A Tale of Two Startups
We are citizens of a global village. Some of us are more tied to one particular area, but we are all members of a growing global society. The connections that bind us seem to grow stronger each day and we may have a number of the great social tools at our disposal to thank for this. My question today is simple: are the social systems we use each day capable of supporting more than just random interactions? Can you build a business with someone else’s data?
Twitter goes shopping in Boston
Crashlytics was acquired by Twitter in late January of 2013. Bluefin Labs was acquired just about a week later. Both startups were young and based in Boston, and arguably, both had considerable upside. At the time of the sale, it was rumored that Bluefin was to be Twitter’s largest acquisition to date, surpassing the $40M paid for tweetdeck, but it turned out that the Crashlytics camp had pulled something of a surprise: Crashlytics was acquired for over 100M and Bluefin came in well below that, despite having raised 20-40x of Crashlytics. Why?
The Economics of Data
Private data is valuable, public data is less valuable, and someone else’s data is valueless without access. Quantifying and placing a value on accessing someone else’s data is hard, because you don’t know what you’re buying or for how long. Take Twitter’s data stream, for example. What can you do with Twitter’s data? A whole lot, but how much does access cost? Well that’s tricky. Some folks say it’s 100k a month, some say it’s $.10/1000 tweets. It’s a question of what you’re willing to pay.
How does one make a sustainable, consistent business on a variable cost structure? On egg shells.
The Good, The Bad and the Ugly
The good of using another companies data to grow? Exponential virality.
The bad of using another companies data to grow? The day you get too big.
The ugly? Bluefin Labs.
Imagine being part of the negotiating team with Bluefin. You’ve just gotten a call from Twitter, you’re flown to San Francisco to meet with the development team. You arrive at the big T’s offices, sit down and the first thing pushed in front of you is a term sheet that’s lower than your capital raise. If you were Peter Parker you might’ve avoided this meeting, but since your spider sense has let you down you stay. Twitter goes on to explain that they think this is a fair valuation for you and you object, playing right into their hand.
Au contraire sir, they have hoisted your petard as flag.
See Twitter owns the data your business uses to operate; Twitter owns your data, and they don’t have to sell you access. Since Twitter owns this big goldmine of info, and you don’t, what can you do? The worst part is that Twitter literally can cut your access and clone your application and there isn’t a damn thing you can do about it.
Result: Sell to Twitter, in a firesale. Unknown sale price on 40M raised.
In another life
Consider the nightmare that Bluefin went through. Now consider what that might’ve looked like if they didn’t build on Twitter’s data?
Fast forward to the meeting in San Francisco. Because Twitter has no leverage over crashlytics, they’re forced to deal purely on business terms. There’s no “well we’ll just cut off your access” because Twitter doesn’t own the data. They can’t easily clone the business because it isn’t written on their platform.
Result: Crashlytics sells for over $100M on a $1M investment.
The Moral of the Story
The facts as I’ve laid them out today involve Twitter, but they could just as easily involve Facebook, Pinterest or any other private data warehouse. This is the fallacy of the massive data warehouses; it’s not your data no matter how cool your application looks or how much it enriches the lives of others. It is not your data.
Fred Wilson has a great quote about building on other people’s platforms:
Don’t be a Google Bitch, Don’t be a Facebook Bitch, and Don’t be a Twitter Bitch. Be your own Bitch.
-Fred Wilson, Union Square Ventures
When you try to sell to the company who is also your only vendor, you have no leverage. You are literally at their mercy. Folks would do well to remember the pain of Bluefin Labs and not to repeat these sins. If there’s one thing my readers should take away from this it’s that having one supplier, in any activity, is the kiss of a slow but inevitable death.
If your survival relies on the continued good will of one vendor, you are already dead.