I’ll assert that market is the most important factor in a startup’s success or failure.

Why?

In a great market — a market with lots of real potential customers — the market pulls product out of the startup. The market needs to be fulfilled and the market will be fulfilled, by the first viable product that comes along. The product doesn’t need to be great; it just has to basically work. And, the market doesn’t care how good the team is, as long as the team can produce that viable product. – Marc Andreessen, The Only Thing That Matters

Changing consumer’s behavior is a hard thing to do. If the behavior is completely new (a new market), it’s even harder to do. Diving deep into a startup idea that requires a new behavior from users without the proper funding, resources, and timing will most likely result in failure.

Venture capitalists needs to be alligned/in agreement with the behavior change and be willing to commit a ton of capital into the change. Marketers, journalists, and bloggers will then have to pick up the trend and excitedly write about it on highly trafficked sites. Then, it’s green light for entrepreneurs to dive deep into their ideas, look for funding, and build great products.

In late 2007 (August), my startup worked on a micro-transaction gifting Facebook application for a client. We felt providing Facebook users with a way to micro-transact on a real gifts would be a fun way to give tangable gifts to our circle of friends. We felt so confident that we decided to charge a discounted consulting/development fee for a small stake in the business venture. Although popular Facebook apps at the time still consisted of simple user actions — pokes, virtual gifting, answer quizzes — we believed the value in giving real gifts would be a hit. We assumed leveraging a social networking site like Facebook would give us the distribution (users) and trust (social graph) that would make this the perfect application where all parties benefit.

While there weren’t any social network specific payment providers like ZONG, Spare Change, Boku, and Paymo available, we had experience with traditional payment providers like Authorize.net, Paypal, and Google Checkout — and we were confident with the big brands behind those methods that transactions wouldn’t be big friction feature.

We spent roughly four weeks, mostly 10-14 hour workdays, getting an alpha version out for our clients/business partners — three developers and me, working on gathering requirements, user flow, and QA. We spent the next two weeks revising the user flow, copy, inserting more gift items, and making sure out simple dashboard to log all the data worked properly. Our adrenaline were sky high when we launched! We were going to be the first (based on our research) Facebook app that can do real transactions!

Then, four weeks later, a merely 500 total users on the application. Two “real” transactions. The application bombed. No one wanted to spend money on a Facebook app. Afterall, the Facebook apps dominating the Facebook platform at the time were apps named “Superpoke,” “(fluff)Friends,” “Quizzes” but none of those apps direct transactions. The application topped out at 700 users w/ no additional transactions. We moved on to work on other application projects knowing we’ll need to keep the money coming in.

More than a year later RealGifts and GroupCard were funded by fb Fund that acted in a similiar way — real transactions in a Facebook app. That funding was miniscule compared to the other Facebook app companies like Zynga, SGN, Playfish (acquired by Electronic Arts), Playdom, Serious Business, and Slide. Heavily funded by heavyweight venture capital funding, they all implemented ways to buy virtual good and become (really) profitable for their social games.

People have become more comfortable with the idea of paying for games on Facebook, and we’re working to get as close to 100% in direct payments as we can. The reason why we still have offers is that a large portion of our international users don’t have credit cards or don’t have the capability to pay us directly, so offers are a way for them to be able to still buy virtual currency. — Jeremy Liew, LSVP Blog, Interview with Serious Business CEO

So what happened? How did social games change the behavior of users that were relundant to pay for anything to pay a ton for money for virtual goods? How did the real gifting applications convince fb Fund to fund their business idea? Why did our application fail? Why talk about it now — nearly two years since the project?

You’ll have to wait for my next post.

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