The Next Start-up Darling

I’ve long been amazed how us techies jump on the “hot company of the day” and create the next big thing in our minds; even if the mainstream hasn’t heard of them and no money is being made.

My quick list of the past few years is below with roughly the years when each company became a household name, or the darling of the start-up world, not years founded:

2005 – MySpace

2006 – YouTube

2007 – Digg

2008 – Facebook

2009 – Twitter

2010 – Foursquare

2011 – GroupOn

All of these companies became superstars in the start-up community well before the masses had even heard of them. We congratulate and admire them while the average joe wonders what they are. It’s a phenomenon that energizes founders to press on for mainstream adoption, gives fuel to VCs, and allows products to mature through feedback. It also however, generates inflated egos among founders, and ill-fated attempts by others looking to create a better mousetrap of the shiny new thing.

The biggest problem is that hype runs ahead of value and founders often miss the boat. We get into a cycle of “new thing-geek fame-inflated ego-no success-death”. When you look at the list above only Facebook survived the cycle and established a revenue model that delivers. Twitter? Sorry, not there yet. Foursquare? Unless you’re nuvo-tech you’re not using it, and GroupOn is printing money but advertiser value is a question mark while everyone from Facebook to my next door neighbor is replicating the model – long-term success is a toss-up.

Case in point #1: Digg

A few years ago Digg was the start-up darling, the place to go for the best news headlines. To get “dug” was huge, and being near the top of the list meant massive traffic. Jay Adelson and Kevin Rose built a winner complete with an advertising deal with Microsoft. What happened? Digg didn’t sell and a real revenue model never came. Today Digg is in shambles after a failed re-design, losing traffic, and there are better ways to find top news stories. Is it worth $200M today? Doubt it.

Case in point #2: Foursquare

That’s right, Foursquare, the start-up darling of the day. Well, badges or becoming a “mayor” don’t really make money so the play is now partnering with brands. I hope it works and Foursquare is successful. But in the same rewards space is Shopkick, who built around the rewards+location model from the outset and is in market; Best Buy has rolled Shopkick out to 257 stores.

Let’s take a look at Foursquare’s roller coaster year…

– Everyone in the start-up world is checking in, becoming a mayor, and having a blast. Average Joe has no idea what Foursquare is.

– A few months later, Gowalla, MyTown and Foursquare are growing and getting massive praise in the blogosphere. Average Joe still has no idea.

– In April, Techcrunch’s Mike Arrington urged Foursquare founders not to sell to Yahoo but to go for it. In September, Techcrunch sold to AOL for $30M.

Facebook Places launches directly competing with Foursquare et al. and with massive reach in their pocket and likely not looking to give people badges.

– Recently, Foursquare founders were featured in a Gap ad. Only geeks noticed.

– Just last week, Techcrunch published an article questioning Foursquare (and Gowalla) and labeling them the past unless they do something. Average Joe still isn’t checking in.

My guess is that Foursquare will either sell to Google or someone else that will attempt to figure out a business model. I hope it doesn’t become Digg v2.

Don’t Miss the Boat

My point is simple, it comes down to what people will pay for. Don’t believe your hype and get screwed. Make money or sell.

a) You have a cool company without a business model, but early adoption is growing fast. You’re the darling of the start-up crowd, and others are starting to copy you.

You need to: figure out what your real value is and how you’ll make money while you have the time. If you can’t figure it out but you have a big fish interested then sell while you’re hot. Don’t kid yourself – early adopters move on to the next new thing, VCs lose interest, and you’re left holding the (empty) bag.

Examples: Facebook figured it out. YouTube and MySpace sold. Digg didn’t. Foursquare and Twitter are on the clock.

b) You figured out your revenue model early and built your company to realize it. People/companies are excited because what you provide makes sense and they will pay for it. Technology is simply the tool that’s solving a real problem. Your company might be getting less hype but it’s making money and you’re happy. Personally, these are the companies I love. You run a great business (Amazon) or get acquired at a price that recognizes your hard work and accomplishments (Zappos, PayPal).

Examples: ShopKick and OpenTable are making money. Zappos and PayPal made real money then got the big payout. Google, Amazon, Ebay, and lots of other great companies just keep growing and never sold.

The latest rumor is that Google is interested in GroupOn, offered to buy Twitter, and might be interested in Foursquare. Henry Blodget thinks they should buy all three. I’m not sure I agree that it’s a smart idea for Google just because they have the cash, but I will say that it makes sense for all of these companies to sell. GroupOn is making money but the space is getting crowded fast and could become a commodity. Twitter is still looking for revenue and I hope figures it out, and Foursquare…well, remains to be seen if brands really care.

Do something great that adds value. You’ll have a blast and make money and if a big fish comes knocking you’ll be in the driver’s seat to sell and do it again or keep doing your thing.