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Seven questions
to ask yourself
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1. Does the
business concept lead to positive, reinforcing network effects? |
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Does the value of the product/service increase with higher use or
distribution? If such positive network effects are present, a
first-mover advantage coupled with decent execution and customer
retention can translate into a tremendous barrier to entry for
subsequent competitors. |
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2. Does the idea scale with the
growth of the Web?
Transaction-based pricing and variable pricing models allow for more
upside than flat-rate, one-time licensing deals.
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3. Are there
innovative, Web-based marketing techniques that can be used to promote
the concept? The special catalyst for
Hotmail's growth was what we at Draper Fisher Jurvetson first named
"viral marketing" — not because any traditional viruses
are involved, but because of the pattern of rapid adoption through
word-of-mouth networks. Every customer becomes an involuntary
evangelist for the company, and by using the product they spread the
marketing message to their friends. Viral marketing compounds the
benefits of a first-mover advantage and it's something we eagerly look
for when evaluating any consumer Internet startup. |
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4. Will you
adapt?
Everything is changing quickly in our
current economic milieu. Startups have the advantage of being nimble
and being able to change business plans dramatically on a dime. In the
Internet Age, a company's competitiveness depends on its velocity of
thought and action.
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5. What are
the barriers?
Companies can grow more rapidly than
ever before, but they can die from obsolescence just as suddenly. The
critical difference is whether the company has built-in switching
barriers for its customers and barriers to entry for its competitors.
Rapid growth is of no value without customer retention. Whenever we
consider an investment in an Internet startup, we strategize about
customer switching barriers, and the impact of the inevitable arrival
of competitive imitators. The Internet supports a whole ecology of
business organisms, and the "fast follower" is a classic
form.
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6. Are there personnel bottlenecks
to scalability?
Often the young Internet company
finds that its growth is constrained by its ability to hire good
people. This is why many of these companies try to engineer around
people-intensive elements of their business, using such strategies as
consulting and customization.
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7. Do you
have a "market shrink" strategy?
By lowering prices or offering free
products, the new entrant can make it very painful for established
companies with established distribution relationships to follow.
Although the new market size may be smaller, the new entrant driven by
Internet price efficiencies can gain significant share by
restructuring the basis of competition. There may be less revenue in a
free email market, but it's tough for Eudora and companies based on
selling client software to follow Hotmail's lead.
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Courtesy
of Business 2.0 |
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