Every time a new idea becomes big on the web lots of companies replicate the model. Many of these companies are what I call sliver companies. Sliver companies mimic new innovation, differentiating themselves by targeting a sliver or a niche of the addressable population that the first movers served. For example, while eBay, YouTube and MySpace (and their early competitors) largely served a broad demographic, new companies launched shortly after them, focusing on more specific slice of the market---auctions for specific products, videos for specific ethnic groups or social networks for professionals in specific industries.

To clarify, not every site that replicates the model of another player is a sliver business. It’s not uncommon for new startups to rise that challenge incumbents for the broader population. Myspace launched to compete with Friendster.

Others that seek to eventually conquer the broader demographic can start as sliver businesses, expanding to serve the broader demographic after gaining critical mass. Facebook is a perfect example of this. While Friendster and Myspace duked it out for the entire market, Facebook entrenched itself in a relatively large sliver - the college population. Once they had critical mass in their niche, they were positioned to expand into the broader demographic.

It's worth noting that these companies should not strictly be deemed 'me-too' companies. While sliver companies do copy the underlying service, focusing on a specific niche of a marketplace can be a meaningful differentiator and can create successful endeavors. Take the auctions started in Europe, for example. Their focus on new geographies led them to be profitable endeavors, leading to Ibazar's acquisition by eBay.

One of the challenges of creating a sliver company is that at first glance they do look a lot like pure ‘me-too’ plays, leading many investors to roll their eyes. Sliver companies carry with them two types of stigma that they need to overcome.

First, investors generally assume that sliver businesses target addressable markets that are too small. By targeting a smaller population, many sliver companies do reduce their revenue potential. There are, however, some exceptions. When entrepreneurs cleverly seek to serve sliver populations that can be monetized more effectively, the higher price can more than make up for the smaller volumes.

Second, investors generally assume that sliver companies are not differentiated from the giant they are mimicking. By segmenting a specific population, however, members can derive a different type of value from the same technology. For example, while Facebook isn’t a great forum for a member to find a support group, a sliver social network focused exclusively on creating a community-driven support group might provide just the right type of interaction for someone in need of help. In other words, while blogging about a problem you have on Facebook makes you a downer, talking about a problem you have in a support community makes you a member.

The cycle of innovation continues to create giants and those giants inevitably give birth to a plethora of sliver companies. While most sliver companies have smaller markets or not enough differentiation, as an investor I keep an eye out for diamonds in the rough.