Why Seattle needs to create the next Zynga or Facebook

Guest Commentary: Last week, Forbes published its annual Midas List, ranking the top 100 tech investors. While these types of lists make great fodder for instapaper, I’ve found drawing substantive conclusions from them to be tenuous.  Still, sometimes I’m a sucker for the cognitive shortcuts that rankings provide. In perusing this list, I was mostly interested to find only one local investor made the cut (Matt McIlwain from Madrona Venture Group).

That compared with 61 in the Bay Area.  I expected these rankings to reflect the Valley’s dominance, but I was surprised by the magnitude.

Clearly the sheer size of Silicon Valley’s venture ecosystem predisposes the Bay Area to prominence in startup rankings like this where absolute metrics are used.  The common refrain of Seattleites is that a more relative approach like ‘value created per capita’ would paint a stronger picture and more accurate of the Seattle startup scene relative to its peers.

We could debate the merits of different methodologies ad nauseum, but I believe such arguments are missing the point.  I believe in this case, perception is reality.

And this is the problem.  Seattle is not portrayed as a powerful startup community in the national media.

Entrepreneurship is today’s media fascination and Seattle is not part of the story. From the glamour of success depicted in The Social Network to the purported economic panacea of Startup America, it seems American citizens and journalists alike can’t get enough.

Hopefully, this deluge of media attention encourages the next generation of entrepreneurs to found industry-defining companies.  But my concern is that they won’t be doing that here.

Does a talented engineer from Wyoming think Seattle is the right place to relocate to raise capital after looking at something like the Midas List? Probably not. Some local entrepreneurs may be having similar trepidations. I know several who have relocated to the Bay Area seeking greener ($) pastures. Again, perception is reality and our ecosystem suffers.

So how do we solve this problem?

Here’s one idea: we need a game-changing consumer product.  The explosive growth of companies like Facebook, Zynga, etc. has captured the fancy of the average consumer and thus the media.

Unfortunately, Seattle has been unable to cultivate any of the top tier players in this space and we have thus been somewhat marginalized as a startup destination nationally.

I know there are a number of strong, growing consumer startups in town, but most of our recent large exits have been from decidedly less sexy spaces.  I believe that one such breakthrough success could revitalize the community, attracting new entrepreneurs, more capital, and economic growth.

Many local entrepreneurs (myself included) are hard at work too capitalize on the boundless opportunities of the social web to make this happen. As a region that has long been defined by the corporate headquarters it has hosted, from Boeing to Microsoft to Starbucks to Amazon, we are perceived as pioneering and it is up to all of us to ensure that remains reality.

Brewster Stanislaw is CEO and Co-Founder of a Seattle-based consumer startup currently in stealth.  You can contact him here.

[Previously on GeekWireSeattle teens behind "The Grim Tweeper app dream of making it big ... in Silicon Valley]

  • Skylar Agnew

    Thanks for your motivational message.

  • Jennipher Judge

    Interesting comments Brewster. I am interested since you went to school on the east coast, what brought you here over SF?

    • Brewster

      I am actually originally from Seattle. So it’s a combination of native pride, a desire to leverage my existing network here, and a firm belief in the high caliber of our local talent.

  • Bret

    what’s the best way to get our product out? we have a great consumer product that is in beta, and have approached multiple funding channels, but to this point no one has written checks…thoughts?

    • http://www.daniellemorrill.com Danielle Morrill

      Bret, what is your product? You don’t need funding to go-to-market, and in fact getting to the marketplace and getting some traction will put you in a better position with investors, who will value the business much more when it has a track record. The idea that you need investor’s money to get a consumer product in the hands of customers is a myth.

      • S.

        Though some good counterexamples to that are Google, Facebook, and Twitter – who focused on building the underlying technology, customer base and user experience as opposed to mad scramble to monetize. If there’s nobody willing to fund those sorts of deals locally, they won’t be competitive with areas that do.

        • http://www.daniellemorrill.com Danielle Morrill

          You don’t have to rush to monetize, but I think if you can’t get your product to launch without funding you’re probably not scrappy enough — considering the plummeting cost of build a web company. Traction could just be signups, or engagement.

