A Case Study on the Impact of New Technology

June 8, 2011 § Leave a comment

When I started BuyYourFriendADrink in 2007 (just 4 short years ago), I used to get emails all of the time saying – why don’t you add more bars?  why don’t you add this city?  The answer was, I didn’t have the capital to do so.  The business model had one big barrier to growth – we needed to install technology in the bars for the system to work.  The flip side of that barrier is that once the network is built, it would have become a barrier to entry for a competitor – similar to how cable or telecom works.  OpenTable has a similar model and they have built a big, defensible business.  As a start-up trying to prove my model, I didn’t have the capital to launch many new markets, even though I had bars contact me and want to sign up.  At the time, each bar cost $500 – $1,000 to set up (depending on their system).  And then I needed to support that market with promotional campaigns to create awareness.  The solution I came up with to solve this chicken-egg problem was to get customer financing – i.e. I got liquor companies to pay for a sampling program at certain bars.  I would then use their capital to add the bar, effectively spending all my margin on that deal to grow.  It was a solution, but it slowed growth significantly.

Four years later, new technology has obfuscated this challenge completely.  If I were to start BYFAD again, I would need dramatically less capital and would be able to grow much faster.  The key technology change is the consumer adoption of “check-in” services.  If I were to start BYFAD now, I would use check-ins to redeem drinks and remove a huge chunk of cost from the model.  It would also make the process easier for the consumer.  But in 2007/08 the check-in was in its infancy.  True story, I traded emails with Dennis Crowley after he sold DodgeBall to Google, about a partnership.  For those of you who don’t know, DodgeBall was the pre-cursor to FourSquare, which Dennis started in 2009.  FourSquare has gained much wider adoption than DodgeBall did, mostly due to the increase in smart phones (again only a few years later).  The use of smartphones and mobile web has obfuscated the need for text messaging and text rates for FourSquare’s model to work.  It also made it easier for the consumer to use.

My point here is that we are in the beginning of an amazing revolution in technology and start-ups.  New companies are growing at unprecedented rates due to new communication technologies that have two key features:

1.  They are free

2.  They are extremely viral and have wide adoption.

To put a fine point on this statement, remember that Groupon is the fastest growing company in commerce history.  Think about that for a second.  In the entire history of commerce a coupon company (not exactly a new technology) with a 50% off pricing model (not exactly a new pricing concept) is the fastest growing company ever.   In the history of commerce for crying out loud.  That is literally not believable, if it weren’t true.  But social media has made it true.  There are a lot of stories like Groupon’s success, although not to Groupon’s degree.  So it is not a one-time event.

A lot is being made of bubbles and high valuations for start-ups.  But the fundamentals of start-ups are changing dramatically and for the better.   It is now cheaper to start and grow a company to unprecedented levels.

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