When it comes to successfully investing in companies that build large communities of users, few can compare to Rob Hayes of First Round.

Rob opened First Round’s San Francisco office in 2006, and he has played an integral role in building the venture capital firm’s far-reaching community of entrepreneurs ever since. In particular, he’s made his mark contributing to the $6 billion in capital that investors have funneled into the collaborative economy in the last 12 years — a category that includes companies like Uber, TaskRabbit, Homejoy, DogVacay, BloomThat, Blue Apron and many more.

Working closely with these companies, Rob has seen firsthand how businesses can thrive by building large communities of connected, loyal users — whether they are providing or making use of a service.

So what are the building blocks of a successful, community-driven company? And how does he identify winning platforms in this area?

In this exclusive interview, Rob shares:

  1. The three signals that indicate if your community-based product or service has what it takes to grow into a big business.
  2. Examples of what community can do for your business if you haven’t already invested in building one.
  3. The indicators investors look for when they consider community-driven companies.
  4. Opportunities that Rob thinks community-based startups can and will capitalize on in the next few years.

If you’re interested in raising capital for your community-based startup, or if you will be raising capital after using community as a strategy to grow your business, listen up.

Three Signals That You Have Big-Business Potential

Rob defines community as “a group of people aligned across a uniform set of objectives.” As such, a community-driven startup is one that relies on this group of people as either their user base or the supply- and demand-sides of their two-sided community marketplace.

For startups like these, Rob has pinpointed three key signals that indicate if a company has transformative potential.

1. The founder is the key community builder from the early days, setting tone, vision, and direction.

“Without question, the founders are very important in any community product. They set the North Star for what they want to achieve,” says Rob.

Having that person who can be the final arbiter and who holds the vision is essential. Of course, the founder can only do this effectively when seen as the leader of the community by both employees and the community as a whole.”

While communities often become scalable businesses by gradually ceding control to their members, the early days are not the time to do this: “Don’t let the community bully you into submission,” Rob says. “Digg did that and look what happened.”

In August 2010, Digg launched a controversial community-driven redesign that failed to meet its die-hard members’ expectations. A revolt ensued

Rob says instead, “Know what your vision is for the community and constantly share that vision with the community. If they don’t want to be a part of your vision, fine, but don’t let them set the vision.”

To make sure this doesn’t happen to your company, spend a lot of time at the beginning laying the groundwork for specific, respectful interactions. Make it clear how people should communicate, and make sure everyone at your company is actively setting this example for users.

The Twittersphere: How Evan Williams Set the Tone as Twitter’s First Community Moderator

Rob uses Twitter’s Evan Williams as an example of a founder who set the stage for the company’s early community success. “I think I was user #1,200 on Twitter, and it felt really exciting to be a part of it in the early days,” says Rob. “It wasn’t about the product or the code; it was about how the company nurtured the community. They listened.”

But, significantly, it wasn’t a free-for-all. The early Twitter team laid down the law when it came to elevating discourse on the site. Founder Evan Williams was an early moderator of the Twittersphere, Rob says. “He actually stepped in to control the tone of the community.

2. The team begins to cede control thoughtfully over time.

“This is really tough. As the community gets bigger and you make changes, you have to be okay with the fact that things will never be the same. The companies that handle this the best are the ones that make it for the long haul,” Rob says.

“As you scale, you have to open up. Take Facebook for example. The community has totally changed,” Rob says, alluding to Facebook’s shift from a college-only social network to an open platform anyone could join. “As you begin to achieve more, you will probably lose the people that got you there in the first place. It can be difficult, but it’s a natural thing.”

“As part of this process, you will probably see some splintering. People will propose new ideas and pitch new directions. You may see them take conversation in a new direction. Look at companies like reddit, where users completely define the topics people discuss. It’s one of the most successful communities on the web,” Rob says.

“eBay, one of the first real online communities, saw incredible growth from building tools and not writing too many rules as they scaled,” he adds. 

3. People feel deeply invested in the community’s success.

If you’re doing community right, people will feel like they’re building the company alongside you, even if they’ve never stepped foot in your office.

“UrbanSitter is doing a great job with this,” Rob says. UrbanSitter is a two-sided marketplace that connects sitters with parents in need of childcare. They can find trusted, reviewed sitters, and sitters can expand their client base.

“The sitters in that community are really excited about being in that community. The company has engaged them to understand what it is that the sitters want as opposed to just asking the end customers,” he says. The success of strong supply-side companies can be seen again and again. Urbansitter is one example. Etsy and Yerdle also fit into this group.

