Written by James Slavet, a partner at venture capital firm Greylock. His current investments include Coupons.com, One Kings Lane and Redfin. You can follow him on Twitter @jslavet.
As a venture capital investor, I’m focused on identifying and backing high potential consumer technology startups. It’s the small number of hits that drive the investment returns generated by the best VC funds.
I recently met with a talented and driven Internet entrepreneur who is running hard at building his second company. He sold his last startup a few years after founding it for about $50 million, which was a very fine outcome. He told me that his goal this time around is to “go the distance,” to build an independent company that will be a leader in its space and worth a billion dollars or more.
His goal inspired me to go and look at the data and the patterns behind what kinds of Internet companies, specifically consumer Web companies, became billion-dollar entities. The results of my data dive surprised me, and might surprise you.
It’s A Short List
The first observation in looking at billion-dollar consumer Internet companies is that there aren’t a lot of them. We’re approaching the twenty-year mark of the commercial Internet. Amazon and Yahoo were both founded in 1994. Yet from a recent scan of the public markets, there are currently only twenty-four publicly held U.S. based Internet companies that are worth $1 billion or more. That’s about one company per year for the past twenty years.
When you add to this list all of the companies that have been acquired for $1 billion or more over the past two decades, plus the companies that have cleared this valuation threshold but are still private, the total number just about doubles. Still, that’s only two consumer Web firms created per year worth north of $1 billion.
Social Platforms: Home Runs Happen But Odds Are Low
If you’re reaching for a true grand slam, the best way in the past decade has been to build a defining social platform. Facebook and LinkedIn are the only public Internet companies founded in the U.S. after the year 2000 that are currently worth more than $10 billion. If you include in the count the privately held social-platform companies valued at more than a billion, there are only two: Twitter and Pinterest. Tumblr is close, and Instagram appeared to be on its way before Facebook took it out. These businesses have grown virally and they have deep network effects. The utility to participants grows as the scale of the network increases – which makes the network highly defensible.
A social platform can be a beautiful business, but only if it crosses the threshold to dominate a category. The challenge is there are very few of these defining social platforms that break through and sustain. And to be a true winner, you generally have to get a very sizable percentage of the overall population to regularly use your product.
Media, Search, Payments: Not Many Billion-Dollar Plays Here
Since the early days of Yahoo and AOL, the online media sector has given us Youtube, Pandora and Hulu. Search has of course yielded Google, but there aren’t other independent success stories to point to. The only independent advertising network to clear the billion-dollar threshold since Doubleclick and Aquantive is Valueclick. And Square is the only payments company that has cleared the line since Paypal. In communications there was Skype. And in online gaming there’s Zynga.
And The Surest Way To Build A Billion-Dollar Startup Is…
What most people don’t understand is that the best way to create a consumer Internet company worth north of a billion dollars is to build a digital transaction business – a company that connects buyers and sellers so they can more efficiently transact.
A full two-thirds of the 24 publicly traded U.S. Internet companies worth more than $1 billion are digital transaction firms. The billion-dollar club includes a heavy dose of travel, local and real estate businesses. The list includes Priceline, Expedia, TripAdvisor, HomeAway, Groupon, OpenTable, Yelp and Zillow. Other transaction-focused businesses that clear the threshold include Amazon, Ebay, Netflix, Vistaprint, Shutterfly, Ancestry, Bankrate and IAC/Match.com.
Other than Amazon, very few of these firms deal in physical goods. Almost all are digital information businesses that facilitate commerce. They’ve built platforms that attract and provide value to a critical mass of both consumers and businesses.
The list of transaction businesses that have cleared the billion-dollar threshold through acquisition includes Kayak (bought by Priceline for $1.8 billion), Getty Images and Zappos. Add in still-privately held firms worth more than $1 billion such as Airbnb, Coupons.com and Fanatics. There is also a wave of online marketplaces including Etsy, Kickstarter, oDesk and Uber that haven’t been valued at a billion dollars yet, but are on their way to building a lot of value. And let’s not forget CraigsList, which is still one of the Internet’s most valuable private companies.
Sure, there are other ways to build a billion-dollar Internet company. Companies such as Dropbox, SurveyMonkey and Evernote are very exciting businesses that are emerging at the intersection of consumer and enterprise. But the surprising bottom line is that the digital transactions space has yielded a longer list of billion-dollar outcomes than all other Internet sectors combined.
The Shift To Mobile Will Help, Not Hurt, The Transaction Firm
Many advertising-supported businesses are now struggling as consumer usage shifts to mobile, where advertising rates are dramatically lower. It’s difficult to build sustainable consumer engagement on mobile. Just look at the usage decay curves for most mobile startups. According to Flurry’s analytics, industry-wide only 6% of mobile installs are active users six months later. For even the best mobile applications, thirty to forty percent of installs remain active users.
But the rise of mobile is going to help, not hurt, those entrepreneurs who build essential digital transaction services. The mobile form factor drives a habit-inducing simplicity that will grab and take hold of more spending. Consumers will come to expect that they can research and transact faster and more efficiently than traditional desktop Internet commerce experiences allow.
The mobile-first consumer will plan and buy at the last-second with high confidence, and high expectations of service quality. He’ll get a ride, book a table, get tickets to a show, buy a gift and find a place to crash, each with a couple of clicks on his phone. The best of these digital transaction companies will seamlessly integrate location and context to deliver a hyper-relevant experience. They will occupy permanent real estate on consumers’ phones, and help fulfill high frequency areas of consumer spending. They’ll have credit cards on file, and consumers will book with addictive ease.
There are many factors that go into building a billion-dollar business. A great consumer Internet business typically emanates from the conviction and instincts of an exceptional founder who is on an all-consuming mission. As an entrepreneur, you should pursue a mission that personally inspires you. It can’t just be a clinical analysis of a particular sector or business model.
But if your passion and instincts have led you to start a business in the digital transactions space, that’s a good thing. Perhaps even better than you’d realized. The sector has yielded a large number of successful and lasting companies, and is underappreciated by most people. While advertising-supported models face challenges, many transaction businesses are benefiting from the shift to mobile. Now is the time to build the next generation of great digital transaction businesses.
Disclosure: Greylock Partners has invested in several companies mentioned in this posting, including Airbnb, Coupons.com, Dropbox, Facebook, Groupon, Instagram, LinkedIn, Pandora and Tumblr.
James Slavet is a partner at venture capital firm Greylock. His current investments include Coupons.com, One Kings Lane and Redfin. Prior to joining Greylock, James spent a decade in operating roles in consumer technology companies. James was named to the Forbes Midas List of top technology VCs in 2012. You can follow James on Twitter @jslavet.