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What I find hilarious about this picture isn’t that he’s lighting a cigar with a few hundred dollar bills (looks like a Photoshop job if you ask me) but because the website that reports on Web 2.0 Internet Startups probably makes more money than the Internet Startups it reports on. How many Web 2.0 companies can report that they are making at least $60,000 in revenue a month? Not very many.

Valleywag’s got the rest of the drop.

By now you’ve probably heard that The Little Calendar App That Could(n’t) Kiko has been absolved and is being sold on eBay alongside diapers, that’s a tough ending, especially for a fledgling company funded through Paul Graham’s prestigious Y Combinator warm incubator. From Paul’s Kiko eulogy:

“What nailed Kiko was Google Calendar. Once that came out, not only did Kiko’s growth stop, but a lot of existing users defected. Justin and Emmett told me a large fraction of Kiko’s users had Gmail addresses.”

Defected? Paul makes it sound as though they had no choice and the Google SS was at their door. People checked out Google’s calendar because it was new, and, well, it’s made by Google. Kiko still had the upperhand because a situation is only damning if you make it so, and Kiko certainly did that. Kiko could have surveyed Google Calendar, saw opportunities for innovation, and then executed. In a business world full of copycats, all you have is innovation and marketing so you better work on those two as much as possible before throwing in the towel. To this outsider’s eyes it looks as though Kiko sat on their hands and waited for the inevitable to happen, which is one certain way of causing your business a lot of direct harm.

[Read more…] about GYM’s Shitting On Your Startup

Kiko, an online calendar application incubated by Y Combinator, is up for sale on eBay. The starting price of $49,999 has not been met yet, so we’ll see how it goes.

Traditional exit strategies for companies include being acquired or an IPO, but that’s normally for companies that have at least an inkling of an idea about how to make money. Unfortunately for many “Web 2.0” companies (like Ajax homepages, Ajax IM clients, online calendars) it’s a tough proposition since what they’re offering is essentially free somewhere else and has been for many years. People who start these types of companies are banking on the idea that users would be willing to pay for the convenience of having a traditional desktop application available online, but it’s a harder sell then they imagined.

Some startups in these spaces get acquired (like Userplane) but only if their offering fits in neatly with the new parent company, and that’s not always the case. In the case of Kiko, they are apparently selling the company/app/domain not because they think it’s a failure, but because they believe their time and resources could be better spent on other ventures. What those other ventures are, who knows, but let’s hope they’re attached to business plans.

The harsh truth that tech and “Web 2.0” industry pundits don’t like to talk about is that the vast majority of these new “Web 2.0” companies are failing. New companies are starting, mashing up, trying to innovate, but none are close to approaching the success of MySpace, Digg and YouTube and there’s a very good reason for that:

They don’t “pay” their users enough.

Now “pay” is a relative term since no users of MySpace, YouTube or Digg (more on this) are being paid cold, hard cash to publish their content on these sites. MySpace is a social networking site, YouTube is a video site, and Digg is a cool news site, but they’re all based on user-generated content and without this they would not exist; that’s what binds them together. Their popularity would never have came if it hadn’t been for the first few users to take time out of their days and write/publish/upload content to MySpace, YouTube, or Digg. User-generated content is their lifeblood.

So what could possibly interest random Internet folk so much that they would stop what they’re doing and drop content onto these three sites? Well it’s the quid pro quo my friend, it’s what these sites give back to the user. If you take a look at the most successful “Web 2.0” companies and websites out right now, you can basically pick the ones out that will be successful and which ones will not by looking at the quid pro quo ratio, that is, how much bang do these sites give back to the end user as a Thank You for publishing content to the sites. If you spend X units of time/creativity/effort do you get 3X units of pleasure/entertainment/utility in return, or do you only get 1.2X or .6X? That multiplier is the quantifiable way to figure out if your user-generated content site will succeed or fail.

