"The cave is collapsing!" -- Leia Organa
"This is no cave." -- Han Solo
Here’s a composite of a three discussions I’ve had with whip-smart founders over the past couple of months about building companies on the backs of existing ecosystems like YouTube and Facebook.
“Jason, I’m building a startup around the @Youtube ecosystem -- which I know from your writing that you’ve got some issues with -- we want you to invest!” said the founder.
“That’s an awesome set of tools you’ve built there. Clever indeed. However, if any of them work, you know YouTube is going to copy them and make them free, right?” I replied.
“But YouTube is going to be 10x bigger than it is in the next five years... and you said if it was a stand-alone company it would be worth $50b!” he replied.
“I did say that, and that’s even more reason for you to be worried. As they get bigger and more powerful, they will have even more resources and rationale to rebuild your ideas -- and they will have an even bigger firehouse to spit it out to customers,” I said.
“But look at all the examples of huge companies built off of large ecosystems: Norton Antivirus on Windows is a Fortune 500 company, Hootsuite exploded on the back of Twitter and it has a $1b valuation, Buddy Media rocked Facebook and sold for $800M,” he said.
“You left out PayPal... built off the back of Ebay for billions and now the most valuable piece of the company,” I added.
Then I said, “Now, while all of the examples above are true, they are a small, small percentage of founders who were able to get escape velocity from the exogorth, the space slug in Star Wars that almost ate the Millennium Falcon.”
Ironically, as I was having this discussion, I found out that YouTube had built a tool that did EXACTLY what one of the founders in the above composite had built: a tool to help you connect with your top YouTube fans!
Here is how a blog described YouTube’s new “top fans” tool:
-- A Top Fans dashboard will exist as a new page inside the Video Manager
-- Creators will be able to view a feed of the latest activity from the most-engaged and influential fans instead of having to wade through hundreds or thousands of comments
-- Creators will be able to send out exclusive postings only to top fans
The startup described their tool a year ago:
-- Get to know superfans and influencers
-- Be notified of influential new subscribers
-- Never miss an important question or comment
-- Reply, comment and sub/unsub effortlessly
In other words, YouTube studied this founder’s startup and built all his features into YouTube, made it free and made it better. And they’ve got 100% market penetration on day one for zero dollars!
And you can’t blame YouTube, as they probably had this startup’s idea on their roadmap before the startup began working on the problem of “who are my best YouTube fans.”
Right now YouTube might need Maker and Machinima, but as you can see from YouTube’s Geek Week -- and YouTube’s personal channel breaking into the top 10 -- they have no problem aggregating a bunch of YouTube stars and selling ads around them.
Think about it, Maker and Machinima do two things:
1. Collect a group of channels together to make content.
2. Sell that bundle to advertisers.
What did YouTube just do with “Geek Week?”
1. Collect a group of channels together to make content.
2. Sell that bundle to advertisers.
The only difference is that Machinima and Maker can’t put their promotion in the *logo* of every single YouTube page.
If you work for, or have invested in, Maker, Machinima or another MCN (multichannel network) you should understand that YouTube is taking your business out from under you RIGHT NOW!
YouTube doesn’t need MCNs, they’re using MCN innovations -- like collaborations and group sales -- and putting them to work against their own editorial calendar!!!
MCNs are toast.
YouTube is killing them.
Five Reasons Why You Should Not Do This
There are a couple of thing to keep in mind about the “build in another ecosystem argument. Let’s dissect each one.
1. They’re watching you -- closely: If you’re building inside of Facebook, Twitter or YouTube, they are watching you closely. You’re connecting via their APIs in all likelihood, and they can see everything that’s working. Also, your clients are their clients, so the second they hear 10 of your shared clients talking about your awesome new feature X, they are putting it on their road map.
It’s like playing poker with someone better than you and the person knowing your hole cards. You. Can’t. Win.
2. You’re doing free R&D for them: Not only are they studying you, they’re also studying the 20 other schmucks building on their platform. Since none of you know what will work, you’re all testing things--so they don’t have to!
