The concept of viral equity is simple. A startup can offer equity to its customers as an economic incentive for doing business with the firm. The more customers transact with the firm, the more equity each customer gets in the firm. The more customers they refer to the firm, the greater the value of their holdings becomes. And the earlier the customers get in the game, the more the value of their holdings. The system of viral equity, therefore, closely aligns the incentives of customers and investors.

Two Tectonic Plates

The information revolution has turned several conventional marketing assumptions on their head. Traditional advertising models, where marketers pushed advertising to customers, are being supplemented by consumer-driven advertising models, where consumers act as advertisers, spreading marketing messages at the speed of light. In viral marketing, something of value is given away free to build a large customer base that can be leveraged for services, commerce and referral revenues.

The pioneer of online viral marketing was Hotmail, which offered free email to consumers. Hotmail grew rapidly because every email sent using a Hotmail account included a note from Hotmail advertising its free email; each customer was implicitly acting as a “virus,” spreading the gospel at light speed. By using customers as agents for their message, Hotmail was able to harness the “word of mouse.” However, despite the rewards of lifelong customer ownership through brand loyalty, a business model based on zero margins is hard to sustain without some way to generate revenues from the customer base. Hotmail eventually sold out to Microsoft.

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