A Software Company's Whimsical Widgets Were an Instant Hit. But Its Core Product was Getting Overshadowed.

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Little wonder that the company's angel investors started to get nervous. One investor and key adviser, former AOL Time Warner (NYSE:TWX) CTO William Raduchel, began prefacing every instant-message conversation he had with Williams by typing, "Focus, focus, focus." The widget-software-tools space was rapidly becoming more competitive, with dozens of companies reeling in large checks from venture capitalists for pitches based on widget technology. Microsoft (NASDAQ:MSFT), too, got into the game, announcing it would soon distribute software that would make it easier to create simple widgets with limited functionality. ChipIn's technology lead remained intact, but for how long?

The Decision Refocusing the company on the Facebook applications was tempting. But Williams noticed the majority of the advertisers buying slots on the applications were other Facebook application companies hoping to get users to download their applications. To Williams, that smacked of the advertising mania of the Internet bubble days. Copycat applications that mimicked the monster and pirate themes were quickly catching on; some even surpassed ChipIn's own Facebook applications in total users, which gave Williams further pause. With barriers to entry that low, betting the farm on such a fickle business and fickle user base looked increasingly dubious. Viewed in that light, the original ChipIn business--helping companies build widgets to perform complex tasks--seemed like a better bet. Licensing software, Williams knew, has higher barriers to entry--writing code is hard-- and is a lucrative business, with gross margins as high as 70 percent. And Williams understood that the Facebook application business would always be an unwanted siren song for his team.

Williams began shopping the Facebook applications business and quickly found a number of interested buyers willing to pay in the low seven figures. He accepted an offer from a Silicon Valley venture-backed software start-up looking to acquire interesting social networking technology tools. The deal, which as of this writing had not closed, will also include some intellectual property for widget management tools and, in all likelihood, one or two engineers. Williams says he feels he made the right choice and has high hopes for ChipIn's enterprise offerings, even as Facebook mania continues. In October 2007, Microsoft paid $240 million to purchase 1.6 percent of Facebook, a deal that put the rough valuation of the start-up at $15 billion. "For us, Facebook applications were like a drug," Williams says. "They were loads of fun and making a little bit of money. But in the end, we want to make hundreds of millions of dollars, not millions of dollars. And I didn't think Facebook could do that for us."

The Experts Weigh In

Why not keep both?

If Williams believes widget tools can generate hundreds of millions in revenue, then my gut would be to trust the vision of the entrepreneur. ChipIn's Facebook apps "diversion" will give the company the funding necessary to begin building the widget tools team. I don't see why Williams had to completely divest himself of the upside in the Facebook apps. They are actually pretty sticky, and the competitive landscape in Facebook is not quite as daunting as in the enterprise space, where you have to compete against Microsoft.

Lee Lorenzen
CEO
Altura Ventures
Monterey, California

Follow the market

My first reaction is, Where's the market need? Do enterprises really want to build their own widgets? Or are widgets part of a marketing strategy that they will outsource? With vampires and werewolves, ChipIn stumbled over a "demand pocket." Finding that is the toughest challenge for a start-up. Abandoning it for an untested enterprise tool may have been premature. I would have invested energy in understanding the characteristics of this demand pocket to determine whether a business model existed to support targeting it.

Shellye Archambeau
CEO
MetricStream
Redwood Shores, California

Stay the course

Selling the "Monster Mash" portfolio to fund the core business was the right move. However, it may be more difficult demonstrating Web 2.0 expertise to prospective clients without the advantages of having a top Facebook app. And though margins are, indeed, higher for enterprise software than for advertising-based businesses, these margins are also more difficult to scale without significant investment. I would strongly advise the team not to raise outside capital. Keep the burn rate low, and take on only projects that get them excited.

Steven Carpenter
CEO
Cake Financial
San Francisco

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