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I’ve previously posted on the importance of distribution during the initial phase of a startups life. To be more accurate, I think that distribution is the most important factor for a consumer facing company competing in a new category.

However, I think that this is just the first act of a three act play, with a different factor being critical to success in each act.

ACT ONE: DISTRIBUTION

To summarize the earlier post; early in a category’s lifecycle, users don’t recognize that they have a particular need/problem. They don’t recognize that a category exists and so there is no demand pull. If even your own mother doesn’t know what it is you do; ESPECIALLY if your own mother doesn’t know what it is you do, then you likely face this problem!

Having the best product is neither necessary nor sufficient. Having a decent product is good enough.

You need to get to users as they won’t get to you. Hence the importance of distribution. Read the original post for flavors of distribution and how to get them, plus examples.

ACT TWO: PRODUCT

Over time, categories become established in the minds of consumers. In the case of online travel agencies it took about 3-5 years. In the case of user generated video, it took only 12-18 months. Consumers start to understand who the competitors are in an industry. If switching costs are low (as they are in both online travel agencies and user generated video), users often sample the offerings from multiple competitors. At this stage, assuming that you have done enough to get into the consideration set, product and user experience matters a lot. Distribution has become the ante, and the companies that win will win on the best product.

Having the best product means much more than having the most checks in a feature comparison matrix. It goes far beyond the technology. It can mean having the best prices, the best selection/range, the best customer service or the best community. In the early days of online travel Travelocity won on distribution through its deals with AOL and Yahoo! But once the category became established in people’s minds, Expedia slowly took market share from Travelocity on the back of a better overall user experience, one important factor being better pricing (mostly hotel pricing). [Update: Note comments below from Rich Barton, founding CEO of Expedia, on his view of why Expedia overtook Travelocity.]

Similarly, many user generated video sites claim better features than Youtube, yet Youtube never lost its lead because it had the biggest range of content (and the biggest audience for people looking to upload videos). As technologists we can fall into the trap of defining “best product” too narrowly, but our customers are not technologists and they look at the whole experience.

ACT THREE: BRANDING

As a category continues to mature, it becomes harder to maintain product differentiation. There are some exceptions; when there are positive network effects an early leader like Ebay or Youtube can often hold their leads. But if the advantages built in Act Two stem from technology, process or supply advantages, these often get whittled away as competitors copy, innovate and partner to make up lost ground. At this stage of a category’s evolution, branding is the most important factor and product has become the ante once again. (Note that I distinguish here between branding and marketing. Online marketing that is more direct response (CPC or CPA) in nature is really more a form of distribution.)

Google is sometimes presented as the canonical example of the best technology winning over time. However, as I mention in the post on distribution, Google‘s traffic only really started to climb after its distribution deals with Y! and AOL. It really did pull away from the other search engines on the basis of its better product during Act Two. But today, its not at all clear that its search results are that much better than anyone elses.

When I was at AOL a couple of years ago, we used to test search relevance from multiple engines by taking the results from all the major search engines, stripping all branding and UI, and showing the lists to users who scored the quality of the search returns. The results were surprising – all the search engines were very close to each other in relevance, with variations as to who was “best” from month to month and search term to search term. Interestingly enough, when you put the branding and UI back in, the users always rated
Google as having the best search results.

Google‘s dominant brand is now what enables it to hold and grow its search market share. And in mature categories such as online travel, you see the big players compete purely on branding ads.

In some categories, branding never matters and we never reach Act three. If your users are unlikely to transaction with you more than once (say you sell rowing machines or curio cabinets) then your category will likely never develop beyond Act One. But if you’re in a category with repeat users, whether books, DVD rentals, online auctions, or shoes, branding matters.

CONCLUSION

Distribution, product and branding, all are critical but at different times. Making sure you focus on the right factor at the right stage in the evolution of your category can help you make sure you’re fighting the next war, not the last one.

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Deciding to take outside investment from a VC firm and bring in a new co-owner for your business is a critical decision. Entrepreneurs often want to know how exactly a VC will help once they’ve invested and what could change about the way the company’s board operates and interacts with company management.

