Ning, launched two years ago, yields some excellent lessons. Let’s recap:
After building unfulfillable expectations as stealth start-up 24 Hour Laundry, Ning finally launches as a site that allows users to “roll their own social applications.” Umair from Bubblegen accurately writes:
Ninged, “it’s shorthand for a chasm in usability. Though you’ve created new market space, the share of that market that’s valuable in the real world is tiny; though many might want to use this set of services, only geeks can use them – you’ve built a better mousetrap, but only guys like this can figure out how to use it.”
Listing four usability chasms, TechCrunch questioned: Ning, RIP?
And then there’s silence…
Until February 26th of this year when Ning launched v2 “designed to give everyone the freedom to create their own social networks.”
Ning had successfully down-geeked, transitioning from geek to consumer, and had appeared to have found a focus and validated assumptions.
Consider Ning in the context of the three phases of a start-ups development:
Stage 1: Innovation. Ning is innovative technology. Initial press stressed the stellar team that had been assembled and the complexity of the work they were doing. Even in the geeked out v1, Ning was innovative (just not usable).
Stage 2: Commercialization. As I wrote in a comment:
Commercialization is “about validating assumptions made in stage 1 and taking the ‘geek’ out as much as possible in exchange for ‘consumer’. It’s about finding an initial foothold in the larger market (other than the larger web 2.0 crowd). It’s about finding the right product benefits to focus on for the launch and lowering focus on features that don’t add much benefit to a consumer.”
With Ning v2, they provided a blueprint for other web companies to follow with respect to the commercialization phase. Laying low, they iterated both product and business plan, validating assumptions and transitioning towards ‘consumer’ away from ‘geek’. Marc commented that with Ning v2 they’ve “achieved product/market fit and the service has been scaling very rapidly.”
Stage 3: Scale. With the commercialization phase done it’s time to hit the gas. “There is an excess of cash just waiting to be invested” (from the same comment as above). It’s time to hit the accelerator and grow.
Innovation, done well. Commercialization, done well. Comment on the scaling phase can be broken down into two areas: (i) funding strategy leading into the scaling phase; and, (ii) execution of scaling phase. Obviously we can’t comment on the later but it’s worth exploring the former.
To understand what should be done let’s explore what shouldn’t be done by looking at our old friend Riya.
Out of the gate Riya raised a boat-load of cash ($19M) – when the business plan and success of the start-up had the most risk. It sounds like they had a technology (Innovation: done), but they hadn’t found the right product/market fit and their business plan didn’t hold up (Commercialization: incomplete). After testing assumptions for an extended period they believe they’ve found a winning business plan and are now executing on it.
Riya unfortunately traded equity for a considerable amount of cash when the equity was the most expensive. Had they taken smaller amounts of dough along the way as they validated their business plan and worked through the commercialization phase towards scaling, they would have been left with a larger share of ownership and a much cheaper exchange rate on the equity for cash transaction.
So we know what not to do, but what’s a better strategy? And what about Ning?
The two answers may be the same.
Ideally the start-up should raise the minimum amount of money necessary to complete the first two phases – as risk is mitigated the company increasingly enjoys better deal terms. Once the company is ready to scale, access cheap money in large quantities and hold on tight.
The $44M raised was a Series C. The earlier rounds? They came from Marc and “close friends” – probably minimal amounts of money, as necessary, and at attractive valuations. So minimal amounts of money while the risk was the highest for Ning and while they worked their way through the Commercialization phase.
And then when they were ready to scale? When money for equity was cheap? Woah. $44M.
As Fred said last December “some things don’t change about starting a company.”
As Marc said in his post, the money will be used for “scaling [Ning's] operations to accommodate traffic and growth; in [Ning's] product design and development efforts; and in o[Ning's] platform evangelism and support program.
I have no idea if $44M is needed to scale Ning, but let’s give Marc the benefit of the doubt due to his experience and past success. If that’s the case then it appears that he’s done a stellar job of navigating Ning to this point through the three phases. Let’s see if he can scale as well as he has started.
[It's worth pointing out that the recent discussion about raising a lot of $ vs. raising only a bit of $ - between Josh, Jason, and others unfortunately didn't touch on how critical the time variable is to the debate and the start-ups decision.]