The Economics Of Quid Pro Quo

Before we can equate the multiplier, we must first understand what we are multiplying. The basis of this theory is grounded in utilitarianism which is “a theory of ethics that prescribes the quantitative maximization of good consequences for a population”, or, the counting of pleasure or pain as individual units someone can possess. Essentially if you consider watching TV is good but going to the movies is better, the pleasure found in going to the movies is not a different type of pleasure from TV watching, but rather more units of that pleasure. If X is a pleasure unit, then TV watching could be 10X whereas seeing a movie could be 20X. Eating a hot dog could be 3X and watching your team win the World Series could be 5,000X. The X unit is unchanging, but the quantity of pleasure units varies depending on the activity.

Now it could be said that one’s goal in life would be to pursue activities which maximized the X multiplier, that is, generated the most pleasure or utility. If you have your choice of driving a free Honda Civic vs. driving a free Ferrari 612 Scaglietti, most people would choose the Ferrari. If you think of that decision in terms of its utility, then you would be choosing the Ferrari because it is maximizing the amount of pleasure units, as that would be your ultimate goal.

Utility Theory As Applied To User Generated Content Sites

Now back to the article. Previously I said that the most successful sites (based on user generated content) were the ones that gave the most bang for the buck, or, the most pleasure/utility back to the user. If I put in X units of effort and a site gives me back 2X units of entertainment, that’s good. If I put in X units of effort and get back 20X units of entertainment, that’s much better. On the flip side, if I put in X units of effort and get back 1/8th X units of entertainment, that means the X units of effort I initially put in were a complete waste of time, or, the site took my content and gave me squat in return.

I truly believe that the success of a site based on user generated content revolves around this pleasure multiplier, and sites that are successful have the highest multipliers. Let’s analyze MySpace, YouTube, and Digg in terms of the effort outlaid vs. the pleasure received:

• MySpace
  You create a profile and have to give only minimal information about yourself to start. In return you have the chance to browse millions of random people’s profiles, find friends you haven’t talked to in years, view funny pictures and stories from complete strangers, and possibly meet someone you might spend the rest of your life with. 1X units of effort with a 50X+ unit return.
• YouTube
  You don’t need to create an account or do anything special to view movies, but if you want you can record a video of yourself and upload it. In return you can spend hours watching people lip sync to the Backstreet Boys or see puppies play with kittens. If you do create an account and upload a video, then in return you could feel like a minor celebrity when thousands subscribe or watch your videos. No account: 0X units of effort with 20X+ unit return. With uploaded video: 5X units of effort with 40X+ unit return.
• Digg
  You don’t need to create an account to just find cool stories, but if you do create an account you can actively vote on those stories as well as post new ones. The return is that you are provided with the top tech stories of the day, or if you write a great article and post it to Digg, your site could get tens of thousands of users in just a few hours. No account: 0X units of effort with 10X+ unit return. With account and uploaded story Dugg to frontpage: 5-10X units of effort (took effort to write the story) with 50X+ unit return.

Obviously these multipliers aren’t set in stone, but you can easily see that these three sites ask very little of the user, but in return give them a lot of entertainment or utility back. A ton of bang for the buck = people who tell all their friends and return every day.

Now let’s go a site that isn’t on the level of these three and try to determine the utility it is providing users. Is it asking too much of users? Are they not giving back enough in return? Both?

• Squidoo
  You signup for an account and create a lens where you write content on a specific topic, you can create multiple lenses. In return, if your content is good enough you could earn about $30 but the vast majority of lens creators make less than few bucks per month. 5-10X units of effort (writing content for your lens) with a 8-15X unit return (a couple bucks). Verdict? Not worth the effort.

As you can see, Squidoo asks a lot from its users, but in return doesn’t give back enough to make it worthwhile. The delta isn’t large enough to make the initial effort worth the returned pleasure, so fewer people use the site, fewer people recommend it to friends, and so on. I don’t believe Squidoo will be a success based on many factors, but the most telling factor is the low returned value after the high initial effort put in by end users.

The Web 2.0 Factor

This theory is about sites that thrive on user generated content, but it can be applied other places as well. Think about a site you went to once and didn’t come back to, what was your reasoning? It was probably because there wasn’t enough “to the site” to make you want to come back. It didn’t solve a particular need or problem that you were having, or maybe it was just boring. The key to having a high comeback rate is to provide some sort of value to the user that they previously did not have, and that’s the true way of building a successful company.