          • S.

            I think we agree, though – you seem to be saying “you have to be able to get to market without funding because it isn’t available here” so there’s entire classes of businesses that can’t ever come into existence here locally. No argument that this translates to “so go start something small and scrappy that takes no capital to do”.

          • http://www.daniellemorrill.com Danielle Morrill

            To be super clear – I don’t think you should go to market with very little capital because it isn’t available, but because if you can do it with no capital it is way better for you as a business. You’ll get better terms if you already have traction when you come to the negotiation table.

    • Brewster

      Bret,

      I don’t know the product, so I can’t see how far along you are. But I would suggest that you focus on continuing to improve your product so that it enchants your user base, regardless of its size. Concentrate on tightening your customer feedback loop and iterate, iterate, iterate. Build a portfolio of metrics that shows how much your customers are enjoying and engaging with your product. If you can demonstrate that and have a clear view on how to scale this kind of user delight, funding should be much easier. Make consumers 1-100 as happy as possible–they will be your biggest evangelists in getting the product out.

  • http://erickennedy.org Eric Kennedy

    The good news is that Seattle is much, much better positioned than it was 9 years ago when I moved back here from college. Even though I was a CS major, I didn’t consider moving to the Valley because the articles and books by former Seattleite Po Bronson (see The First 20 Million are the Hardest) made me think the Valley was too money-focused and built around hype cycles. That’s probably just as true now as it was in the dot-com bubble, but at least founders are getting rich creating lasting businesses instead of via instant IPOs.

    TechStars and incubators like Founder’s Co-op are the best way to enable hungry teams fresh out of college to pursue their dreams. It just takes time and continual funding.

    • http://www.daniellemorrill.com Danielle Morrill

      “too money focused” — I don’t understand this criticism of the Bay Area, and I hear it time and time again. The point is to be money focused, you’re building a business to return value to shareholders (hopefully more than just your investors). Sometimes I think people talk like the good folks in the PNW are the only ones tying together money and value. TechStars and Founder’s Co-op won’t exist someday if the founders whose dreams they enable don’t focus on money, it is what makes the whole ecosystem possible.

      • http://erickennedy.org Eric Kennedy

        There are people who are just in it for the money, and then there are people who want to “put a dent in the universe” and make the world better. Compared to Wall Street traders, Valley entrepreneurs are saints. And frankly, Microsoft’s anti-competitive tactics (revealed in emails and documents from the DOJ trial) were a far bigger threat to innovation than greed.

        It’s easy to misinterpret that cliche, such as when Sean Parker told Mark Zuckerberg that “a million dollars isn’t cool… a billion dollars is.” Zuck is in the “dent in the universe” camp, and Parker’s advice gave him permission to resist a quick flip and instead build a great, lasting business.

        The problem with the Valley’s focus on only building billion dollar companies is that there are a lot of great niches for smaller companies. I agree with Scott that what Seattle needs is more modest successes, not a few huge wins.

        • http://www.daniellemorrill.com Danielle Morrill

          Seattle “needs” more people to actually launch stuff that other people want, big or small. The biggest problem I had when I was there was that everyone had their pet startup, but were way too comfortable with their awesome job at a stable tech company and comfortable lifestyle in the suburbs.

          The risk profile just seems completely different from the Bay Area. I’m not sure why that is, I haven’t been here long enough to deeply get it, but something is fundamentally different. If I could bottle it and bring it back I would.

          • http://profiles.google.com/gfaherty3 Greg Faherty

            Danielle, what is very interesting to me is that I have experienced the very same Seattle attitude but in an entirely different industry. I moved here with my wife from NYC and while I knew that I was moving to a much smaller market I was still shocked at the pace of the area. It is something that I still struggle to get my head around and not fall prey to. It is very easy to slip into that comfy pace but our competition in places like NYC, LA and New York are working in a very different way. Just my .02 from someone who has ‘felt’ that same difference in Seattle compared to other big markets.

