When I first started out in Silicon Valley, the Internet was like that clothing label for African Americans, FUBU: for us and by us. Most websites were an echo chamber for highly educated people to hob-nob with one another. Most entrepreneurs took Mike Moritz’s advice to build products for themselves, only discovering other users later by happenstance.
It’s still mostly that way. The kinds of services my friends love to use, like Foursquare and Instagram, don’t appeal to my mother. Many, like Digg, probably never will.
But in today’s era of high-revenue startups, hardly anyone has noticed the emergence of a new breed of companies. The ones that hit $100 million the fastest have cashed in on lower- and middle-class, value-conscious consumers — the kind of people whom their Stanford-educated founders hardly ever now meet.
No one was surprised when the founder of Groupon admitted he doesn’t use Groupon much himself: why would a billionaire snap up a deal for $5 off his next pastry purchase? Building a product first for yourself and yourself alone is what artists do; as a business-man, Tony Hsieh is proud that he built Zappos into an e-commerce colossus without ever really liking shoes.
The first business to reach $100 million of revenues in less than four years, eBay, appealed directly to middle America’s bargain-shoppers with a wide range of odd goods, tantalizing prices and marketing come-ons; its management team probably hadn’t been to a real-world garage sale in years. Back then, eBay was the exception. Now, a generation later, a bunch of companies have reached that milestone more quickly, including Gilt, Groupon, LivingSocial and Zynga, and they are the rule. All take the same approach:
- Profit-driven management teams
- Focused on hyper-growth rather than sustainability
- Targeting a mass-market audience from the get-go rather than early-adopter niches
- Marketing aggressively, even in ways that occasionally get it into trouble
- Teasing high-frequency, low-cost, impulse purchases
It’s a different world, but instead of one far-flung corner of the Internet galaxy, it now sits at the glowing center, white hot with profits. We’ve hardly noticed the change. If you want proof of how far apart the money-makers and the taste-makers have been, look no further than the Internet’s ultimate taste-maker, Michael Arrington. Mike waited to try Zynga for the first time more than two years after the launch of Zynga’s first game.
By that time, Zynga had already cleared $100 million in annual revenue. When the digerati did finally take notice of these companies, it was mostly to complain about online scams and bankrupt coffee-shops. The Internet’s idealists, the people originally excited by the communities created on Flickr and Digg, still haven’t made their peace with the Internet’s wheeler-dealers.
But the boom this time belongs to Groupon and Zynga as much as anyone else, and that boom is cashing in on America’s bust. The premise of all these services has been to let people play games, go to zoos or buy clothes for much less than they’d normally pay. As the country has gotten poorer during the recession, Silicon Valley has gotten richer by turning much of the Internet into a gigantic K-Mart.
In the same way that communities ask themselves whether casinos and Wal-Marts create more poverty than wealth, America may begin to wonder what this part of the Valley, the one far from Google and Facebook, does for the rest of the country. The fact that the tech economy and the real economy are moving in opposite directions, as TechCrunch observed today, is not just an uncomfortable paradox. It’s cause and effect. The best time to start a deal-driven website is when people really need deals.
And nothing creates a frenzy like a bargain. A bartender in Seattle’s trendy district of Capitol Hill recently complained to a friend of mine that he can always tell when Groupon offers a promotion because the “bridge-and-tunnel” customers flood the place. If it’s a LivingSocial deal, the bartender sniffs, “it’s even worse.”
The problem is that frenzies don’t last. Buying stolen stuff at eBay didn’t always make people feel good, which is why some people a few years ago stopped doing it, and why eBay got serious about cleaning itself up. Now Zynga, Gilt and Groupon face the same challenge.
As we wrote last week, there are plenty of Internet companies now going public that make the world better. But as we realized at Redfin a long, long time ago, if the only thing the Internet offers is the same old thing, but cheaper, a few companies will get rich — quickly but perhaps not for long — and the world will be poorer for it.