If you build a tool to help folks do commerce on YouTube -- and I’ve seen a half-dozen of these businesses -- and it works, they’re going to make it native. Not only that, they’re going to look at the five or six players doing it and pick the best features of each.
3. The harder you work and more successful you are, the faster their base grows: This is the biggest reason to not invest in tools and services around another company. As Tweetdeck, Seesmic and countless other Twitter clients built cooler and cooler features, they didn’t benefit from them -- Twitter did! Their features made Twitter accounts more valuable -- not the client’s. The value aggregates to the one who has the direct relationship with the customer.
A couple of bargain-basement purchases occurred; we saw this with Twitter buying clients like Tweetdeck, but to be honest I think those were a PR cover. Twitter did it because it looked good and it might have saved them a couple of months of work.
4 & 5. They will change the rules & converting is hard: Facebook changed the rules on “partners” over and over again, extracting more and more value from the ecosystem until even the mighty Zynga was crippled. Mark Pincus, a brilliant strategist, couldn’t convert the largest Facebook audience off the platform to his domain name.
But Jason, They’ll Buy Us!
I hear this all the time: "If we build something really valuable Facebook will just buy us!" That’s certainly a possibility, but on the small chance they do, here is how your negotiation will go:
Zuckerberg: “Thanks for taking the meeting, we think what you’re doing is neat and we want to buy your company for X.”
Founder: “That’s great Mr. Zuckerberg, but X is actually half of what our investors put into the company, and if we accept X our investors will be screwed and the common share will get nothing.”
Zuck: “F@#$K your investors, I’ll give you a great salary and some nice equity.... plus we have free Philz coffee. Plus, if you don’t take it we will build a better version of your product for 50% of X and push it to 1B people.”
Founder: “Wow... that’s great! Now I can screw the investors who believed in us and work on some obscure advertising feature, crush my dreams and hate my life. Sign me up!”
Building your business to be bought by someone who can rebuild your product better than you can and distribute it to 10,000x your user base puts you in a really bad negotiating position.
It almost never works out.
Bottom line: A wise person once told me it takes the same amount of effort to build a small company as a big one.
In other words, if you’re a great entrepreneur, you’re putting 100% of your life into your startup. If you do this on your own platform or another, it’s still 100%.
For my money, it’s better to go after the big prize -- being your own platform -- than to spin your wheels being a monkey in someone else’s.
I learned this the hard way, and I’m never going back. Mahalo.com was built inside of Google Search and YouTube, and in both cases we had huge success ($10m run rate, 15m+ uniques) only to get crushed in the jaws of the giant exogorth.
And that’s not exactly how stupid I was! In fact, I got crushed by Google over their search update one year and the very next year did a deal with YouTube expecting a different result.
What an idiot I am!
Don’t be an idiot like I was!
Getting your startup crushed in the teeth of a giant sucks. Years of work that could have been spent building your own, perhaps slower growth, startup is a much better deal.
My next startup, Inside.com, is built specifically on technologies that Google, Facebook, YouTube and Twitter can’t own or control. You know, base-level stuff like email, domain names, phone numbers, a trusted brand, some massive consumer value and mobile apps.
And now, the plugs
1. Join the beta of @inside: www.inside.com
2. My keynote from Vidcon about building a business off the back of @YouTube, how YouTube should change their deal, etc. http://youtu.be/Jb2AOdGcYsE
3. LAUNCH Mobile & Wearables in SF Sept 30 & Oct 1st (brought to you by Xtreme Labs) has 25+ awesome speakers has 25+ awesome speakers: http://mobile.launch.co, but we could use a little diversity. If you have suggestions for speakers, submit them here: http://events.launch.co/speakersform
4. LAUNCH Hackathon is Nov 8-10. If you want to hang with 1,000 developers, buy some pizza, sushi or provide backrubs. Well worth sponsoring for $5k-$15k instead of paying a recruiter $25k. http://hackathon.launch.co
5. You can follow me on Twitter: http://www.twitter.com/jason
6. Subscribe to "This Week in Startups" on iTunes:
7. Follow me on AngelList: http://www.angel.co/jason