Big Money Does Not Build Great Online Products
Or, Why Dave McClure is Right:
indeed: most VCs are Dinosaurs, and the World Wide Web is an Asteroid that hit the planet in a slow-motion cataclysmic explosion 15 years ago. It may take another 5 years for the ash clouds & nuclear winter of Browsers, Search Engines, Social Networks, & Mobile Devices to kill all the T-Rexes, but it’s a done deal. The marsupials are taking over, and in 2015 there will be a lot more seed investors that look like Dave McClure, Jeff Clavier, First Round Capital, Y-Combinator, TechStars, Founders Co-op and Founder Collective than any Sand Hill VC.
Take it from a guy who has seen a handful of online real estate competitors raise $5-$10 million each pre-product, hole up for 18-30 months and hire an expensive PR firm to proclaim the release of their huge steaming pile: There is nothing about having a lot of money that improves the odds of a consumer internet startup creating a great product.
The fat startup backlash needs to come to terms with the fact that building a great product is cheap. There are some great examples from the Seattle area – companies like Picnic and UrbanSpoon. While both sold before they became huge companies, they both built phenomenal products that were ready to scale with small, cheap teams. Loads of other companies created in the last 2-4 years have built phenomenal, creative products on the cheap – companies like Smule, Xobni, and Chegg – all of whom went on to raise a bunch of cash after they had consumers using their awesome products.
What used to be a laughably small investment – something in the $100,000-$500,000 range – is now enough enough money to build a truly great online product and cultivate an initial base of users. Facebook is the premier example of this phenomenon: Facebook had 200,000 users before they raised a dollar.
Dave McClure, Jeff Clavier, First Round Capital, Y-Combinator, TechStars, Founders Co-op and Founder Collective know this. At the same time, they aren’t delusional – they know that their companies need more than $100,000-$500,000 to really take off. Because they are investing relatively small amounts, they can make a lot of money with a handful of “dipshit companies” that sell for talent acquisition, a handful of moderate, $20-$50 million successes and a few huge successes.
It is still expensive to grow a company into a billion dollar business. You need a lot of money to flesh out the more expensive parts of a business like marketing, PR and sales and flesh out the product (to dominate the market, per Horowitz’s advice). But because startups today have already eliminated a lot of the risk (product! users!) on a significantly smaller amount of money and dilution, they can demand better terms from VCs or raise more money from a new class of “super angels.” This is good for founders and angels.
All in all, this is good for the rest of us too. This new ecosystem will create extraordinarily more experimentation and ultimately creative destruction than the old VC model: the angel-funding boom is a Cambrian explosion of entrepreneurial life (The Arrington of the Cambrian would have bitched about all the dipshit lifeforms) and when the amount of capital needed to create an online product is so low, products can get built in spite of the VC vetting process.
Profitable
We are celebrating a profitable 3rd quarter at Estately this week and an October already in the black. This in spite of the market’s typical Fall-Winter dive (Google Trends illustrates it elegantly in 2008 and 2009 – so does this) and the worst housing market in my lifetime.
About a year ago, after launching New York and Chicago, we looked at the year ahead and realized that:
- The capital markets were hosed – the “raise more” door was closed
- There was a chance we weren’t going to make *quite* enough on our existing trajectory to make it into the black
It was time to get creative.
What Did We Do Right?
Get Even Leaner
We looked high and low to find every expense we could cut. We couldn’t save much by cutting the co-founders’ “living wage” (aka “insulting wage”). So we slowed down our geographic expansion because new markets require upfront investment. We also froze technology purchases and skipped a couple of business trips.
Then we set out to improve the bottom line.
Test. Test Again
By last winter, we began A/B testing on a weekly basis. We started by making it easier for anyone who wanted to tour a home on Estately to do so – and increased our “property tour rate” by 200%. The changes we made were significant and are the reason we are successful today. The awesome thing is that we can improve further: Our most recent A/B test improved our conversion rate by over 30%.
1) Introduce Distractions. 2) … 3) Profit!
We chose this route in a very round-about way. We get a lot of inquiries from people who want a white-label Estately, but until this year we considered white labeling to be a potentially fatal distraction. Andy Liu’s story on NetConversions, the company he started right in the midst of the dotcom crash and eventually sold to aQuantive, changed our thinking. During a conversation he probably doesn’t remember, he told me they did “semi-related and pretty-unrelated” side projects to keep the lights after the dotcom crash. We realized we could do that, add some more revenues to the bottom line, and not lose sight of other priorities.
We were lucky enough to find Sutton West Coast, a Vancouver-area real estate brokerage that wanted a world-class real estate search product, but didn’t want to build it in-house. We penned a deal in the spring and we launched Sutton’s Vancouver Real Estate search service early this month. We also worked out an arrangement with Findwell, an awesome Seattle-area brokerage, to power their search.
Our white label deals are only a small part of our revenues. We probably would have been better off financially if we had focused solely on Estately, but we we weren’t in a position to risk some downside for a bigger upside. Regular and predictable revenues from the white label sites reduced the risk of running out of money.
What Can We Do Better?
Our real estate search product is already fantastic, but we know dozens of ways we can improve – and become the de facto real estate search in the markets we operate in. We just need to execute.
We Forgot To Tell the Story
We haven’t introduced ourselves to people who want to write about us. When we do, we don’t always tell them about our awesome snappy map search, our compelling features like transit-search (think convenient to BART), or the ability to search within a distance of an area (like West Babylon).
We got involved in feature releases and improvements, leaving fantastic new features un-blogged and unmentioned. The most popular feature request was for sales history on every home – a feature we launched without any fanfare in the spring (see it live on this Naperville home). We need to keep people better informed of what we’re doing!
Consumers who have used Estately love it – most of them have just never tried it.
Our Agents are Awesome – But you’d have to ask us to find out
We collect feedback from everyone who interacts with one of our agents and we have aggressively promoted our best agents. Thousands of people have worked with an Estately partner agent and people rave about our agents. There is no sign of this on Estately.
OK, we got a little distracted
We launched with what was hands-down the best search interface in the industry, but we’ve been working on so many new features and projects that we have occasionally lost sight of the core mission: search. User interface, speed and data accuracy are what have kept consumers coming back to us – we need to keep it that way.
What is next?
Seeing the end of your “runway” lengthen and eventually disappear into the horizon is liberating.
This winter will see us back on the road – expanding into new territories – and, more importantly, back to our product-development, user interface-obsessed roots. We’re taking Estately from being very useful to indispensable for people searching for a home.
Join the discussion »Free falling costs and website funding
The trend towards small, efficient startups like Menuism, 37Signals, and the Robot Co-op and a host of other small, unfunded or minimally funded startups is forcing venture capitalists to scrounge for non-traditional investments (halfway down the page).
ALTERNATIVE INVESTMENTS The blog VentureBeat has been following the venture capitalists scrounging for alternatives to technology investments as free-falling costs have drastically cut the need for outside financing. This week, Eric Eldon noted that Kleiner Perkins took part in a $50 million investment in YesPPG, a shirt factory in Shanghai (venturebeat.com).
There is no doubt that it takes money to start a company (although it doesn’t take much for a web-site!), but one has to wonder if it really takes $20 million+ to provide an outstanding experience to consumers like our massively funded competitors seem to believe.
Join the discussion »
