditional startup hubs; Rovio from Finland, Firemint from Melbourne and dozens more examples bear this out—geography doesn’t have to be as much of a disadvantage in mobile either.
The consumer web, with its bigger markets and consumer appeal will of course continue to get most of the headlines, particularly in the techo chamber of Silicon Valley. But while we’re obsessing about the next social location photo platform, companies like Australia’s Atlassian, Chicago’s 37 Signals, London’s Huddle, New Zealand’s Xero and hundreds of others will keep booking hundreds of million in revenue from business customers all over the world. Which is why I encourage you to look to businesses as your market when you’re doing your next startup.