Building New Billion Dollar Companies

Some people love and adore Path, but the application has always just fell flat for me somehow. Maybe I'm not using it to keep tabs on people I really care about (I would, but those people are not using the app), but the content really isn't appealing to me. And it got me thinking - how come content posted elsewhere, on single-serve applications (Instagram, Soundtracking, Foursquare, etc.) can be so interesting, yet this app, which lets you do a little bit of all those things, just isn't that captivating? I don't think it's Path's fault - their interface is attractive and beautiful. However, I'm beginning to think Path isn't setting up its users to succeed. When I download a single-serve app, I am implicitly declaring that I have an interest in the thing that application does. I'm far more interested in looking at Instagram photos than I am looking at Foursquare venue locations. But also, in some ways, the act of creating a post on Instagram is so much more "expressive" to me, and the nuances speak in a way that say, checking into a location on Foursquare do not. And I don't think it's just me - people use the apps that they feel allow them to express themselves best, and because of that, I think they end up creating more interesting content.

However, on Path, everything is too easy. You don't have to download Instagram to post a picture, so why not just post one? Same with posting a song or a comment, a location, or whatever. And that ease makes for content that just isn't as captivating.

My friend Christina posted a fascinating, interesting post on the USV blog that I think really speaks to how these single-serve applications are much more in-line with a certain vision of the future than everything-and-the-kitchen-sink type apps like Path. But she isn't talking about software development.

One reason to create firms is the coordination and signaling problems of situations with imperfect information and transaction costs. As technology increases information flows and decreases transaction costs, individuals can leave their old employers and strike out on their own. Their livelihoods will still depend on providing valuable services in exchange for fees, but they'll do so as freelancers - and on their own, they'll capture more of the value generated by their work.

There's this weird thing going on - it strikes me as a sort of, "Reverse Industrial Revolution." Between the second and first Industrial Revolutions, a more automated manufacturing process created mass production, but also brought people into larger groups to benefit from these new economies of scale, and the modern corporation was born. In Christina's vision of the future, we're now back to working alone, able to be productive as individuals. But this isn't just happening for our users and customers - web technology is allowing the web industry itself to change to a place where smaller teams and build, ship, and sustain products.

That seems to be at the heart of these single-serve apps: smaller teams building more niche products. Since you don't have to support a huge team to get something done, you can appeal to these niches. Many of the large niches seem to be taken by first-generation internet companies: everyone needs to buy stuff, and so Amazon was built. Everyone needs to live somewhere and get local services, so Craigslist was built. Everyone needed some organization of the web's information, so Google was built. But it's hard these days to find something everyone needs, because so many of the obvious ones have been built already. So what is an overzealous entrepreneur that doesn't think a million dollars is cool (a billion dollars is cool) to do?

More from Christina:

Last year, John Maeda predicted technology would become a cottage industry by 2020 "with bespoke applications made by many, rather than today's industrialized, Microsoft-esque mass production and distribution model." I doubt we've seen the last billion-dollar software company; tech companies will continue to ride the economics of software, and larger companies will use strong network effects and scale to drive consolidation. However, we'll likely see fewer companies that need to build - and fewer companies that will build - every piece of their technology themselves.

There's two things Christina is saying here that are relevant to building big companies. You still need to build something large-scale - something that a lot of people want. Any one niche is too small to be interesting in this lens, but all the niches together make up a big market. And a generalized application will never serve an individual user as well as a specialized application. Now that the economics for specialized applications make more sense, potential big companies have a tall order to beat the specialized apps. So the thing you want to do, it would seem to me, is build something every niche needs. Don't build for consumers - build a component part that every consumer needs in their application. In this case, your "customer" isn't the user - your "customer" is the application developer. Indeed, the second generation of billion-dollar tech companies seems to be doing exactly that: Everybody wants to use social apps with their friends, so Facebook was built. Everybody wants to broadcast their actions and creations on various apps and services as well as general experiences to their audiences, so Twitter was built. Everybody wants to use their applications in a great mobile space, so Apple and the iPhone/iPad/app store ecosystem were built.

These companies show that Christina's point about network effects and consolidation is an important one - in order to really force developers to choose your product over another, it helps to have a network effect driving that consolidation. Facebook and Twitter obviously benefit from social network effects, which is a very popular route to go. Apple's iPhone store actually benefits from this as well - there are a ton of Apple mobile users downloading apps, so developers choose to build for that platform, and more people want to use the same apps their friends are using. A few exceptions to this include those that are still benefitting from the traditional economies of scale - Amazon Web Services being a great example of this. But in general, this shows why you have to build a great consumer application first - you have to create those network effects before you can get other developers on board.

That, in itself, is a sort of funny catch-22: you can't create a tool every developer wants to use unless you already have all the users. But every user is likely to be able to find an application built by a smaller team that meets their niche-specific needs better. So, if you are trying to build a large company today, you can't just be looking at competitors who have the same scope you do - you have to look at the sum efforts of all the smaller companies who will slowly erode away your users.

I was thinking about this, and realized you could make an argument that the rise of the many "clipping" services (clipboard, Findings, Snip.it, Svpply, The Fancy, GimmeBar, etc.) is actually the result of Tumblr's reluctance to "platformify" (I just made up the most buzzwordy sounding word ever). And the biggest failing of Tumblr's may have been the rise of Pinterest, in particular.

The truth is, functionally, all these sites are very, very similar. Clip, tag/board, reblog, etc. But they've each developed their own cultures and interfaces around this fairly basic set of actions, that appear to be an interesting set to a wide variety of end users. How different would this market have looked if Tumblr had automated a lot of these tools and allowed people to build their own applications on Tumblr's backend? Pinterest has hit on an interesting niche - women seem to LOVE Pinterest: they post wedding dresses and recipes and photos of homes and DIY crafts and essentially anything that was ever printed in a women's magazine, ever. The scary thing about this niche is that, well, it's sort of large for a niche. I wonder if it is the kind of niche that you could possibly leverage into creating network effects if you ever decided to start opening up your service to other developers. I wonder if it's the kind of niche that would cause Tumblr to look back and really regret forcing everyone to use their dashboard.

Now we watch the next generation of web companies attempt to "platformify" and deal with this new landscape, a landscape that's changing what "swinging for the fences" looks like. Dropbox, Airbnb, Foursquare, and other companies like them seem to have a clear vision of this challenge, and I'll be curious to watch them grow.