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Why Some Tech Companies Have Staying Power and Some Don't

Alexis Ohanian describes himself as a "start-up guy with the aim of making the world suck less." The 30-year-old entrepreneur and investor is the co-founder of Reddit, a vocal supporter of open Internet initiatives, and author of the just-released book Without Their Permission: How the 21st Century Will Be Made, Not Managed.

Ohanian advises online start-ups not to be intimidated by incumbent giants such as Google  (NASDAQ: GOOGL  ) and Facebook, and points out some of the advantages of playing with the big kids. He also shares his views of why some companies like Google can build a beachhead and dominate their competition, while others like Groupon  (NASDAQ: GRPN  ) and Myspace can't. 

A transcript follows the video.

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Brendan Byrnes: Speaking of some of the big boys -- Google, Facebook, Twitter, et cetera -- how do you view them? Are they a positive or negative overall?

Obviously they have the ability, and they do sometimes, to squash some of the smaller companies, or maybe come and take some aspects of an idea and implement it at their massive scale. How do you think, overall, when it comes to the Internet space? Positive or negative?

Alexis Ohanian: You know I -- and I warn people -- this is the start of a chapter. Do not be scared of the incumbents. We've seen hundreds of YC companies now, because I was in the first round and I've been an advisor since.

Hundreds of these companies I've seen since the beginning stages -- including Dropbox and Airbnb -- one of them has actually been crushed by an incumbent. The Googles, the Twitters, the Facebooks, they might be someone to acquire you, which is not necessarily a bad position to be in.

And oftentimes -- nearly always -- they are so busy, so focused on whatever it is they're doing, they can't be concerned with whatever you're doing. To the point where, for instance, when Google stepped up their travel search game a lot of folks looked at us at Hipmunk and were like, "Are you guys worried?"

It's like, "No, of course not. Google's an advertising company that makes their money on search. We can engineer a much better solution for travel search, than they can. With all their smart people, it's really ...

Frankly, I think from an ecosystem standpoint it's almost an asset, too, because they can help recruit and get people excited about tech, and then they work at Google for a year or two, get bored, and then we can hire them for a start-up, or they go off and stat their own.

Byrnes: Taking the opposite view of it, there are a lot of big tech companies that have gotten taken out by smaller upstarts. Do you view it as maybe Facebook, Google ... look at MySpace, for example, came in and got disrupted.

Ohanian: Ooh, yeah.

Byrnes: Is it a negative to be the top dog and have people gunning for you, or does it totally depend on the specific company? How does the tech space move as far as Internet innovation?

Ohanian: You know, you look at a company like Google, which clearly is still just printing money. Then you look at others; Groupon's had a rather turbulent time. Obviously much shorter timespans have gone by, but clearly there are companies that establish themselves -- Google in search, for instance -- and can build enough of a beachhead that they are very, very profitable and do really, really well.

There are others -- and I'll pick on Groupon -- that catch onto something that is clearly booming and doing really well in terms of those sales, and it's not enough. It's not a long-term thing. We're seeing Fab now, trying to become more of a retail destination. It really varies.

I don't have a crystal ball, but if you can ever put yourself in a situation where you are indispensable -- where you aren't part of what looks like a fad, but you actually are a company, a brand that people trust and go to -- at this point, you could put some of the mainstays of tech on anything, right? Google wants to make self-driving cars? Why not? OK.

That's the difference, and time is going to tell, but really it is hard not to get excited because I want to be in an industry where the upstarts can grow and displace the incumbents, because that's why there's so much innovation.

Because if you start sleeping, if you start getting soft, someone is going to be there with that straw, drinking that milkshake -- and hopefully I'll be an investor in that start-up.

Byrnes: Right. I was about to ask you about that. We have quite a few investors watching right now. You've been invested in dozens of companies. What are some things you look for when you're evaluating a company, and things you like to see overall when you're looking at making an investment?

Ohanian: You know, the stage of investing that I do is seed stage, so it's really early. Here's a pair of founders who maybe have a prototype. They have a little bit of traction, maybe one employee, tops. At that stage, you really, really can only evaluate a company based on those founders and what they've been able to build. It's very, very team driven.

I've got an anecdote in the book about Steve and I applied to Y-Combinator. Long story short, we got rejected on our original idea. We wanted to make a mobile food ordering service called MMM, "My Mobile Menu."

Anyway, we got rejected. Next morning, on the train ride home, Paul called us back and said, "You know what, we like you guys. We don't like the idea. If you change your idea, we'll let you in." So we changed our idea. The thing we changed it into was Reddit, which worked out pretty well.

If I didn't believe in rooting for founders and investing in founders, I'd be a bit of a hypocrite because Paul and Jessica took a chance on me and Steve.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 22, 2013, at 9:30 PM, constructive wrote:

    The problem with Groupon isn't execution. They successfully dominate their niche. The problem is that it's a bad business model. It doesn't matter how well they execute if the business is a bad idea.

  • Report this Comment On October 22, 2013, at 9:34 PM, constructive wrote:

    When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.

    -Warren Buffett

    But of course, this is not quite the case. Coupon sales have a deserved reputation for being a bad business, but GRPN management has no reputation for brilliance.

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