It’s Not A Bubble, It’s Valleywood

Editor’s note: Bob Buch is a two-time startup founder, was VP of Business Development at Digg, then at AOL, and is now working on founding his next business. Follow him on Twitter @bobbuch.

There is a certain type of company that can only exist in Silicon Valley. People outside of the Valley scratch their heads at how a company with no revenue and no apparent business model can be called successful, much less be worth $1 billion.

But maybe the problem is that we’re mis-categorizing Internet and mobile products as businesses in the first place. What if we looked at them as TV shows instead – where success and failure is determined by ratings not revenue? Isn’t Instagram closer to American Idol than it is to Oracle? It entertains millions of us for a few minutes every day – maybe that’s enough. Perhaps the Valley is pioneering a new business model, one where revenue isn’t the goal but where distribution and engagement are paramount.

The titans of new media have a distribution channel that’s always hungry for more entertainment. They need to feed the beast – and they can’t innovate fast enough. They need to rely on the Pinterests, the Instagrams and the Paths to give them the entertaining new hangouts for their audiences. Big companies aren’t known for their ability to innovate, and certainly not as effectively and nimbly as startups That doesn’t stop them from trying, but frankly my advice to them is to give up on innovation (Google+, ahem). Focus on your strengths – monetization and distribution — and outsource your weaknesses. Be more like a big movie studio. They don’t make The Blair Witch Project, they make $700 million budget James Cameron action movies that are filmed on the moon and in the burning core of the Earth.

So translation to Google – keep going on the self-driving car and the augmented reality glasses, nobody else has the balls or the cash to do that anyway. And see if you can get James Cameron involved somehow.

What big new media companies do well is sell advertising. So think of them as a TV network – NBC doesn’t make shows, they buy them and sell ads around them. You have relationships with the distribution channel, so you get the entertainment in front of the eyeballs, and then you sell it to big megabrands. Little production companies can’t do this, and neither can a little photo-sharing startup. When I was at Digg, we were lucky to even see a seven-figure RFP come through the door from a big brand, much less win it, and we had an audience of 40 million people. At AOL, it was just a given that we were getting a piece of it – when you’re a top five Internet property, the advertisers have to spend there if they want to reach enough people. The big companies should stick to monetization and distribution, and let the Instagrams focus on building the cool stuff.

This isn’t to say that all Internet startups should take this path. At Digg, we grew so big, so fast, that we aspired to be a network ourselves. If you’re going to turn the corner from TV show to network, you’ve got to have your own ad product. Our idea for this was DiggAds – ads that behave like news stories and could be voted upon. We had aspirations that these ads would be the answer to the online news industry’s monetization woes. We were off to a good start; the ads were extraordinarily successful – so much so that you can see echoes of them in Twitter’s Promoted Tweets and Facebook’s Sponsored Stories. Despite our early success with DiggAds, Digg failed to become a studio ultimately because people stopped watching the show – we didn’t build a network so all our bets were on a single show.

Welcome to Valleywood where talented creative people can come up with a crazy idea that no big company would ever take a flyer on, and getting rewarded if it becomes a hit. I think we should encourage this model – maybe even have ways for the big companies to participate without having to purchase the entire company. Maybe startups will form themselves into labs and crank out multiple products, build up followings, and then license them off to big companies. Maybe incubators like Y Combinator and Techstars will become the mini-majors or the great independent production companies.