I wanted to expound some more on my ideas about Web 2.0 and how it has impacted our thought process:
Preface: When I say Web 2.0, I talk exclusively about business models. Some people, when they say Web 2.0, mean technology like
So, in reference to business models, here is what I think makes Web 2.0 work and Web 1.0 a disaster: In Web 1.0, you raised a bunch of money and hired 50 editors to create content. These 50 editors had to get paid so becoming profitable took a lot of revenue.
Web 2.0 is about user-created content. If you can harness the public to provide the content they consume, then you have changed the economic model for creating value. A good Web 2.0 website provides a framework for extracting knowledge from visitors and framing it in a way that (hopefully) adds some value then reflecting it back to the community for consumption. The result is that a Web 2.0 effort is a (small|medium|large) technology effort and that is it. Web 1.0 ideas had the same LOE (usually more, that’s some other post) for technology plus editors. How this changes the consumption of VC money is documented in many many plances.
Gotta love MySpace. It looks like it was probably coded by half a dozen people and now content is created by 70 million unpaid editors every day. That is a financially reasonable content creation model.
We can really illustrate this by breaking down Cogmap and looking at the business list industry. One of the things that we thought a lot about in creating Cogmap – our competitive advantage – is that companies like Factiva, InfoUSA, and others generate lists by hiring armies of people to call into companies and generate organizational data. Not only is it expensive, the ability to maintain it is limited by the size of their small army. I have laid out their model in this picture:
Their Way (Web 1.0 in theory)
The result is the amount of data generated is directly correlated to the expense. To generate more data (both volume and constantly confirming accuracy) they have to add an editor. Scale is limited by staff.
The good news for them is that this model is not a straight professional services model. They can resell the data an infinite number of times, so revenue is not correlated with expense and they can make a lot of money. Unfortunately, the amount of money they can make is constrained by their willingness to invest in accurate data. The more money they want to make, the less they spend on good data. The less they spend on good data, the worse the long term prospects of the business. So they must constantly re-invest in data to justify the ever-growing customer base. The result is a good business with a high start-up cost, but not a great business.
In a Web 1.0 editorial world, it’s just a bad business. Generating content is directly correlated with page views. Conceptually, you get the same data consumption angle, but practically what happens is that you need more and more content to generate the page views so revenue becomes tied to content generation, capping the upside while creating a huge and expensive launch where content must be generated prior to pages being viewed.
So here is the Web2.0 approach:
The Cogmap business model is Web 2.0-ish. We build technology, look to the community to contribute the data that other members of the community value and consume and our data increases (along with our ability to monetize data, theoretically) while our costs do not.
The next hurdle to make it uber-2.0 is to figure out a way to get the community to force non-community members to play. LinkedIn uses you to go recruit your friends. MySpace has people go recruit “friends” that are not on MySpace yet. The result is a strong centrifugal force that sucks people into these networks. Cogmap is a Web 2.0 tool, not a social network, so it will never generate the high volume, high frequency page views that these sites generate.
There are several more things that have changed in the market that drive company building and capital consumption, but I want to talk about those in a different post. Moral of this post: Hiring editors is expensive for start-ups. Try not to do that.