Dave Cowan of Bessemer Venture Partners has an excellent post on VC-think when it comes to investing in consumer deals. Two key excerpts:
- Fortunately for us, user adoption is only one of the key milestones reached by a successful consumer venture. Others include a validated revenue model, a validated distribution strategy, and an IPO-quality management team. Those other milestones are ones that we can more reliably predict and control. And so, as Bessemer assesses consumer ventures, we are least interested in funding User Behavior risk, but much more comfortable with risks associated with the revenue model, distribution model, and team.
- That's why we believe that the formula for any successful consumer venture is to be as scrappy as possible until you see that exponential growth curve. Twist, tweak and test until you find the mark. Only then is it time to raise lots of money, hire expensive VP's, and "monetize" your users.
Netting it out: Nobody can truly say what consumers want and the cost of figuring out the answer to that question and selling the solution to consumers in either direct piecemeal fashion or indirect broadcast fashion is horrifically expensive. While demographically and psychographically segment-able, consumer buy decisions are a product of alchemy, based on intangible wants, impulse decisions and fuzzy perceptions that only become "obvious" after a market has materialized. Plus, unlike corporate enterprises there is no clear cut buyer, no defined budget and no large average selling price that offsets the high cost of selling. Fortunately, in the age of the Internet and web services, the strategy of shipping the idea, fixing it based on user feedback, tweaking, polishing and then iterating some more is a path to success -- if and only if your expense model gives you sufficient runway to live into adolescence.
A good compliment to this article is, "Stealth Start-Ups Suck," by Mark Fletcher of Bloglines, which speaks to the importance of quickly getting new software offerings out into the market.