          • http://erickennedy.org Eric Kennedy

            While most tech people in Seattle and SF are transplants, people in Seattle were recruited to work at Microsoft or Amazon while people in SF usually went to join the startup culture. Crucially, that passion for startups persisted through the dot-com bust in SF but withered in Seattle and longer to recover.

            The worst mistake I made was to go work for a profitable dot com (Expedia in early 2003) instead of a startup on life support. I have job hunting notes from 2002 where I wrote that I thought I would learn from working at a successful company instead of a floundering startup. It was logical, but the problem is that all of my coworkers were buying condos and cars and it was very, very difficult to resist the temptation (I didn’t.) Once I had debt, it was really difficult to quit my job and bootstrap my idea for a Dropbox-like system.

            Expedia was the kind of huge financial success that Zyna is, but both are the wrong place to get more experience on building a startup from the ground up. It’s better to fail early than get used to a safe paycheck.

          • http://twitter.com/chrisamccoy Chris McCoy

            +1 to Danielle’s comments. I’ve been here for 1.5 years, feel the same way. Although Danielle’s in SF and I’m Sunnyvale (bounce between here and Palo Alto). I think there’s a noticeable difference between these two startup communities (Valley and SF).

            Valley it seems is ruled by 2 beliefs:
            1) Data is gold. To be first or second place in a vertical with data strategy to move horizontal makes you king. Money flows to companies that own data.

            2) “Failure” makes you stronger, better, more apt to succeed in turn 2.

            Seattle ruled by 2 beliefs:
            1) Transactions are king.
            - Limitation here is the cost of sales to create those transactions. Data lowers these costs. So ceiling is lower on businesses, we see a lot of “apps”, not world-changing companies.

            2) Failure frowned upon.
            - Increases risks of starting companies, lowers incentives.
            - Possibly stems from the Microsoft culture and influence on early-stage investing so far
            - My hunch is that when the Amazon culture starts to get heavily involved in the early-stage community we’ll see some really, really cool stuff happen. Just a hunch though, no real data or evidence.

            What Andy Sack, Andy Liu, and co. are doing is SENSATIONAL. It’s a big step to creating a culture where failure becomes a learning opportunity (thus creating better long-term entrepreneurs) and lots of tolerance for horizontal data plays.

            Another area to take a look at is culture of entrepreneurship at the UW. What type of startups and early-stage co’s are coming out of there, from who, and why.

          • http://www.daniellemorrill.com Danielle Morrill

            Totally agree re: Valley vs. SF having different cultures. In fact, to some extent they breed totally different kinds of companies. SF seems to be about hip consumer companies, the Valley about big technology plays. By this measure, Twilio would make more sense based in the Valley – but culturally we’re happier in the city.

  • http://www.facebook.com/profile.php?id=562790974 Brad Hefta-Gaub

    I hate to sound like a hater, because, really, I’m not… and although I agree with the basic premise of your post, I think it’s a little simplistic… Yes, of course, if there was a NEW huge blockbuster consumer technology company to come out of Seattle it would obviously do wonders for enhancing the region’s image.

    But it’s not like all the region needed was for you to point this out to us. You didn’t really think that we simply didn’t realize this would be a good thing did you? Really?

    • Brewster

      I agree with you that my point is a simple one and I certainly didn’t mean to pander. But just because something is obvious, doesn’t mean it’s not worth saying. I think it’s worthwhile to have a little reminder that 1) the national media shows us no love, 2) we should care about that fact, and 3) the only way to fix it is to get out there and build something revolutionary. Honestly, if one prospective local entrepreneur dreams a little bigger after reading my post, than I consider it a great success.

  • http://twitter.com/scottporad Scott Porad

    Naturally, Seattle would benefit from the next blockbuster. How is it beneficial to state this?

    In my view, this valuable space in Geekwire would have been better spent celebrating one of the Seattle’s more modest success stories. Those successes aren’t Zynga-esque, but my view is that celebrating a constant stream of small successes will improve the perception of Seattle as a suitable location for startups. Articles like yours do the exact opposite.

