Posted on January 3, 2008
Filed Under Web 2.0 Kool Aid |
Allen Stern at CenterNetworks lit the tech blogosphere ablaze today with a post about . My favorite “community” CEO Jason Calacanis, leader of one of the Dumbest Startups of 2007, Mahalo, with an absolutely brilliant explanation of why Twitter will be a billion-dollar company in 12-24 months. Among his pearls of wisdom:
Allen wrote a blog post today about Twitter focusing on a business model. Allen, my friend, you’re thinking small. Get out of Brooklyn and spend more time in the Valley. Business models!?!?! The business model comes AFTER you get to scale.
Bottom line? Ev shouldn’t worry about a business model for another two years. Just build the service to *massive* critical mass. Get to 100M users–which is where the service is headed. If the service gets to 100M monthly users it will be worth a couple of billion.
That’s what I learned at AOL: Once you have critical mass you can’t help but make a fortune. An absolute idiot with 10-20M users can make a ton of money. So, get to tens of millions of users and forget about money.
Running a startup is NOT about revenue anymore–it’s about critical mass. It’s about scale. When you’re playing in the big leagues with unlimited access to capital you shouldn’t worry about revenue BEFORE you have critical mass.*
* Note: if you’re not a player like Ev, and you don’t have unlimited access to capital do not take this advice and focus on building revenue streams.
Fred Wilson, a partner at Union Square Ventures, which has invested in Twitter, for obvious reasons :
And I also noted that some of the best web companies of our time; Google, YouTube, Skype, and Facebook all launched without a business model and too their sweet time getting to one.
To me its really simple. You can’t monetize web services very well until you have an audience of scale. Jason Calacanis suggests that 10mm monthly uniques is where you have scale. I think it can be less in some cases (highly targeted services) and more in some cases (social nets). But every ounce of time, energy, money, and brainpower you spend on thinking about how to monetize will take you away from the goal of getting to scale. Because if you don’t get to scale, you don’t have a business anyway.
I have unlimited access to capital, but I still focus on building my business first and my scale second.
The “scale first, then find a business model” route only works as long as you’re in a bubble, like we are now. But if that bubble bursts before Twitter both gets to scale and finds their business model, they could be in big trouble.
Companies that already have a solid business model, especially those that are bubble-bursting resistant, on the other hand, should be able to clean up.
Unless you’re a VC, and you’re fine losing 99 times out of 100 as long as that one hit is massive, running a startup *IS* about revenue, not critical mass.
I think smart entrepreneurs would be far wiser to heed Don’s advice than the advice of Jason Calacanis and Fred Wilson. Don’s company has been in business for just over 5 years, has over 450,000 paying customers and generates over $10 million in revenue per year. More importantly, it has never taken any outside money and from all appearances, will probably never have to. Compare this to Plaxo, which has joined desperate startup Digg in hiring an investment bank to get itself sold: also around for 5 years, Plaxo has taken over $20 million to achieve the scale/critical mass Calacanis and Wilson describe but has yet to turn a profit. Where will its money come from? If it’s lucky, an idiot who wants to pay $100 million for something that hasn’t made a cent.
In other words, guys like Don may not have the “sexiest” businesses but they’re sitting on real money (the kind that you can touch and smell). Guys like Calacanis and Wilson spend most of their time sitting on paper money that they hope they can turn into real money by finding people who think they are getting a great deal on the Brooklyn Bridge.
Don’s comment gets to the heart of the following truths:
- Calacanis and Wilson are clearly advocating a model that only works in a bubble. They are not advocating the development of true businesses - they are advocating the development of wildly popular products that are rarely monetized effectively but that can hopefully be sold to companies whose executives have more money than brains. This is little more than gambling.
- When you have a solid business model, you can make money in both good markets and bad markets. As I have pointed out, with a possible recession on the horizon, smart startups will consider the potential implications of an economic slowdown.
- Entrepreneurs who take advice from VCs should remember that VCs can theoretically still win even if almost all of their portfolio companies fail. They play a numbers game and those numbers are not in favor of the entrepreneurs at their portfolio companies. They’re far more likely to end up like Edgeio than they are like YouTube, which is essentially the startup equivalent of the person who wins $10 million playing the penny slots in Vegas.
At the end of the day, Twitter is irrelevant (I personally think it’s a useless service that, at best, is used by useless people, and at worst, wastes the time of people who could be doing something useful). The debate over the importance of revenue is really a simple one for every entrepreneur: are you building a business or are you gambling? Twitter might become a billion dollar company but if it does, it will likely have done so by gambling, not by building a business.