Kevin Rose’s famous online community Digg was sold recently to John Borthwick’s NYC-based Betaworks, which paid $500,000 for its assets. The Twitterati went wild. How come such a pittance of an exit? Digg was so special. Its community was so loyal. Can anyone forget the “Diggnation” podcasts, or the famous evening when Leo Laporte, the Tech Guy and founder of TWiT.tv was hoisted into the air and crowdsurfed by the attendees at the annual Digg party at SXSW? (Yours truly was there.) Digg was so “successful” that investors poured $45 million into it.
One problem. It was never a business. Digg was never able to create a sustainable business model. This is a lesson for entrepreneurs everywhere.
As an entrepreneur, you must first learn to separate an idea from a product, a product from a business, and a business from a company. These terms are related, but certainly not interchangeable.
Every day hopeful entrepreneurs come into my office with an idea. They ask me to invest, or to find someone else to invest so they can develop the product. My job is to present reality. Ideas are a dime a dozen. Only on Kickstarter, where unsophisticated investors are willing to risk small amounts of money on other people’s dreams, do people fund ideas. And my prediction is that after a while, people will begin to become disappointed in ideas that never become reality and will not be so willing to risk their money.
Once there is a product, things get better. If an entrepreneur can get a minimum viable product up, at least there’s a prayer of success. Then an investor is funding further product development, manufacturing, or marketing, not dreams. But this stage is still nascent and hard to fund. Luckily, Kevin Rose was well-connected, and built a community on Digg rather quickly. That attracted the interest of venture capitalists, who thought the community itself would be monetizable some day. Like Facebook. Or Twitter. By advertising, that most elusive of business models.
You don’t have a business until you have customers who pay. Twitter wasn’t a business until very recently, and only after five years. People with prototype products and no customers are not “in business.” I refer you to the famous Business Model Canvas, a free tool that allows an entrepreneur to figure out how to get someone to pay for his product or service.
The arrival of paying customers creates a business. You’re then past the startup stage. You are more certain to have a real solution to a real problem perceived by customers, or perhaps you have convinced customers they have a problem they didn’t know they had (the Apple way).
Now how do you get to the stage where there’s an actual company? When you have a team that can function without the founder, you have a company.
Digg is a very useful tool. Borthwick, whom I consider brilliant, will combine it with News.me, a service that already delivers me news from my Facebook and Twitter friends. Adding Digg’s voters to my list will get me even better news. The whole will be better than the sum of its parts. But what’s the business model? I can’t help asking.
[Image: Flickr user WildVanilla (Rob)]