Design is the key to success

One of the great things about living in SF is the proximity to Silicon Valley and all that entails (the wine region is another great plus, but that’s for a another blog). Recently, I went to an IBD Strategy Session hosed by Shasta Ventures (a VC fund in the valley). The topic of the evening was focused on the components of a successful web / business 2.0 business model.

The evening included representatives from Writely (nee Google Docs), Salesforce.com and my alma mater, Flock. Each of these was offered as an example of a successful (or likely to be successful) web 2.0 business.

What was interesting to me was listening to the terms that Shasta put the conversation in: If you’re going to survive on advertising (a la AdSense or Microsoft Advertising Solutions), you need to achieve significant scale. If you’re going to achieve scale, you need to really focus on your users. Yes, that’s right, a venture capital firm telling people that UX is a critical success factor. Maybe the best quote of the evening was:

“The user drives 2.0″

As the evening continued, we began to talk about the difference between surviving on an ad bounty, versus lead generation. The consensus was that this provided a much better way of supporting a business. Lead generation did so for two reasons:

1. Lead generation pays significantly more than ad referrals alone
2. Lead generation can allow you to focus on a much smaller population. This is the case for dogster.com.

As the evening continued, it became clear that virtually all involved considered any business model predicated on ad revenue alone a shaky investment at best.

At one point, Shasta started talking about what they look for in a funding pitch. I was encouraged to hear that they won’t even look at a proposal if there isn’t some form of a prototype. LAMP (Linux, Apache, MySQL and PHP) has enabled a lot of entrepreneurs to get to an early prototype with little investment. What was most interesting was when Shasta started to talk about how it saw start-ups bifurcate into two categories:

• Small start-ups with limited user breadth tend to top out at ~40 million in valuation. These are typically either acquired by established companies to fill a hole in their product or R&D plans
• Big user breadth plays top out at 200 million plus. These are companies that have found the secret sauce of the right user base and the right experience to satisfy them. These are the companies that are typically strong enough to go it on their own.

The conversation mentioned, in specific, that they were starting to look for specialty (read vertically focused) e-commerce plays, as well as mash-ups based around specific usages. In each case, they talked about how essential it was to understand what the user is trying to accomplish and focus on that obsessively.

This is a big deal: when venture capitalists start talking about design, you know it’s gone mainstream. What a great time to be a designer!

Technorati tags: Design, Business, Web 2.0