VCs can add an important dimension to the collective experience and depth of a “start-up team”. They can also deliver connections and open key doors which accelerate a company’s ability to enter the market and achieve a leadership position. However, its important to know how to assess a specific VCs ability to help and deliver on these key benefits before making a decision. Here are 4 areas to research as part of the process for determing the fit and effectiveness of a potential VC partner in helping to build your business.

1. Ask VCs to explain how they think about your business and be convinced that they have a solid understanding the model and important strategic issues — opportunities as well as risks. Not understanding the details of your business could lead to unrealistic expectations for how things are likely develop and might lead to surprise or disappointment if unanticipated “bumps” occur.

2. Ask VCs for details about their business model for working with companies. Get comfortable that your potential VC partner isn’t over-committed with existing board seats and has the ability to be actively engaged with your company. A robust set of VC network connections isn’t usefull if the partner is too busy to leverage it on your company’s behalf.

3. Ask for references from entrepreneurs and CEOs that a VC is currently working with and has worked with in the past. While these poeple are likely to be generally positive given they were referred by a VC, they will usually be straightforward in speaking about their experiences and describing how a VC reacted during challenging situations faced by the company and will also point to key contributions they feel the VC made in assisting the company.

4. Understand aVC firms culture and make sure it fits. Internal cultures and philosophies at VC firms can vary significantly. Organizationally some are more hierarchical and some are flatter. Some firms are team oriented with multiple partners assisting a company at various times while others can be more individualistic in their approach. Some VCs look to be actively involved while others assist but in a more passive role. Some VCs make fewer investments and focus on each company while some VCs make a larger number of investments per fund and take more of a portfollio approach. VCs can also have different areas of focus or emphasis for adding value to help portfollio companies. Its important discuss these issues with a prospective VC partner to fully understand their approach and motivations.

While each situation is different, researching the above topics will help to identify a VC partner who can be a good match and a supportive partner. Given the multi-year length of a typical investment commitment, its worthwile to go this diligence exercise upfront , just as VCs do for a prospective investment, to be sure there is a strong mutual fit.

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Well we were hoping not to announce our investment in Flixster until they got a PR firm engaged, but Mike Arrington at Techcrunch has his sources and broke the news tonight.

We’re very excited to partner with Joe and Saran (the two founders) and the rest of the team. They have built an amazing user generated content site around movies, including ratings, reviews, actor pages, trivia quizes, movie compatability tests and tons of other stuff. Traffic growth has been truly viral and the site has grown from nothing a year ago to very meaningful pageviews per month from users all over the world. They’ve done a great job of applying social networking and viral best practices to engineer this growth.

As we’ve posted in the past, we’re big believers that this year social networking becomes a feature, a mechanism used to incent users to create content that will be of broad interest to many other users. We think that this is most interesting around verticals with endemic advertising opportunities. Web based advertisers still pay a premium for content related to their product (vs buying demographics or broad reach). As movie studios follow their audiences online they will be marketing more on the web, and movie related content will continue to draw premium CPMs, just as it does for Moviefone, Yahoo Movies, etc. Flixster fits right into this model.

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Ask the VC points to a good post by Matt Macall at his blog VC Confidential about why startup entrepreneurs should not get too focused on the issue of control and of owning more than 51%.

In a nutshell, he …

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The best part of being a ‘VC’ is meeting passionate entrepreneurs and listening to pitches about how their idea is going to change the world. Since I joined Lightspeed, I’ve found myself meeting amazing people and debating revolutionary ideas on …

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There have been a lot of posts on startups laying people off, losing founders or closing down in the last couple of months, part of the natural cycle in the valley. But what has disturbed me has been …

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I’ve been thinking a bit more about how consumers adopt “new” products online recently, in part because of a couple of recent posts I wrote in reaction to rumors of a Safari browser for Windows and questions on the value

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Todays’ NY Times article on Widgets and the blogosphere reaction brought to mind Josh Kopelman’s post last May on the 53,651.

Josh made the point that too many companies are targeting an audience of 53,651 (Techcrunch‘s audience …

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Just a short addition to my previous post. There’s been some interesting commentary on the need for both “art” and “science” to induce viral growth. The science component is comprised of a website’s ability to systematically measure all aspects …

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Two good posts today on why VC’s don’t sign NDAs, one from Brad Feld at Ask the VC and the other from Rick Segal at The Post Money Value.

When I was VP of Strategic Planning at IAC and …

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