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Distribution Advantage

Rob Go
July 11, 2013 · 4  min.

Reading Time: 4 minutes

I was asked recently how NextView evaluates such early stage companies for investment.  The reality is that pretty much all investors looks for the same core things.  It’s some combination of great teams, attractive markets, and promising products. As a seed fund, we tend to layer in “capital efficient beginnings” to the mix given our investing model and belief about the best way to build internet and software businesses.

But this time, I gave a different answer.  We tend to favor companies that have a “distribution advantage”.  This isn’t true for every single one of our portfolio companies, but in at least half, we had a thesis about why this company had some sort of unfair advantage or head-start when it comes to getting their product out into the market.

This is increasingly true in both consumer and business facing companies.  The web and the app store is littered with terrific products that have a hard time getting scale, even though the teams behind them are strong and the product and market seem pretty attractive.

So what are some examples of distribution advantages?  Here are a couple examples from our portfolio:

  • Vertical Communities: One of the exciting attributes of GrabCAD in the early days was its rapidly growing, engaged community of mechanical engineers.  As a vertical community, the business of GrabCAD was never going to look like that of a social network or social media company.  However, as a software company enabling collaboration, the fact that GrabCAD has significant mindshare among engineers and hundreds of thousands of individuals discussing models they have uploaded to the cloud is a great head start.  We invested in the company had only a few thousand engineers, but even then, you could see the beginnings of a vibrant vertical community that could provide an amazing distribution advantage once a paid product was released.
  • Legacy Distribution Power: Quite a few successful companies got a nice head start because of legacy traffic.  Sometimes, this comes from a prior business with an existing user-base or customer list (eg: Fab).  In the B2B world, this could take the form of founders who have such strong market relationships that they can get things done on the sales and partnership side that create huge credibility for the company well in advance of what others could accomplish in the same time period.  In our portfolio, Custommade had an early distribution advantage because Seth and Mike had worked hard to recruit large numbers of makers to list their portfolios on the site and build significant organic search traffic to When it was time for the company to shift the business model to a marketplace, the biggest challenges to early liquidity was largely addressed, which made this a very attractive investment opportunity even though the company was planning a business model pivot.

Sometimes, a business doesn’t necessarily have an inherent advantage in distribution apart from the strategy of the team and design of the product.  This is often much harder to appreciate or identify early on, but can still lead to real go-to-market advantages.  Typically, I tend to notice two approaches to delivering product-oriented distribution wins.

1. Design a product that by its very nature, touches a lot of non-users repeatedly. This tends to be pretty hit-or-miss, I find.  Some products have what look like great viral loops, but aren’t very successful.  Others have spectacular growth because they were clever about piggy-backing on another platform, but crash and burn pretty quickly (Remember Viddy and Socialcam?). As an investor, I tend to look for products that I think have several, extremely natural touchpoints between users and non-users and a team that is scrappy, analytical, and hyper-focused on driving growth.

2. Produce a “wow” moment for a narrow audience that cares. Also hit-or miss.  But I think there are quite a few examples of companies that have taken this approach.  These companies are often dismissed as being “small” or too “narrow’ by some investors.  But strategically, the focus of the team is not to be applicable to lots of people (initially) but to go way over-the-top in delivering a uniquely great experience for a narrow segment.  A couple companies come to mind here.  On the B2B side, Crashlytics (which was acquired by Twitter) went over-the-top in delivering a premium, consumer experience to developers for crash reporting.  This wasn’t just lip service either – this ethos was ingrained into every part of the company, even their office lobby which features an artistic flowering tree with hand folded origami petals to symbolize the attention to detail that was taken with every customer interaction.  On the consumer side, I remember when many people wondered “how many people really want to book a hotel on the day of travel?”.  But for those that were willing to do this, HotelTonight created an unparalleled mobile booking experience.  All of a sudden, lots of people who thought they would never wait to book a room until noon on the day of travel decided that it was perfectly acceptable.

The last type of distribution advantage I’ve noticed is probably pretty controversial.  But it’s the ability to access capital.  There are few magic bullets out there for distribution, and many of the lead bullets cost money (to hire great people, buy media, maintain low prices and great service, survive long enough to establish a brand, etc). My friend Steve Kane pointed out that this has been a huge advantage for Square, for example.  I think this can be an advantage, to a point.  However, there are also many examples of companies with founders that had super-human access to capital that failed to get widespread, sustained distribution over time.

For more on growth and distribution, I always recommend Paul Graham’s “Startups=Growth” essay last year, Adam Nash’s three part series on “User Acquisition for Product Leaders” and David Skok’s presentation on “The Science Behind Viral Marketing”. If there are others that you recommend, please share them in the comments – I’m always looking to learn more.

Thanks to my friend Wayne Chang for helping me with my thinking here.

Rob Go
Rob is a co-founder and Partner at NextView. He tries to spend as much time as possible working with entrepreneurs to develop products that solve important problems for everyday people.