So I have been very vocal in the past, with the Crowdfund and beyond, that I am not a fan of copycat sites. I feel that if you are going to spend the time and energy on doing a startup, then you should do something that is going to wow the world and be memorable. Not much memorable about a copycat site.

(Btw, by “copycat” I mean a site that is based on another site, more than likely US based, that you are thinking of launching here in South Africa.)

So at our last Crowdfund board meeting, I brought up the fact that I really wouldn’t be interested in funding any sites like this, even if only because I believe we should focus more on the global space than the South African space. And I was knocked down flat by every board member present.

Everyone pointed out that copycat sites usually bring improvements with them, that are geared towards the local market. Also, South Africa shouldn’t be left out in the cold just because there is an excellent regional model elsewhere that hasn’t made it to our land yet. Etc, etc. So, as I have stated before, we are in fact going to look at investing in a) local sites and b) maybe even copycat sites. But for me the first option will always be innovative, and global.

Anyway, all this talk made me realise that there is indeed logic in the madness….if a good model exists elsewhere, is it really so bad to replicate it here?

I am going to give it a shot, just for the hell of it.

I have been thinking long and hard for a while now about the best way to use the web to score a good deal. Nothing original there, of course. I was simply trying to come up with the optimal way. I even registered a cool domain name (www.dealcatcher.co.za) back in October last year while I was thinking about it.

In the meantime, I have been spending a lot of time researching “what’s big online”, in the US. And the one thing that jumped right out is Groupon.com. It’s gotten a lot of funding, it is cash positive, it has a lot of media attention. It also has a hell of a competition (at least 65 other similar sites) and not that many members, relatively speaking (3.6 million, after abt 3 yrs of operation). Still, I like the model, or at least half of it.

Here is how it works: Groupon finds an awesome deal (a massage at half price) and offers it to its members, conditional on the fact that a minimum of x people accept the deal (say, 75). Once 75 members sign up and pay, the deal is ON. More people can sign up while the deal is live, which is usually for the one day.

(Actually, it’s a bit like the Crowdfund. Without a R million in pledges, the deal would be OFF).

So, guess what? Yep. I’m launching a local Groupon-like site. Will use the www.dealcatcher.co.za domain, and will tweak the model (substantially) to suit our local market.

Of course, now I want it up ASAP. I have put a super team in place to make it happen, so I am giving myself (and them) a tough deadline. Three weeks to beta. I think it’s possible, although there is nothing set in stone.

Here is the kicker though: this is going to be a fun, side project. It certainly won’t use any Crowdfund money (obviously), but it also won’t use much of my own money (there is a team in place to run with this, so it’s not a solo project for me). Let’s see how I can bootstrap this to profitability. I am going to try to be as transparent about the process as makes sense strategically, and I will use this site to blog the process. Ultimately, I am going to put my thesis to the test that it is possible to harness the social cohesiveness of the South African online population to launch a good site cheaply, but well. And it will go one step further to apply the Geekretreat credo of “Making the South African Internet Better”

Most times, it is the ideas that are so simple, so obvious that are the best of all.

Chris Dixon points out in a post that if you are relying on advertisers for revenue, you actually need your website visitors to leave your site. So you shouldn’t be too sticky.

He cites Google vs Facebook as an example. Google is obviously designed to get you as fast away from it as possible….they want you clicking on those advertisers, the more often the better. They know you’ll come back of your own free will. Facebook, on the other hand, is very different. It wants you to stay there, and therefore does not offer much hope for advertisers who are waiting for you to click, click click.

Which goes a long way to explain why Google’s revenue is 30x that of Facebook’s.

As Chris says:

Facebook is like a Starbucks where everyone hangs out for hours but almost never buys anything.

This only applies to ads that want to be clicked. Maybe ads should simply want to be viewed? For brand building, for instance. (Chris refers to this as “intent generating advertising” as opposed to “harvest generating advertising). He suggest the big brands will have to rethink their approach.

They would be smart to look at our local Daily Maverick, which has done the thinking for them. The advertising model there is clearly built for brand awareness, rather than a “click now!” mentality. Which is great for the Daily Maverick, because it can then be as sticky as it wants to be.

