So You Want To Be A Facebook Entrepreneur?

entrepreneur_oct09_web Recently, I’ve been fielding questions from a few people I know who ask about starting a small venture based around a Facebook application.

Is it a good idea?
Can I make a lot of money this way?
How do I make a lot of money this way?

Now the process for starting a startup is a very widely written about topic, and that’s where you should probably begin your journey. However, there are some specific Facebook-centric issues that make a Facebook based startup a bit different. Some issues make life easier, some issues make life more difficult. That’s what we’ll discuss here.

When you create any type of software startup, there are 3 key roles that need to be filled. It’s important to understand the role each plays to help you understand where the real challenges are going to be. Let’s take a look:

The Idea Originator
Software Development
Marketing/Sales/Strategy

The Idea Originator

The most misunderstood thing about creating a software startup is the importance and value of the original idea. Here’s the grim truth: The original idea is worth $0.00. Why? A few reasons: When you begin to validate your ideas and have them exposed to customers, the original idea will change. But more importantly, the value of the idea is far overshadowed by the value of the execution of the idea. There’s far more work and creativity required to do things like drive customers to your product and monetize the idea than to come up with the initial ”Million Dollar Idea”.

There’s even a whole scene about this in The Social Network where Mark makes an impassioned speech to the Winklevii’s lawyer about why they don’t deserve a piece of Facebook. He rightfully says that Facebook’s value came from all of the good ideas and hard work that went into the product. Since the Winklevii weren’t even capable of participating in this work, they deserve nothing. Surprisingly, Hollywood got it right!

Still don’t believe me? Read on …

Software Development

Everyone who’s ever done development in a big company knows that they’re the company’s crown jewels. Development is the engine that everything else revolves around, and so it’s the major contributor of value for your company, right?

Well sure, software development is really important, but is it the most important aspect? In a startup you also need to consider …

Marketing/Sales/Strategy

Sure you need a solid development team, but as a startup that’s only the beginning. Your big company had loads of luxuries that your startup doesn’t have like brand recognition, distribution, existing customers, money in the bank, and other things that make a difference. These things are key, and how your startup deals with getting customers and making money will determine your success. You can conjure up all kinds of fantasies for how you’ll make money, but in the end only a rational plan will do.

Here’s what you’ll need to think about:

Distribution

Distribution is how you’re going to get your product into the waiting hands of the teeming millions. In the olden days that meant producing a box and getting some shelf space at the computer store. But no longer, this is 2011. Since you’re building a Facebook app, you’re going to use Facebook to deliver your great product. Distribution problem solved, until …

Attention

Getting people’s attention is a much harder nut to crack than simply having a distribution strategy on Facebook. How you choose to do this is really important. Perhaps you’ll say “Of course people will pay attention to my product because it will be so great and unlike anything they’ve ever seen, they’ll come to us in droves, and the app will go viral.”

Bad plan. How many apps do you think people have access to on Facebook? Currently, it’s somewhere around 17 gazillion. And yes, according to Facebook Statistics, people are installing 20M apps per day, but that doesn’t mean they’re installing yours (actually most of those are probably going to the latest incarnation of *Ville). Getting people’s attention is becoming harder and harder. Simple virality is a thing of the past as Facebook is taking away many of the tools and tricks that developers used to use. The problem was that many of those developers used spammy tactics to boost their numbers and customers rightfully complained. Things that used to work no longer will, and anyone who thinks they can recreate the success of an application that went viral two years ago will be sadly disappointed.

Of course, you can always raise your app’s profile and get some attention by using Facebook ads. These ads can be targeted to whatever demographic you like, but they cost money. If you need a large user base to effectively monetize your application, then you’ll need to spend quite a lot on ads to get that necessary attention. You do have a big pile of money to spend on advertising, right? Hmm, didn’t think so.

How about free publicity, like being picked up by the Wall Street Journal, TechCrunch, or even Inside Facebook? Great idea, but how do you get that done? The fact is this is possible but will require some really great traction, perhaps some connections, and perhaps a bit of luck.

Monetization

How does one monetize their Facebook application? Good question. When you come up with a good answer, perhaps you can share it with the world and help out all of the developers milling around the Facebook Developer’s Forum asking the same question. In short, monetizing your Facebook app, even a good one, is not so easy.

You could try to monetize through advertising. Facebook even has an approved list of companies that will help you do this. Will you make money this way? Probably. Will you make lots of money this way? Probably not. It all depends on how popular the app is. You do have loads of users, right?

An alternative way to monetize is through some sort of in-app currency. Of course, Facebook has their hand in this after introducing the concept of Facebook Credits last year. Credits can be used to do things like purchase virtual goods within a game. Think the idea of purchasing virtual goods is stupid? Think again, it’s big business. The problem with in-app currency though is that your application must naturally require it. Whatever you use the currency for must meld with the idea of the app or it will just seem like a random idea bolted on as an afterthought. There’s no money to be made in bolted on ideas.

Of course, you can come up with other ideas for how to monetize your application, but that will require a large dose of cleverness. And remember, whatever you do must also stay on the compliant side of Facebook’s TOU.

Funding

At this point you may be noticing a pattern: when it comes to various tasks for your startup you can either come up with some really clever ideas, or pay some money. Since inspiration for great ideas may be low, you might think about looking for some funding to pay for what you’ll need. You might even be thinking, “Hey, I’ve watched Dragon’s Den or Shark Tank a few times. My ideas are much better than what I’ve seen there – surely getting some Venture Capital or Angel money won’t be so hard.”

Uhhhh… yes it will. Getting anyone to put money into your startup is incredibly difficult, even if you have some traction. What, you don’t have any traction yet? It’s going to be harder.

Now something you should know about is that there are some special circumstances for receiving funding as a part of the Facebook ecosystem as many investors are looking to find the next Zynga. Long ago (well, long ago in Facebook years) Facebook created the fbFund which was a funding source meant to help young companies in the Facebook ecosystem. Depending on when you were looking, this help could have come in the form of a grant or an investment that took a piece of the pie. Right now, it’s all academic as the fbFund as an entity no longer really exists.

When fbFund ceased to exist, fbFund REV rose from its ashes. This incubator program was run by Dave McClure of Founders Fund, and provided exceptional startups money as well as mentoring and great access to everything and everyone a startup could need. Sadly, this too seems to have lost its steam.

But that’s okay. There are sources for funding Facebook ventures popping up all of the time. You just need to take a bit of time to learn what they are. But more importantly, you need to plan for something that deserves venture funding.

Alternatively, a good dose of cleverness is always welcomed to create your own funding strategy. Give me 15 minutes and buy me a beer and I’ll tell you the story of how we funded the development of FriendRunner with mostly other people’s money. You probably won’t be in a position to do exactly what we did, but perhaps we can inspire you. Learn where the money is and the rules for how to get it. Throw in some clever ideas, and see what you come up with.

So, is it a good idea?

Absolutely, it’s a good idea to build a business around a Facebook app.

However, to be successful it’s critically important to focus on the right things. Zynga’s FarmVille didn’t just spontaneously happen. You can almost imagine early meetings where they discussed:

How people will learn about the game
How Facebook’s social aspects will be used so that players can suck their friends into the game
How money will be made
Alternative ways that money will be made
How to tie the game into the real world
Partnerships that can be entered into
What to do if Facebook changes the rules in midstream (oh yeah, something important to think about)

You can also imagine that at the end of the meeting someone asking “But what will the game be about?”. After a bunch of blank stares, someone else throws out “You can pretend you’re running a farm or something.”.

Please leave a comment with your thoughts about starting a Facebook venture.