“I’ll use it if you will”

Online and offline there are two types of business

  • Crowd dependent: The service only has value if many people use it.
  • Self standing: If it works for me, that’s fine.

Examples of “crowd dependent” are markets like ebay and the stock exchange; telephone networks like skype; social networks like bebo; “knowledge aggregators” like crowdstorm. In each case, their value increases as more people join.

Conversely, services such as calendars (airset, google), spreadsheets (google) and docs (zoho, think free) or something as simple as a ticket agency/online store can be useful to an individual or a small group regardless of the total customer base.

This is a significant distinction because the likelihood of success for a venture varies enormously between the two.

Crowd dependent businesses are hugely dependent on early adopters joining in “anticipation” of it eventually becoming useful. Hopefully, a virtuous circle is created in which sufficient people join that it reaches a tipping point. Depending upon the crowd size required, this may demand enormous marketing spend to drive customers in quickly. Of course, once you achieve the tipping point, this provides you with enormous competitive advantage over other new entrants – essentially it creates a barrier to entry. Customers are also locked in to your business to some degree since they derive benefits from being part of the crowd.

A self-standing service can afford to grow more slow (funding permitting) and can immediately deliver value to its customers. However, it’s far easier for customers to switch to a new service. Whilst they may have invested time in using your business

Hence in evaluating a business opportunity as an investor you intuitively think along the lines of

Investment required

Success probability

Potential value

Crowd dependent

High

Low

Very High

Self standing

Low

Medium

Low-Medium

This isn’t gospel and obviously the nature of the opportunity will affect this rough guide.

Comment posted by John Wilson
at 2/2/2007 10:41:00 AM
Sorry about the table – now fixed.

Breaking out of the early adopters is the big challenge as everyone knows but is rarely achieved. The bigger winners are those that go mainstream like youtube, bebo, myspace.

Comment posted by Adam
at 1/29/2007 1:42:00 PM
The table doesn’t quite come out, but I get the gist. If something is crowd-dependent, it’s tough to do, takes more investment, but has a much higher potential value.

I guess the holy grail would be one that is both–like del.icio.us, though their user base still may not be more than early adopters.

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