    • http://erickennedy.org Eric Kennedy

      Good point. What made the Valley (and now SF) so successful is that it has had 20 years of an even distribution of company sizes from 5 to 500 to 5000 employees. Seattle’s tech scene was so dependent on Microsoft (and spinoffs like Expedia) for 25 years. The CTO of the Seattle startups I interned at from 96 – 01 warned me to not work at Microsoft because 1) being successful at Microsoft does not translate to being successful at a startup and 2) you can’t gain expertise in something at Microsoft and then leave to start a company as that would mean competing against Microsoft. Amazon seems to be a better training group for entrepreneurs as each dev team is responsible for their service. Running a startup means pager duty 24×7!

    • http://www.daniellemorrill.com Danielle Morrill

      Word.

    • Brewster

      If Geekwire were a more nationally-read publication (I know it will be one day John and Todd), then I would agree with you. But I question how many prospective entrepreneurs outside of the local area are reading my post. Typically they are reading more widely distributed pieces like the Midas List. I don’t think my post will discourage anyone from coming to Seattle, but I think you are right on a more general basis. Had I been writing for Forbes, I would have praised Seattle to the moon. But since my audience was a local one, I was merely hoping to remind all of us to aim high. I don’t want to disparage any of our local successes; I just want us to push further. And you are right–our strong consumer companies like Cheezburger do need more press!

    • johnhcook

      There’s been a mentality in Seattle’s startup community over the past few years to applaud bootstrapping and base hits over the home run swings.

      I am all for the lean, bootstrap mentality, and that’s a huge advantage this community has going for it. (I just returned from Hops and Chops where this was on full display, and that’s very much a special ingredient of the community).

      Here at GeekWire we focus attention on the startup companies of all sizes, including those building nice, sizable businesses under the radar. Our story on Avalara is one recent example of a local success story, and there are many, many more that we’ve highlighted:

      http://www.geekwire.com/2011/marooned-bainbridge-island-fastgrowing-avalara-establishes-seattle-outpost

      But there seems, at least to me, to be a lack of support for entrepreneurs in Seattle who want to think big. I don’t think you see this in the Bay Area.

      It is a good thing that companies like Cheezburger are countering this, and raising the capital to take their businesses to the next level.

      But acknowledging the region’s shortcomings, and highlighting those companies that are trying to break the mold, are part of the process toward building a more successful tech region.

      Brewster’s right. We do need a breakout success story, something I’ve said myself on a number of occasions. But we also need a framework here that supports the entrepreneurial mindset which can deliver those types of companies. Do we have that right now?

    • http://www.facebook.com/aaron.a.bird Aaron Bird

      I disagree. We need to push the Seattle startup community to swing for the fence more often. Hitting singles and doubles will never get us the national attention needed to persuade entrepenuers to come to Seattle to setup shop. This article was targeted to the Seattle community, and the in my view the point was right on. There will always be great places in America to start $1M companies (Austin, Boulder, NYC, Chicago, Boston, etc), we need to be on that very short list of places to build $1B companies, and the only way to do that is to make some big home runs and get the media attention.

  • http://www.jrotech.com/ Jeff Rodenburg

    Nice article Brewster. In thinking about how we (as a region) get to a game-changing consumer breakthrough, the concept of risk-begets-reward is front and center. While places like Sili Valley have Google and Facebook and Twitter as examples of consumer home runs, more so they’re examples of bets. Big, bold risky bets that Seattle seems to avoid.

    The reason (I believe) we don’t get a lot of national pub about our thriving startup community is the perception that we don’t place those game-changing bets. Quite frankly, it’s hard to argue with that perception.

    As Brewster has referenced, on a national list of prominent tech investors, there’s just 1 person out of 100 who identifies with our region. Adeo Ressi was recently bemoaning the fact that Pacific Northwest investors are sitting on their hands. John Cook just wrote about all the Bay Area venture deals being completed by local firms (http://www.geekwire.com/2011/california-dreaming-ignition-backs-startup-ties-region).

