Jan 13 2007

StubHub: Vertical Specialization On Sale for $310 million

Earlier this week eBay announced it was buying StubHub for $310 million.  My partner Ryan McIntyre – who was an early angel investor in StubHub (congrats Ryan – dinner next time is on you) has an excellent post titled StubHub: the value of vertical specialization

While building a horizontal technology is often the starting point for many entrepreneurs and VCs, we continue to experience the incredible power of vertical specialization.  This is distinct from “going after a vertical market” (say selling products to law firms, or manufacturing firms, or financial services firms) which is another classic approach of entrepreneurs and VCs (I can’t tell you the number of times in the past 10 years I’ve heard “we are doing X and are going to dominate vertical market Y and, after that, dominate vertical market Z.” Much of this emerged from the Geoffrey Moore bowling alley thesis from Inside the Tornado but was also a standard strategy of many of the successful software companies in the 1980s and 1990s.

Vertical specialization is different.  Service Magic took the notion of a generic buyer / seller marketplace and applied it to an ecosystem around home ownership (contractors first, then home buyers / real estate agents, and finally mortgage financing.)  Stratify took a horizontal enterprise search technology that was awesome but difficult to sell (“hey Mr. CIO – do you want to buy some horizontal enterprise search?”) and applied it to the business of electronic discovery, building in awesome company in the process.  Granted – you could say that each company went after vertical markets (which is an element of vertical specialization), but the key is that they took a horizontal technology and applied it very clearly to a vertical market and then built out a robust business around that, rather than customizing a generic application for a vertical market and then expanding into the next vertical market after they had some success.

Vertical specialization doesn’t work if your underlying horizontal technology doesn’t work.  So – when you hear someone talking about how they are doing “vertical search applied to market X” or a “vertical social network for category Y”, dig deeper and find out how they are actually doing it and whether the underlying technology will work at scale.