“The way that these companies engage all sides of their business (rather than ignoring the supply-side in favor of the end-customer) makes them more successful and responsive to change over time,” Rob says.

What Community Can Do For Your Business

If you have yet to invest in community as a major part of your business or make it a key part of your mission, Rob has some compelling reasons to start:

1. Growth and network effects create an indestructible product.

“The thing you get from community is network effect,” he says. “There is certain failure in trying to start a parallel community if your competitor has built something that incorporates all of the leaders of the community you’re trying to reach. Those people won’t want to move over.”

For instance, imagine if someone attempted to start a direct competitor to Etsy. How hard would it be to move those millions of crafters and artists over to a totally new platform? It would be nearly impossible.

2. Community galvanizes great work from users. 

“Community is important because you feel like you’re a small piece of a much larger solution,” Rob says. “This has never been more true than in the way companies are listening to their communities today.”

3. Community gives you the ability to reach new groups of people and give them a voice. 

Taking the Urbansitter example, “Many of the company’s sitters are still students and are really excited about UrbanSitter because the company engages them and solicits their input in guiding the company.”

In many instances, power has shifted dramatically toward users: “Twenty years ago, there was no company that everyday users actually had a stake in,” Rob says. “Even if people cared about how a company was growing or changing, there were hardly any channels for them to express themselves. Now there are many, and they are taken very seriously.”

4. Tapping into groups of people and resources lets you solve problems of underutilization. 

“One of the things that Uber understands is that community can solve the problem of under-utilization,” he says. “When you build a community around a resource, you get better utilization. You get all these people throwing their hats in the ring and you become more efficient.

Community has the potential to make us vastly more efficient and to give us new avenues toward financial flexibility as a result.

What Investors Look for in a Community-Driven Startup

Rob Hayes First Round VCRob says he is definitely influenced in his investing decisions when companies can point to strong communities they have created.

“It absolutely factors in, but not for the reasons you might expect,” he says. “Building a community around a product is something that resonates with people because they know they can become a part of it.”

In terms of how he invests in community products and businesses that use community as a tactic, he says: “When investing in community products, each one is so different.” But he does take a close look at the founders’ role and personality in a community-driven startup. “I tend to bias towards an ‘execution focus,’ but even then I have made exceptions.”

What is an execution bias in venture capital and how do you hone your ability to execute? Execution bias means that the founders are focused on setting a vision and then doing, building, and creating all the time, Rob says.

This type of learning by doing can pose a challenge when building a community, as it’s easy to get stuck in the middle of multiple members’ opinions. Instead, the founders must set the vision, listen, but ultimately hone the product and company mission around what they want to create in the world.

Opportunities for Community-Driven Startups

“The one I’m waiting for is the total disruption of the mobile carrier space,” Rob says. “You see the beginnings of this now with a company called Firechat in Asia, it’s Bluetooth to Bluetooth technology.”

Firechat is taking communication off the existing network. It’s not a true mesh network, but rather a series of peer-to-peer connections. “When you think about the density of mobile phones, this is super powerful,” he says. “You get everyone to download this one app, and then because of the community of the user base, these people will never need a carrier.”

Rob is also excited to see how community companies can impact the way we obtain, share and distribute weather and map information.

“In downtown Tokyo, there are no street addresses. So how do you merge and put together photos to construct a map? How do we build the canonical community world map of every street in the world?” This problem could potentially be solved by someone who builds a community that is passionate about solving this problem.

Rob explains that most problems we face today likely can be solved by community efforts, including problems that need to be solved in agriculture and other industries that most of us likely don’t think about on a daily basis but that touch our lives in myriad ways. Someone simply needs to call our attention to them in the right way.

Conclusion

Despite all of these openings for companies, community is not the be-all and end-all. It doesn’t solve all problems or apply to all businesses.

“Community is not a panacea,” Rob says. “When I think about consumer packaged goods, I’m not sure how making breakfast cereal ever becomes a community endeavor. But I think that there will be components of community everywhere. Companies will be listening and monitoring social conversations across the board to give more people what they want.”

As time goes on, he believes the notion of community will feed more and more into everything people do. “You’ll see this across different industries,” says Rob.

The financial opportunities for building community “can be huge,” Rob stresses. That’s why he continues to be interested in investing in community-centric products and services. Community will power the many products yet to come that will solve our inefficiencies, connect us to one another in new ways, and shape our daily habits and decisions.

Carrie Melissa Jones

Carrie Melissa Jones | @caremjo

Carrie is the COO and Founding Partner of CMX. She has built community at Chegg and Scribd and has consulted with community companies around the world. She lives in Seattle, WA with her pup, Bruce Wayne.