    Certainly, lower startup costs to vetting an idea contribute to a smaller number of opportunities for major venture firms. Nonetheless, in a town that counts Microsoft and Amazon headquarters, and development offices for Google, Facebook and (now) Zynga — it sends signals about goals, ambition and focus on the part of both investors and entrepreneurs.

    Until we (investors & entrepreneurs alike) make major bets, we’re not going to reap rewards of size. It’s like the lottery — we can’t win if we don’t play.

    • http://www.daniellemorrill.com Danielle Morrill

      Just an observation, but everyone keeps listing Twitter, Facebook, and Google as big Silicon Valley wins. Do you have any idea how many startups there are in the Bay Area? It is just mind blowing. TechCrunch, for example, covers a tiny tiny TINY fraction of them. If the Bay Area had it’s own Seattle 2.0 index (which I contemplated creating for a few minutes and then went back to work) it would easily contain over 10,000 companies. Even a success story like Heroku would be huge for Seattle in terms of raising visibility – it doesn’t have to be consumer to send a powerful message.

      • http://www.jrotech.com/ Jeff Rodenburg

        I actually do have an idea about startups in the Bay Area — I work with a few in the Valley. I was using T/F/G as examples of big payoffs, due to their size & prominence.

        But without a doubt, the volume of startup activity around the Bay is astounding. Actually back to the point, the reason the Bay area can point to T/F/G as recent successes is due, at least in part, to the sheer volume of startups. They make *many* more bets than we do, so the likelihood of successes increases as a function of math.

        There are very few stones being left unturned in Silicon Valley.

      • http://www.jrotech.com/ Jeff Rodenburg

        > Do you have any idea how many startups there are in the Bay Area? It is just mind blowing.

        I work with several companies in the Bay area, and you’re right — the volume of startup activity is an order of magnitude larger than Seattle.

    • http://www.daniellemorrill.com Danielle Morrill

      Just an observation, but everyone keeps listing Twitter, Facebook, and Google as big Silicon Valley wins. Do you have any idea how many startups there are in the Bay Area? It is just mind blowing. TechCrunch, for example, covers a tiny tiny TINY fraction of them. If the Bay Area had it’s own Seattle 2.0 index (which I contemplated creating for a few minutes and then went back to work) it would easily contain over 10,000 companies. Even a success story like Heroku would be huge for Seattle in terms of raising visibility – it doesn’t have to be consumer to send a powerful message.

  • http://www.facebook.com/aaron.a.bird Aaron Bird

    +1. Great article Brewster. Some recent posts on the subject point to other issues like the lake of a strong and active Angel community in Seattle. But, it’s a chicken and egg problem that would be solved by building a few large consumer companies that grab media attention in Seattle.

  • http://twitter.com/adamac Adam MacBeth

    We definitely DON’T need to create the next Facebook or Zynga. The current bubble in social networking and consumer media is just the latest bandwagon that everyone from investors to entrepreneurs are hopping on. We don’t need to be followers.

    We do need to swing for the fences, ignore the current hype, and build the NEXT wave of technology. That’s what leaders do.

  • http://twitter.com/alwaysbshipping Tom Leung

    IMO Amazon, MSFT, and Starbucks are just a impressive as Google, Facebook, and Twitter, esp when you consider the relative volume of startups there versus here. Zillow, Redfin, Picnik, Expedia, and Real are pretty impressive stories as well IMO (there are of course many more).

    I have no doubt we’ll get our next blockbuster — it’s partly a statistics exercise where it can take a lot of points on a distribution to get one that ends up in or outside of the right tail.

    And then there are of course structural advantages that the Valley seems to have over Seattle. Their sheer number of inbound entrepreneurs, critical mass of VC’s, Stanford, sunshine (I actually think this is often under indexed by observers), media attention, and perhaps a more risk-tolerant culture are a pretty potent cocktail.

