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Thursday, August 29, 2013

Reporter’s Notebook: Divining a Start-Up’s Potential

Divining the future potential of a start-up is no easy job. And yet, this is the task that tech reporters take on constantly. We spend a lot of our time trying to figure out which companies, both large and small, are newsworthy and why.

It’s not an exact science â€" more of a balance between intuition and reporting. For clues, we look, in part, to venture capitalists who finance these companies because, after all, they want to bet on winners. These investors say they write checks for entrepreneurs who seem confident, capable and driven by an inner hunger and desire that will carry them to success, and say they often prize these qualities more than the particular idea or company that is involved.

We also, of course, talk to entrepreneurs, who often say a winning idea is one that invents a new way to do something â€" like exchanging messages with your friends or how to find the best restaurant. And we look at data, seeing which companies are gaining users quickly, or attracting people who are particularly interesting to advertisers for one reason or another â€" teenagers or women, for example.

Still, none of these factors are enough to necessarily warrant coverage. An all-star roster of investors is not a surefire measure of success. Investors can bet on losers, too. Good entrepreneurs, by loose definition, are generally passionate about their pursuits, so that doesn’t cut it either. Gaining users is important, but what if the company isn’t making money from their customers yet?

The tipping point â€" the moment at a which a start-up transitions from being an interesting company in the periphery of your radar to a notable that is prime for covering â€" is hard to pinpoint. In some ways, it’s just a gut feeling, based on overall experience. The app, game, service or idea that you’ve had your eye on starts to pop up all over â€" in casual conversations at random parties or in an overheard conversation on the subway. In some ways, a gut instinct is the only way to distinguish between companies that perform the exact same function â€"  Vine versus Viddy, Instagram versus PicPlz, GroupMe versus FastSociety, WhatsApp versus Kik.

Sometimes we get it right, but we can also miss the mark.

Last year, after Facebook announced plans to buy Instagram for a mind-boggling $1 billion, we tried to figure out which companies might be next. We waded through the list of companies we had noticed and picked the ones that seemed most promising for the year.

One company that we originally put on the list was Tumblr, the popular microblogging service. But then we took it off. The company, founded in 2007, felt a bit older than the rest to be considered a start-up and while we knew plenty of people who obsessively used it, it seemed as if most of them worked in media in major coastal cities. We knew that the company was self-reporting eye-popping page view numbers, more than other popular social media sites â€" as far as we could determine based on what we knew about these private companies that don’t have to reveal details about their business. But Tumblr didn’t seem to have a clear revenue-generating strategy or plan for forward momentum.

We went back and forth over whether it belonged, and then decided to take it off and keep it on a mental list of “companies to watch.” Either Quora or Findery, nee Pinwheel, took its place on the roundup.

Then, a few months later, Yahoo bought the company for $1.1 billion, proving it doesn’t always take revenue or a clearly defined road map to attract the big bucks.

As for our other picks last year, demand for Uber seems to only be increasing, amid rumors of a round of funding that would push the company’s valuation into the multibillions. Similarly, Dropbox seems to be sustaining its momentum, by more than doubling the number of visitors who are using the mobile application in the last year, according to comScore, a Web analytics firm. Path also appears to be drawing large numbers of users through mobile. And Pinterest is still widely considered to be a social media heavyweight and is now valued at $2.5 billion, thanks to a recent $200 million investment in the company.

Quora, on the other hand, has lost traffic to its home page in the last year, with a 20 percent dip to 1.5 million visitors from 1.8 million visitors, according to comScore. Airtime and Findery weren’t generating enough traffic at all to register on comScore’s tools. And although Square has convinced many a venture capitalist to funnel several hundred millions to its coffers, the payments start-up seems to be struggling to impart that faith in consumers.

This year, we’ve tried our luck again at picking out a fresh crop of companies that seem poised to take off, both among consumers and among larger companies and corporations who might buy them for their talent and technology. As always, dozens were considered, but not all made the list, including VHX, a video-delivery service, Tinder, a popular dating app, Feedly, a news reading application; Leap Motion, a device that lets you control your computer with hand motions; or Dots, an addictive iPhone game.

We’ll have to wait another year to see how we did.