The Second Life business plan contest launch event was fun.  Here’s a snapshot from the event - we panelists are facing the audience: 

We were asked, “What are you looking for in a Second Life business plan?”

My answer is that I’m looking for the same things that matter in every other type of business.  None of this is novel - far wiser and more articulate folks have made the same points in the past. 

1. The team, and its authenticity and empathy for the user experience.  What I mean by this is that I’m looking for founders who come from the community that they aim to serve.  Do they speak the language of their customers? Do they empathize with their customers’ pain?  Do they feel passion for their users? Mitch Ratcliffe wrote in a great blog post today, “Social networks need some soul, not just a business school pedigree.”  For example, I would be a horrible Second Life entrepreneur.  I don’t use Second Life nearly enough to understand the relationship dynamics between its citizens and its service.  My starting a business in Second Life would be presumptuous and arrogant, because I’d be coming in as an outsider. 

That old Hairclub for Men line of “I’m not just the President, I’m a customer!” is comical but rings true.  We are looking for founders who deeply understand the customer problems they are trying to solve.  Don’t despair - even if you’ve never experienced hair loss, you could still build a believable Hairclub for Men business.  Do first hand research.  Go into the field.  Live amongst your subjects.  Take notes. Observe.  Listen.  If you observe and listen well, you’ll learn the local language and customs, internalize your tribe’s aspirations and fears, and your customers will soon begin to accept you as one of their own.

2. Unfair advantage.  This is the elusive secret sauce that sets you apart from all of your competition.  What about your business and your approach can’t be done by anybody else? Focus on that, and outsource/open source the rest.   That din you hear at your door? That’s [Google|guy in a garage] waiting to crush you.  Your unfair advantage is what keeps them at bay.  Unfair advantage can manifest itself as proprietary and differentiated technology, a superior business model, an incredible team iterating on past success solving similar customer pain, or a network of relationships that drives down customer acquisition costs. 

Furthermore, you need to demonstrate that this unfair advantage is sustainable.  Sustainable, unfair advantage is directly correlated to your ability to consistently receive better economic returns than your competitors.  Software as a service has a sustainable advantage over traditionally delivered enterprise software because it’s simply a far more efficient alignment of capital allocation and customer needs.  That being said, SaaS by itself is no longer a sustainable competitive advantage of its own - not in a market where every emerging software company employs a service strategy.  [I've written about the economic advantages of SaaS and open source on another blog.]

 3. Attractive market.  Let’s imagine that I’m the most cynical financier possible and the one and only thing that matters to me is delivering economic returns to my investors.  I’d be looking for businesses that served the entire world population and whose customers were completely price insensitive.   [Oil.] [Drinking water, in unregulated markets.]  Businesses with high customer switching costs.  [Cigarettes.] An attractive market doesn’t necessarily have to be sizeable - though size and [willingness to pay | average revenue per user] are on the same axis.  However, I’m happy to say I’m not a completely cynical financier.  Ideally, I’d love to back businesses that deliver sound economic returns and also do good for society.  [eBay. Google, maybe.]

That all being said, there are some tangible differences between building a Second Life startup and building a more traditional startup.  Though it may seem like the traditional startup business resembles the Wild West, the Second Life frontier is far hairier.  The risks inherent in Second Life startups reminds me a bit of investing in China - there’s a mostly benign dictator (Linden Labs, in this case) who wields enormous regulatory power over the landscape.   Audience members at our session had a lot of questions about currency and economic stability in Second Life.  Just as we trust the Federal Reserve of the United States to keep our dollar stable and valuable, so too must entrepreneurs have faith in Linden Labs to maintain the stability of the Second Life economy.   The Linden dollar has only as much value as you have faith in Linden Labs.

[sidebar:
friend (12:12:09 AM): What are you up to?
me (12:12:18 AM): I'm writing a blog post about unfair advantage and how it's critical to startups
friend (12:12:29 AM): What's your unfair advantage in writing about it?
....
me (12:15:23 AM): my sparkling personality?
]

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