    It would be interesting to think about what Seattle could do to gain some competitive advantage. While government is rarely the answer to most of our problems, I do think if done well, it can be an enabler. E.g., could massive tax breaks for startups and their financiers, more sponsored applied technology research and enablers like stipends and small angel grants, and perhaps even giant Washington VC fund that offers matching capital help us prime the pump?

    Not sure if any of that would work but it’s interesting to ponder if you were Governor (or Mayor), could you do anything to help Seattle set the optimal conditions to make it easier for our next blockbuster to emerge?

    • Brewster

      I think that MSFT, SBUX etc are more impressive than the current crop of social companies. The problem is the culture of ‘what have you done for me lately’ and that’s why we need one of those huge wins in this current cycle.

      As you and many others have touched on, SV definitely has huge advantages over SEA in terms of scale, which creates a much higher statistical likelihood of huge exits. And I think you hit on what is the most important point: what can we do to maximize our odds of having one of these exits given our lesser scale? Your potential ideas for government acceleration are the type of things we should be thinking about. Ultimately, a high-publicity exit will rely on a reasonable amount of luck, but it’s incumbent on us as members of the local community to increase the likelihood that it happens. And I believe this kind of self-reflective dialogue is a good step in that direction.

    • S.

      Amazon is fifteen years old, Starbucks and Microsoft upwards of 30 – not quite startup material anymore, more in retire-and-write-your-memoirs category. Would be nice to see a current generation (post first-dot-com-bubble). Zillow might be a winner, Real sure isn’t, and Expedia is more a spinoff than a startup – TBD on Picnick or Redfin.

    • HT

      We are also home to some underlying juggernauts in terms of gaming..Bungie which develops the high profile HALO series and Pop Cap who created Plants VS Zombies are all local and doing very good buisness

  • johnhcook

    We asked Andy Sack about the lack of a big consumer Internet success story in Seattle on the GeekWire Podcast. And here’s what he had to say:

    “I firmly believe you’re going to have me on the show next year and the year after, and we’re going to look back and be, like, wow, (TechStars) was an important moment in the development of the tech scene in Seattle. … I would say today there are a small handful of companies — Cheezburger comes to mind as an interesting company to watch over the next few years. Because actually I think it has possible potential to be a bigger company.”

    You can access a partial transcript of Sack’s remarks and the full show here:

    http://www.geekwire.com/2011/rewind-andy-sack-techstars

  • Anonymous

    I have to agree with Scott on this one. I’m not entirely sure of the point of this article – I read a great tweet the other day – “37signals is an example of people who got ridiculously wealthy, have no idea how, but think everyone should try being rich.” (http://twitter.com/#!/fijiaaron/status/58244183307198464). Great, you want Seattle to be the home of the next Facebook or Zynga. I’d like a unicorn that peed root beer and hundred dollar bills came flying out of its nose every time it sneezed. We’re both no closer to getting it.

    Further, it’s not like we don’t have some great success stories recently – Cheeseburger, PopCap most recently – have had some huge announcements, but we’re still not really converting it into long lasting goodness.

    I think if there was one thing missing, it’s the step up exit. The valley is so packed with startups because there is a ton of money being spread around – a business gets going, you get enough traffic or traction to hire like mad, and then the original guys have enough stock on from acquisition, IPO or SecondMarket to go do something else.

    • johnhcook

      First off Dave, your comment about root beer-peeing unicorns is perhaps the funniest thing I’ve read on GeekWire. (Certainly, a strong contender for our “comments of the week” overview on Sunday).

      There are some success stories around Seattle, but I think there is a missing piece in terms of the “small ball” mentality. There are a few entrepreneurs breaking this mold (Dave Roberts at PopCap, Ben Huh at Cheezburger, Sunny Gupta at Apptio, Glenn Kelman at Redfin and Kathy Savitt at Lockerz are a few).

      I think Brewster’s column simply points out what’s needed here. There are multiple ways to get there. Or, maybe it is just luck and it is not tied to political environment or money or educational systems or anything else.

      There is more money in the Valley, and that does help, and as Chris McCoy points out more of a mentality of failure making you stronger.

