It pays to be lucky – part 3

February 10, 2007

This time I am not blogging about how lucky I have been in the past but about how lucky others have been.

Paul Kedrosky, a venture capitalist, recently posted the shareholder information from the Youtube transaction on his blog (see: http://paul.kedrosky.com/archives/2007/02/07/goggling_at_goo.html), which I reproduce below.

Clearly Chad & Steve did extremely well for 18 months worth of work on Youtube. What is even more extraordinary is that they did not intend (at least as far as I can tell) to create an amazingly successful company to change the way people entertained themselves with video. They just wanted to create a simple way to upload their own videos on the web. It happened to take off and become incredibly popular.

When I look at some of the other mega-successes on the Internet over the past 10 years, most of them were not intended (again if the legends are real):

  • eBay: Pierre wanted to allow his wife to sell pez dispensers online
  • Yahoo: David & Jerry built a directory of the Internet for their personal use
  • Craigslist: Craig’s list was a list of fun parties and events for him and his friends to attend
  • Google: Larry & Sergei started Google as a Stanford PhD research project
  • MySpace: While Chris knows why MySpace took off (inherent virality and the early focus on music), he clearly did not expect it to have the success it ended up having

The only extremely successful consumer Internet company that seems to have been intended is Amazon. Jeff decided that his entry strategy would be the book market because of the long tail (to offer books bookstores could not). He located his company in Seattle to be near Ingram – the largest book distributor in the world. He already had designs on other product categories from the beginning. In other words, he intended to build the company he built.

While I have somewhat more respect for Jeff as I like to see intended successes (it would be depressing if outcomes were purely based on luck), I still tremendously respect the entrepreneurs who got lucky. They might have gotten lucky, but they did so by trying to solve a problem that they – and as it turned out the entire world – faced and they fully used their skill and intelligence to capitalize on their luck.

In a famous 2001 meeting between investment bankers who will rename unnamed and Larry, Sergei and the newly arrived Eric Schmidt, the bankers were excitedly telling Google that Overture (or Goto) had successfully raised money and that its business model was becoming very successful as a means of monetizing search. Larry, Sergei and Eric went on to reply that they would never put ads on Google because:

  • The quality of their algorithmic search results was so good no one would ever click on paid search results
  • They did not want to interfere with the purity of their search results

They went on to produce a 55 page Powerpoint (that my banker friend still has saved for historical purposes) to explain that they were going to make money by selling their search services to enterprises to help them sort through all the data they collected and mostly did not use. If anyone needs 55 pages to tell you how they are going to make money it’s a very bad sign! Today this accounts for less than 1% of Google’s revenues.

Clearly, they had the strength and intelligence to recognize the error of their analysis and then went on to copy and then greatly improve upon Overture’s model – displaying the highest revenue generating ads on top, not the ads with the highest CPC – and the rest is history… All the “lucky” upstarts mentioned previously probably had such forks in the road where they could have gone down another path. Hats off to them for successfully managing growth and getting to where they are today!

On a related topic, Joel Cutler, a great venture capitalist at General Catalyst and friend of mine, pointed out to me yesterday that the companies that got lucky and grew extremely rapidly with little capital in the past few years had at least one of two things going for them: they were inherently viral, had great search engine optimization or both. Wikipedia clearly benefits from the fact that its millions of articles are indexed in Google. MySpace and Youtube truly succeeded because of the viral nature of their services.

As my companies are not inherently viral, I will just have to slug it out for a few years and see what happens. As for you, if something is nagging you about your online experience – go fix it – it may actually be something that’s nagging everyone else too! If whatever it is you are fixing is viral and produces lots of content – preferably created for free by users – all the better! Maybe you can get lucky too 🙂

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