Web 2.0 and Burn Rate
Posted on May 12, 2006
Josh Kopelman at RedEye VC has an interesting post about Web 2.0 companies and how small their target audience is. He says he has been pitced several ideas by companies looking to the next Flickr or Digg killer. But when he checked with local Philly acquaintances none have heard of any Web 2.0 companies and only a few have heard of more widely known companies like Craiglist and MySpace. He says many Web 2.0 companies are targeting an audience of 53,651 -- that's the number of subscribers to TechCrunch, a blog that focuses on Web 2.0 developments.
As more and more entrepreneurs start building what Fred Wilson referred to as second derivative companies, I think they run a big risk of designing a product/service that is targeted at too small of an audience. Too many companies are targeting an audience of 53,651. That's how many people subscribe to Michael Arrington's TechCrunch blog feed. I'm a big fan of Techcrunch - and read it every day. However, the Techcrunch audience is NOT a mainstream America audience.Eventually a few of these Web 2.0 companies will survive to become more widely known but timing may be as important as having a great product. Many of these Web 2.0 companies have small start-up costs and little overhead. However, many will still have a high enough burn rate that they go out of business before they ever reach a larger mainstream audience. Even a small burn rate can be fatal if it takes a company too long the reach the right kind of audience.
There are a few interesting follow-up posts to RedEye's post in the blogosphere. Brad Feld explains why the "first 25,000 users are irrelevant." Jeff Nolan at Venture Chronicles adds "Per Josh's suggestion, the 25k users may not tell us anything, and in the enterprise arena it's not about who's using your stuff but rather who's paying to use your stuff." And Genuine VC blogs about the quality of the users: "I think that a greater point here isn't that the first X number of users for a web service are irrelevant (as some have suggested), but that all users are not created equal. What really matters is if the current users of your service are in the eventual target market and how well they are interacting with your service."