      As I pointed out earlier this week, another missing ingredient is the young teenager or 20-something entrepreneur who needs to be cultivated here.

      • Anonymous

        I think Brewster does a good job of laying out the situation, but I do not agree he points out what’s needed. The closest he gets is this line “this deluge of media attention encourages the next generation of entrepreneurs to found industry-defining companies.” I think the lack of media attention does help, but that’s a symptom, not a cause. Big businesses with big exits with a great environment for the smart people who made money (or who want a chance to make money) make entrepreneurial community go from good to great. I don’t believe simply stating what everybody knows (that Seattle is missing one to many of these components) that helps get us there.

  • http://twitter.com/fijiaaron Aaron Evans

    But Facebook & Zynga are opening offices in Seattle. Maybe we’re the South Bay’s sweatshop in the same time zone?

    I’ve seen other people complain that Seattle is full of me-too clones. I haven’t seen that really except Zillow/Redfin/Estately which are all local (with Trulia being the Bay’s contender that’s doing pretty good by working with Realtors instead of against them.) But maybe it’s my lack of exposure to the phenomenon.

    Now we’ve got an article calling for just that.

    There will be a next Facebook, unless Facebook succeed in subsuming the internet where AOL failed. But it won’t be a Facebook clone. Just like Facebook started out as a hot-or-not clone/dorm directory, not a MySpace clone.

    Zynga has a billion dollars but nothing but a bunch of Farmville clone acquisitions to show for it. They’ll need to do something with that money to matter. Not to say that they can’t. By scaling the way they have, they’ve got an infrastructure to compete. And that’s there similarity to Facebook. And Google. And Amazon. And YouTube & Twitter & etc.

    It looks like it turns out that the really important lesson a company needs to learn is how to massively scale. That’s what investors are rewarding anyway. Of course, there’s the chicken and egg issue that unless you develop a phenomenally successful app, you’ll never learn how to scale.

    But it’s the scalability that’s being rewarded, even if it’s being rewarded for the wrong reasons –investors think you can develop another mega-hit– but it’s irrelevant, because once you have the money, if you’ve go the scale, you can buy the up and coming hits.

    It’s the Microsoft strategy, the Oracle strategy, the Google strategy, and the Zynga strategy. It’s companies that have figured out how to scale that are given the money to buy. They’re acting as a gateway for Venture capital, which in part explains both the high valuations, and the new acquisition-targeted exit strategy.

    There are two local companies that come to mind that have found a way to scale in a smaller er… scale. Big Fish Games & Cheezburger Networks. Contrary to popular perceptions, they’re not Casual Gaming and Joke Site companies. They’re a subscription based download company and a advertising delivery company. And they’re experts in their field, and they know how to scale.

    That’s why Cheezburger is sucking up all the local venture money. Because VCs have decided they know how to pick winners (in fact, Ben Huh is an advertising guy who bought LOLCats to sell ads.) I’d expect Cheezburger to expand from delivering media, to delivering ads on other people’s media. And that puts them in direct competition with Google.

    Big Fish Games has had a hard time figuring out micropayments and social networks. Their Farmville name-shift FaunaSphere crashed and burned in part because of this (and in part because it was a weird game that no one was into, even though it had a lot more polish and gameplay than Farmville.) While there may still be a place for downloadable (& flash) subscription games, their foray was crushed between Blizzard and Zynga. (Midrange MMORGs seems to be a difficult segment — whatever happened to Evony, etc?)

    Still, there are areas that I’d look for clones, though really more like giant killers. Craigslist and Ebay are ripe for beanstalks (as are Netflix and Paypal.) And I’d even venture to say Amazon could go on this list. But they’re all (except Netflix) sticky networks that have even more crowd advantage than Facebook.

    Find an area that doesn’t have a clear market leader like surprisingly even at this date, shopping carts. Or find a market that can be split into services & data, like real estate (or another that I’m interested in, job search.) Or create a market with a new idea.

    Personally, I’d rather create a new market, but that’s a lot harder.

    • http://twitter.com/chrisamccoy Chris McCoy

      this is really a great comment!