Mike Arrington from Techcrunch recently hosted top notch VCs to a roundtable discussion, mostly focussed on the high valuations that some startups are getting these days. The transcript is here, and the video is below.

Arrington raises the issue that certain startup companies have extremely high valuations as dictated by the latest investments rounds: Foursquare ($80 million), Quoara ($86 million), Blippy ($38 million). None of these have shown any substantial revenues, never mind profits, and there is no clear exit strategy for the investors. So what is going on?

Marc Andreessen (founder of Netscape, Ning and now Andreessen Horowitz, a $300 m venture fund) had some good insight. He points out that every year there is a very small number of companies that have the potential to be “incredibly important companies”, and that those are the companies that “have the potential to be very financially successful, and … important and financially successful in this industry turns out be the same thing“.

He goes on to say that:

• Every year, in the long run, the tech industry creates about 15 companies that end up doing $100 million+ in annual revenue
• These are the “important franchise” companies like Google, Facebook, Salesforce
• These companies are “the main event”
• These companies are in demand by the VCs
• These companies merit the high prices, assuming they work.

David Hornik, from August Capital, points out that

“ultimately…you can talk yourself into pretty much any valuation because at the end of the day if it’s the multi-billion dollar outcome, then having done it, you know, done around it a hundred million pre- is sort of irrelevant. The difference between 50 million and a hundred if it’s the same multi-billion dollar company is nonexistent. The only problem is, do you get it right?…..We all seem to agree on what the things are that might be those interesting deals and that’s driving up the price.”

So basically, what it boils down to is: the VCs are willing to pay a premium for companies that they believe will make it big. Question is, are they targetting the right companies? As is pointed out in the video, there are plenty of startups, with excellent technologies and business models, that for some reason have not been able to get the “hype” and are therefore not perceived as “big” or “important”. And these companies can be acquired for a fourth of the “important companies” price.

Is Blippy an “important company”? I will say a clear and loud “No”. (Blippy allows users to post details of everything they purchase, as in “I just spend $356 at Amazon!”. Theory is that advertisers will be able to see who is buying what, and target them with precision. I’m not too convinced). Yet it has received a second round of financing, and is valued at $38 million.

The VCs seem to be paying a high price for good PR campaigns. Is that a bad thing? No. Perceived succeess often leads to real success, so paying a premium for hype might well be worth it.

Lesson to be learnt? It’s not, after all, all about the technology. You need traction, PR, consumer love. Get that right, and you might just be onto something big.

Fred Wilson, a well known VC and blogger, gave a talk in February about what he considers to be the 10 Golden Principles of successful web apps.

I have a lot of respect for Wilson, and I think his blog should be a regular read for those who are interested in conquering the online space. You can view his talk below, or you can read the full transcript here.

If you don’t have 30 minutes to watch the video, or to read the transcript, I have summarized the key points below:

The 10 Golden Principles of Successful Web Apps from Carsonified on Vimeo.

1. Speed: if the app is slow, or if it becomes slow, people will stop using it.
2. Instant Utility: if the app requires a lot of work to configure before it is useable, the uptake won’t be fast or great
3. Software is media: and just like media has a voice (Vogue vs Vanity Fair), so should your app. Personality is important.
4. Less is more: do few things, and do them well.
5. Make it programmable: Include a read/write API so others can build onto what you are doing
6. Make it personal: let people personalise your app, let them take ownership of it. let them believe it really i theirs.
7. RESTful: this is a “technical” term. Basically, make sure that eery service your app offers has a unique, easy to understand URL that can be shared.
8. Discoverability: Be easy to find by Google, and be easy to be shared via social media.
9. Clean: Don’t clutter. Be clear.
10. Be playful.

The Crowdfund is looking for The Next Big Thing. Not much less.

And why not? Pretty much every single big thing was started by two or three guys, sitting on a worn couch, drinking a couple of beers and shooting the breeze. One thing led to another, an idea was born, and with perseverance, sweat and luck was taken to market.

