Community, or not community

I chatted with an applicant to the Y Combinator Summer Founders Program this afternoon, and he brought up a really interesting question that I’d never really thought about before.  His question was, roughly, “Do community-based or value-based Y Combinator backed businesses do better?”  Let’s assume that a “community-based” business is one where the user base creates the vast majority of the value (like reddit), and a “value-based” business is one where there is value even with only one user (like Zenter).  So, by this definition, a community-based site must reach a certain level of popularity before random folks on the Internet want to use it, while a value-based site can make life easier for a single person and that single person will keep coming back.

The reason this is interesting, to me, is that Y Combinator likes community-based companies, and my impression (admittedly supported by merely anecdotal and circumstantial evidence) is that they prefer them to value-based businesses, though this preference may be changing over time.  So, the question it raises is whether having a preference (even a mild one) for community-based businesses results in better outcomes for Y Combinator.  I suspect that it has a negative impact, but I don’t know that for sure.

We can break it down by exit, though:

Community-based YC exits

  • Reddit – Rumored 12-ish million dollar acquisition by Condé Nast

Group of men at Ellis Island

Value-based YC exits

  • Zenter – Undisclosed acquisition by Google
  • Parakey – Undisclosed acquisition by Facebook
  • Auctomatic – 5 million dollar cash+stock acquisition by Live Communicate
  • TextPayMe – Undisclosed acquisition by Amazon
  •* – Undisclosed acquisition by Imeem

Farmer turning sod

I’ve put an asterisk by above, as I’m certain some folks would consider it a community-based business…but it provides most of its value even with only one user, so it fits my requirements for a value-based business, and I think it’s fair to say they were not acquired based predominantly on the size of their community or traffic growth but on the strength of the application they’d built.

Of course, since all but one of those acquisitions in the “value-based” category are for an undisclosed sum, and I’m basing the reddit acquisition price on rumors (though rumors from disparate sources, I’ve never heard the numbers from any of the people actually involved), it’s hard to say with any confidence that the five exits in the value-based group are worth more to YC than the one community-based exit.  But, one can safely say that value-based businesses have made a lot more young YC-backed entrepreneurs rich than community-based businesses.

This isn’t the whole picture, of course.  Some of the biggest potential YC success stories have yet to have an exit.   It’s hard to argue that Loopt isn’t going to  be a big success story for YC, and it’s pretty much purely community-based, though they have the added hurdle of having to sell to mobile providers to attain their customer base.  Scribd has seen tremendous traffic growth and it’s a community-based site with a small amount of value independent of the community.  Obviously, “going viral” is a fantastic marketing opportunity that is only generally available to community-based businesses, but historically it seems that building a useful application is more likely to result in a successful exit than building a product that relies on a large community to have value.

I found this result surprising when I began listing off the exits and thinking about what kind of business they were.  I’ve always thought of Virtualmin as an outlier among YC companies, since we build a traditional installable web-based application, but when broken down into value vs. community, we’re not so far out.

Anyway, I don’t think I’ve stumbled onto anything earth-shaking in this little exercise, of course, but I do think it would be interesting to break down all YC companies (and perhaps even everything in the TechCrunch Crunchbase) into this categorization and see how things shake out with regard to who is still around and growing.  Maybe later…right now I’ve gotta go build some value.