This is the reality that Brad and I stared at in 2003 as we were developing our initial investment thesis for USV. We saw the cloud coming but did not want to invest in commodity software delivered in the cloud. So we asked ourselves, “what will provide defensibility” and the answer we came to was networks of users, transactions, or data inside the software. We felt that if an entrepreneur could include something other than features and functions in their software, something that was not a commodity, then their software would be more defensible. That led us to social media, to Delicious, Tumblr, and Twitter. And marketplaces like Etsy, Lending Club, and Kickstarter. And enterprise oriented networks like Workmarket, C2FO, and SiftScience.
Fred Wilson shares a story and his initial investment thesis at Union Square.
The only moat that a company can build for itself these days, to protect it from competitive threats, is a network – replete with users, data, and partners. A newer, better Facebook gets launched everyday of the week, but none of those new startups have your friends as users. And until one of them figures out how to cost effectively acquire you and your friends, you’ll stick to Facebook.