We have the guys (and gals), we have the couches, we have the beer. And god knows we have the ideas. What we might be lacking in is the confidence that Big Ideas are worth taking on. We can’t blame ourselves: it is tough to get any product to market successfully, and it is particularly tough to do so from South Africa.

What I am really hoping though, is that initiatives like the Crowdfund, and Silicon Cape, Tech 4 Africa etc are beginning to awaken the entrepreneurial, fighting spirit in the really smart people that we have here, and that they begin to realise that taking three months out of their lives to “give it a shot” is a risk they owe to themselves.

I don’t really know how to define the Next Big Thing. I guess that when we see it, we will know it. (Well… I hope we will. Or we will be kicking ourselves real hard.) I do know it must check all the usual boxes: innovative, valuable, simple to use, have global appeal. I also think it must be really, really simple in concept. If you need more than 30 seconds to describe it, it probably isn’t it.

It’s very likely that the Next Big Thing is mobile based, although I personally am still a fan of the web as seen on my 24” monitor. It will almost definitely be a filter of some sort, because that saves time, without draining it. Localisation is big.

Whatever it is, if you are applying for Crowdfunding, try to find it. Think big. We are. Remember, with enough passion, skill and perseverance there is nothing separating you from those two or three guys drinking beer on a couch in Silicon Valley. Get to us, and we’ll help you get there.

When it comes to evaluating the strength of an idea for an online project, I am all about innovation. Copycat products make me yawn, and make me think that you haven’t researched your market very well. (For instance: I have had people pitch me ideas for instant chat programs on ecommerce sites as an add on customer service. When I pointed out that those exist, I got a “They do?” as a reply. Or, the time I got pitched a hand held device that could allow a salesperson to communicate with his company’s intranet. Uh, like a smart cellphone?)

This is when I, and more importantly the investors, love to hear the “Yes, but…”.

It’s “The but” that shows how innovative people are, and how aware they are of the target market. And it’s “The but” that makes prospective investors change their look of disinterest to sudden excitement as they understand the potential of what it is that you are selling.

For example, take our recent local start up, Personera.com. They create customised calendars based on data in your Facebook profile (like your friends’ birthdays, for instance).
Me: “Oh, you mean like the calendar Facebook app?”
Them: “Yes, but….these calendars are actually printed in hard copy”
Me: “Oh…..wow”

Ideas are a dime a dozen, and probably pretty much anything that you come up with exists in some form, somewhere online. However, if you add your own clever “Yes, but…” you might just be laughing all the way to the bank.

(An important aside here is that I do think that it is perfectly OK to bring concepts that already exist and customise them for the local market. There are so many online products that I would like to have a strong presence in South Africa, but that will only have one if they are developed by a local team. Unfortunately, I don’t think The Crowdfund will be funding many of those, though, because this time round we want to focus on global appeal. But the good news is that we are working on a different model that would promote these kind of startups in the country.)

The most common model of a seed accelerator, like the Crowdfund, is to invest small amounts of money (usually less than $30,000) in about 10 startups at a time, and house/mentor those startups through an intensive 6-8 week development period. After that time, the seed accelerator hosts a “Demo day” where venture capitalists are invited to hear pitches and see prototypes from the 10 startups, thus paving the way for the next round of funding.

I like this model, but will not be using it in its entirety for The Crowdfund. For starters, the money will be limited to R50-R100,000 per company, and there will be no “deadline” for “admissions”, and thus probably no “Demo day”. We will take applications as they come in, and make investment decisions appropriately.

The real value in the Crowdfund comes from other benefits:

• A cool, funky and functional work space that is condusive to collaborative development, and quick launch/turn around times.
• Free bandwidth and hosting (provided by Internet Solutions)
• Access to experts in various online fields, as well as experts in sectors at which the online product is aimed (for insight, contacts and potential outsourcing)
• A no-holds-barred attitude from the board, who are determined to see the dev team succeed with a successful product launch, and second round of financing.
• The credibility that comes from being a Crowdfund sponsored company

All that should be enough to ensure that the product you are developing for launch is as valuable and focussed as possible, and therefore has a good chance of attracting that crucial second round of funding.

