How do VCs evaluate social networking startups/products?

Way back during my presentation at Barcamp, somebody asked me – “How do you define the success parameters for a social network?”

While I don’t know the right answer [is there any?], here is how few VCs [to be more precise, Nissan Gabbay] evaluate social networking startup before they shell off $$s [and suck blood later]

  • Product that fits the needs of an underserved niche
    A company that has truly unearthed a market need that isn’t being met by other services and delivers upon that need with the right feature set and value proposition represents the best opportunity for an Internet start-up today
  • Strong ability to leverage natural search as the primary means of user acquisition
    search neutralizes the need for brand recognition..Any company that can demonstrate an ability to achieve high natural search rankings for a high volume of search terms stands a good chance to become a success on some level. Recent examples here include Yelp and Digg, both of whom owe a great part of their success to natural search.
  • Service that empowers people to make a living iStockphoto is another good example, enabling semi-professional photographers access to the stock photography market..
  • Free (or near free) alternative for a previously high cost service
  • True viral distribution potential
    A viral Internet service is one where each new user must involve friends to derive personal value from the service. This is best exhibited by communication and hyper-social services. Telling a friend is not an option; it is a necessity in order for the user to derive value from the service. Although it is easy to incorporate viral feature sets into any Internet service, actually getting users to utilize these features is quite hard unless they recognize the value they personally and immediately will receive by involving friends..
  • Ability to jumpstart user acquisition through distribution partnerships
    Having a distribution channel to jumpstart user acquisition isn’t a requirement, but it does increase the likelihood of success. Skype was able to acquire its first 500,000 users by being bundled with Kazaa. MySpace migrated users over from a dating service (CupidJunction) and made heavy use of database marketing. Bebo marketed to the install base of its established, sister property Even Digg launched via a TV show that reached 100,000+ of its target users (tech enthusiasts)…
  • Story that lends itself to mainstream PR
    Companies that have the potential to be good PR stories after achieving some initial success, have a much greater likelihood of being break-away successes…

Mike Brown, also has some interesting [and very valid] points:

  • Instant (or near instant) gratification – this means I don’t have to download something and get a ton of friends on the thing before I actually get some goodness from the product/service.
  • Clear use case. Duh! Some sites are impossibly hard to understand when you show up for the first time. If I can figure out what to do there in about 10 seconds, forget it. You’ve lost me.
  • Improve an existing user behavior rather than require a new user bahavior.
  • Non-linear economies of scale. Obvious example is communication products but it could apply to cost reduction as well as user adoption.
  • Previously unknown ability to personalize. Personalizing shopping, media, medical recommendations, restaurants, etc. The beauty of the web is in finding new ways to get ME exactly what I want.
  • New or proprietary access to data presented in simple ways. It’s cool when companies take previously unknown, inaccessible or complex data and make it usable for consumers to make decisions. Zillow, Farecast, and lots of others do this.
  • Assume people are really lazy and mostly selfish. Businesses predicated on people doing stuff just because it helps others are a bit naive (this doesn’t mean people don’t want to participate in collective projects, ala Wikipedia).
  • Help me get the stuff I want cheaper or make better decisions about stuff I will buy.
  • Help me get access to my media in new places I couldn’t get it before, e.g., my music or movies or shows on the go (iPod, TiVo, SlingBox)
  • If it’s mobile, does it work on all handsets or just some? Do I need to integrate with the carrier or does the service just work out of the box?

Do you guys agree to this? I pretty much agree with points put forward by Nissan and Mike. End users have way too many options and a smart product has to have enough meat to be on top of the user’s mind.

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