VC Explains Why Hosting Companies Don't Get YouTube-Like Valuation

• By Isabel Wang on December 18, 2006

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Peter Rip, a general partner at Crosslink Capital, received pitches from two technology startups last week. The companies were at similar stages, but (A) received a 2x higher valuation than (B).

Peter says the folks from (B) had grand visions of numerous use cases that their technology could enable. Unfortunately, from Peter's perspective, "enable is a value-halving word". Enable means value creation is left up to someone else - who may or may not invest time and energy to build a solution on (B)'s platform. Technology is only 10% of success, no matter how much differentiation it provides; the other 90% comes from subject matter expertise.

I think PhotoBucket is a good example that illustrates Peter's point with respect to the web hosting market. PhotoBuckets gets 80,000 daily signups, while even the largest hosting companies with the most generous ad budgets don't. PhotoBucket's value proposition is simple: it hosts photos. Every web hosting provider I know does as well, not to mention website builders, blogs, shopping carts, databases, 2500 email accounts, free Yahoo ad credits... This extensive feature set *enables* many web presence possibilities - but doesn't directly facilitate any.

Peter says when a technology company doesn't feel comfortable focusing on one specific opportunity, it clearly doesn't know its customers. (You fall under this category if you describe your target market as "developers" or "small business owners".) Don't enable, he says - solve. And don't ask customers to build - show them how to use. He promises this formula will do wonders for your valuation.

Following Peter's advice, how about an ecommerce package for brick and mortar retailers? An online scheduling service for appointments-based service providers (doctors, accountants, financial planners, etc)? A developers' community that combines hosting resources with code search tools, an application directory, etc? Instead of *enabling* these groups, might there be potential in building customized environments that feel just right to each?

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