Of course, the real clincher is that once your development starts, and we see it progressing, The Crowdfund kicks into the “agent” mode, and starts helping you attract the second round of financing. To that end, we have a wide network of investors in South Africa, and will be actively selling your idea to those angel investors and Vcs who we think will be a good match. But we also have (and are ever expanding) access to Vcs in the United States (specifically Silicon Valley) and will be strongly tapping into that too.

At the end of the day, much as we want to see you succeed with your startup, we have a mandate with our investors for as high an ROI as possible. And therefore the more successful you are, the more successful we will be. So we are as motivated as you are.

Any investor in a business is ultimately looking for a positive return on investment (ROI). But in the online space “positive ROI” can be achieved by a product that does not in fact make much, or any, money. In fact, it is very possible that angel round investors, or seed accelerators, make a fortune out of an initial investment in an online product that will never, on its own, make any money at all.

What a startup does need to do is prove, or at least strongly suggest, is at least one of these:

• that it will be able to generate sufficient revenue on its own
• that it will attract a wide enough audience, that can eventually then be monatised
• that it has technology that will be desirable to a bigger player, and will be acquired

All three of these can work hand-in-hand, and having more than one potential revenue source is obviously a good thing.

At the end of the day, just like in any other business, an online product needs to add enough value to those who will be paying for it to justify the money spent.

Unfortunately, it is very difficult to get money out of consumers, advertisers or the “bigger” players. Consumers are used to getting things for free online, and will most often only shell out money if doing so will save them time or money. Advertisers have a plethora of advertising options, and simply offering them a “just another” new platform to speak to consumers is usually not a strong enough proposition. And the Bigger Players often have their own development teams or at least access to unbelievable coding talent, so will only acquire companies if doing so will offer a shortcut to them developing a similar product themselves, or if that is the only way they can get their hands on a patented technology.

Reddit.com is a case in point.

One of Ycombinator’s earliest success story, Reddit.com, is very similar to digg.com: it creates a “front page” of the web, listing and linking to interesting stories as voted up by the users (readers). It appeals to a tech savvy crowd, and gets about 7 million page views per month.

It was initially funded by Ycombinator with $11,000 and went on to attract about $70,000 in angel funding, and rejected a buyout offer from Google five months after startup. (Interesting enough; when the two Reddit founders first approached Ycombinator for funding, it was with a completely different idea that YC didn’t particularly like. What they did like was the team, so together they developed an entirely new idea, which resulted in Reddit.)

When Reddit launched in 2005, it had no advertising on the site, and no revenue stream or model. What it did have was an extremely low burn rate (money needed to exist, over and above revenue generated) and a strong focus on growing traffic. About six months post launch, it started displaying advertising. It also sold merchandise. It allowed people to buy placement of headlines on the front page (which would have been most controversial, had it also not allowed the readers to vote those headlines up or down). But the key to success was licensing their technology to a bigger player – in this case Conde Nast. In the end, Conde Nast was so impressed with the product, and the team, that they acquired the company for an undisclosed sum (but rumored to be between $10 and $20 million).

Today, Reddit relies on advertising and licensing as revenue generators.

Lessons learnt:

• Keep the bigger picture in mind, over and above everything else. In Reddit’s case it was about providing value to the readers (at no cost) so that there was a strong, cohesive audience.
• Think outside the box. Reddit allowed its technology to be licensed by other companies, which made it a proveable concept and led to an acquisition.
• Stay cheap. Even at time of acquisition (18 months after startup) Reddit’s highest expense was rent.

(Just for the record, I consider Reddit a success story only from the founders and YC’s point of view. I do not think it was a particularly successful acquisition for Conde Nast. That, however, is no fault of the Reddit founders, and is a topic that deserves a blog post on its own.)

This is a 3 part series by Marc Andreessen, from Netscape fame.

If you haven’t done so already, I really suggest you sign up for his blog.

• The truth about venture capitalists, part 1
• The truth about venture capitalists, part 2
• The truth about venture capitalists, part 3