Prolly worth noting that all of the "value-based" exits were basically talent acquisitions of essentially just the founding team (though the Auctomatics had a couple employees).
I think the effect we're seeing here is that it takes more than a year to build your company up to a multi-million dollar valuation. Community sites have the upside of being able to show traffic numbers as a proxy for value, but ultimately no matter your space, if you want a $15 million exit, you can't sell out six months in for $2 million.
Absolutely true. Communities take time, no matter how fast you can code. Value takes time, too, but if you work really fast and sell really cheap, you can seemingly be in business and sold out in six months.
I think it'd be really interesting to know just how much all of the exits were worth.
Most of those value based companies sold to community companies. A community company generally needs to get quite big before they are an acquisition target, but if they do get that far than the customer base makes them worth a lot. I generally think reddit was a bit undervalued - being an internet front page is something they never really exploited.
> Most of those value based companies sold to community companies.
Exactly. Large acquirers typically already have a community, and are looking for additional products and services to offer that community. Meanwhile, community sites are typically more difficult to integrate. Witness Yahoo's struggles with integrating Flickr and del.icio.us.
Seems like there must be better terms to use for these two types of businesses. Community-based makes some sense, but "value-based" is almost meaningless without the long description attached.
I do like this subject. Nice post. It's an interesting thing to think about. I certainly came away feeling like doing a community-based startup takes a lot more guts. Seems like a more fun thing to do though.
Max Levchin's thoughts on building a web startup: Appeal to what is common in all of us: human frailties...
"As a final word of product development advice, Levchin encouraged founders to think about the Bible’s seven deadly sins - especially greed, sloth, envy, pride and gluttony. These characteristics, he said, describe many of the primal motivations for users."
I don't know what terms you might use, but it's a continuum that goes from all value deriving from network effects, to no value coming from network effects. "product based" and "community based", maybe?
I agree...it took a while on the phone to get to the heart of what the fellow was asking about, and I've arbitrarily called the types of business "community" and "value" since that's the only thing I could think of that really fits the difference between these very different businesses. Auctomatic and Zenter are obviously not even a little similar, and yet when one asks "did their value come from their community or the utility of their software?" the answer is clear. Since none of these things are really black and white, I just fudged a bit to try to bring to light the "ah ha!" moment I had during the conversation.
I'm obviously not suggesting that people shouldn't build community-based startups or that YC shouldn't fund them. Just suggesting that maybe a useful application is a safer bet than an application that has to reach millions of users to be a valuable acquisition target (or to make money). But, if we wanted safe, we'd be working for Microsoft or Google, right?
Let me suggest we might call them "tool" or "service" businesses.
I think this is a useful distinction, but it's also one that breaks down at a point. Reddit, for example, was a useful way to kill time even before it had a big user community, just because it had a few good posts each day. If kn0thing and spez sent you that list by email rather than maintaining it on the web, it wouldn't feel like a community but like a service. Finding a service that can be delivered usefully without a big community, but can also become an identifying activity for a growing community, seems to be the secret sauce of many successful community sites.
Let me suggest we might call them "tool" or "service" businesses.
I think this is a useful distinction, but it's also one that breaks down at a point. Reddit, for example, was a useful way to kill time even before it had a big user community, just because it had a few good posts each day. If kn0thing and spez sent you that list by email rather than maintaining it on the web, it wouldn't feel like a community but like a service. Finding a service that can be delivered usefully without a big community, but can also become an identifying activity for a growing community, seems to be the secret sauce of many successful community sites.
I think the effect we're seeing here is that it takes more than a year to build your company up to a multi-million dollar valuation. Community sites have the upside of being able to show traffic numbers as a proxy for value, but ultimately no matter your space, if you want a $15 million exit, you can't sell out six months in for $2 million.