You have heard this story before. A small application or a piece of content took off on the net and had a major viral effect. MySpace, Facebook, YouTube, BitTorrent, Flickr, Skype … Fred Wilson has written a whole story about this today.
Well, it is the kind of business the VCs are looking for right now : Microcap deals with Viral traction.
Now, there is a bit more of a framework that you can create for yourself, if you are trying to come up with such applications, services, or content.
Think of the segments that are online, always-on, and participate in this sort of viral behavior: Tech Geeks, Teens & Twens, Digital Photo hobbyists, Gadget freaks, and perhaps a few other such large niches. So, by definition, to get the full benefit of your viral effect, you need something that appeals to and leverages, one of these Viral Islands. All the services I mentioned above will nicely fit into one of these categories.
This also means, if you have a service that is outside of these few segments, you will NOT get the immediate benefit of the viral effect. You would need to seed those segments first.
So, if you can put together traffic momentum around a service by boot-strapping & micro-cap’ing, it is relatively safe to say, today, that one or the other VC will fund your Series A.
There is a small fallacy, however, in this investment thesis from the VC point of view, if too many deals get funded on the assumption that let’s build traffic, and the monetization will happen automatically.
Imagine, based on the Teens & Twens Social Networking phenomenon that is getting funded a dime-a-dozen right now (even YouTube is, in effect, a Teens, Twens, and Geeks Social Networking service, via Video sharing) – there will be an overbuild in ad inventory to reach this segment, dropping CPM / CPC / CPA prices down drastically.
Already, there is too much Ad Inventory out there that serves the Tech Geek audience, as well as the Photo enthusiasts, the former because of the success of Blogging, which the techies embraced first, and the second because of the over-funding in the digital photography category.
Rather than being short-sighted and following the crowd, VCs should start thinking about how to seed new segments that are coveted by advertisers, and funding deals that are outside of these early adopter niches.