I stumbled across this old post on Calacanis.com that Jason Calacanis wrote back in January.

http://www.calacanis.com/2008/01/02/the-three-business-models-that-make-twitter-a-billion-dollar-bus/

In discussing Twitter, he made some strong statements about when a startup should focus on business models. He recommends spending some time in Silicon Valley where the prevailing wisdom is that you should reach scale before obsessing over a business model.

I can see his point… Everyone can name a company like YouTube that was acquired for billions before they ever figured out a viable business model.

I agree with Jason that a small profitable business is not what VC-backed startups are all about.  It’s generally about bringing life-changing technology to the masses (say 20m+ users) as quickly as possible.  This is how multibillion dollar businesses are created.  And the Silicon Valley venture capital ecosystem exists to create multibillion dollar ventures.

Now comes the “but”…  Unless it’s viral (like Flickr, Twitter, YouTube, Skype…) bringing life-changing technology to the masses costs money.  A lot of money – think $50m-$100m in marketing to acquire 20m+ users.  Jason points out that an endless supply of capital makes this possible.  And again he’s right.  But a startup with $50m to $100m in venture financing will require a $1 billion+ exit to be considered successful.  These exits are extremely rare.  For a company that raises that much money, a more common scenario is an outright failure or an exit where employees and founders earn little if anything.

Wouldn’t it be better to have a business model that allows you to spend the same $10m several times over a few years? This limits dilution and still lets you grow into the 10s of millions of users.  It also offers a much broader range of attractive exit options. A self funding marketing program makes this possible, but it requires a solid business model and of course a product/service that people actually value.

I’ve been able to use self funding marketing programs to attract 40 million+ users across my last few startups. Many others have also used this approach to build valuable companies. GoToMyPC created the easy remote PC access category with this model.  Dell is another company that used direct response marketing to build a massive business.  Both of these businesses did it out of necessity – their cost per unit required a monetization plan early.

But even startups with zero marginal unit cost can benefit from this approach. Critical mass should be the goal of a VC backed startup and an ROI driven aggressive marketing plan is one of the most reliable ways to get there. This even applies if you are “a player with unlimited access to capital.”

UPDATE: Funny timing…  The same day I posted this, Jason made a related post called “Traffic buying strategies–a complete education on every detail.”  In it he acknowledges that he may be missing a “huge opportunity”.  He goes on to ask “What I’m wonder is, are there ways to buy decent/real traffic for .01 to .03 per visit. That would be $10 to $30 per thousand, so that we could possibly break even on buying the traffic.”  Here’s a link to the full post:

http://www.calacanis.com/2008/06/05/traffic-buying-strategies-a-complete-education-on-every-detail/

Dave McClure organized an excellent gathering at the first Startup2Startup dinner tonight.  The evening started with a great presentation called “Speed: the ultimate startup weapon” by serial entrepreneur Mike Cassidy.  Then each table had an organized round table discussion on critical startup topics.  The guests at each table were prearranged to ensure a good mix of veteran entrepreneurs, first time entrepreneurs, angel investors and VCs.  This was followed by casual mingling.  The whole evening was fun, educational and very collaborative.  I saw some old friends and met some great new people too.

I was excited to log into Download.com today and see that LogMeIn and Xobni were both featured in “Download News and Updates” (back-to-back).

An Outlook add-on getting big buzz (Xobni Story)

I joined Xobni after 4.5 years of running marketing at LogMeIn.  I love to see both companies featured on Download.com together!

On similar note, this appeared in the Xobni forum today:

it would be great to be able to turn off animation of the app – so that when you click it just “pops” to the next screen instead of pushing (wiping) across – I access my email using logmein remotely and the animation makes it painfully slow to use.

It’s a very exciting night over at Xobni.  We just pulled the trigger on the Xobni public beta launch.  This coincided with a great article hitting NYTimes.com announcing the Xobni launch:

http://www.nytimes.com/2008/05/05/technology/05xobni.html?partner=rssnyt&emc=rss

Of course the Microsoft Yahoo fallout is stealing some of our thunder, but it’s still amazing for a 14-person company to get our launch covered in the New York Times.  Huge kudos to Sutherland Gold for getting us the New York Times (Jeff Bonforte was right – they are awesome).

The biggest credit goes to Matt and Adam for founding a great company and the rest of the engineers for executing an awesome product.  We still have a lot of work to do, but we’ve had an amazing private beta with very passionate and helpful users.

On the marketing side, Xobni already kicked up a lot of interest before I arrived.  My goal has been to ensure that we harvest this interest and build on the great momentum.  Now that we’re publicly available for anyone to download, we should really be able to optimize conversions.

I expect great things from Xobni and I’m proud to be part of this incredible team.

I love the fast pace of working at a startup in a marketing role.  There is always so much to do – particularly around customer acquisition.    Turn new campaigns on, scale highly effective campaigns, cut the bad ones…   Other campaigns can be optimized by testing new messaging and user flows to improve conversion rates, etc, etc…  On the web it’s all very iterative and there is always something that can be done to improve efficiency and scale acquisition drivers.  It is the dream job for any ADD powered entrepreneur.

But that’s post launch.  Before that you have to lay a foundation to maximize your chances of hitting the ground running when your product emerges from private beta.  Important marketing activities include ensuring your product meets real needs of a large addressable market and defining necessary tracking systems to manage and grow campaigns.  I’ve outlined some of the critical pre-launch activities in this post.

So what happens in between these two stages?  If you’re anything like me, it’s primarily a time of agitated chomping at the bit.  It takes time for engineering to get a product ready for mass market adoption (fixing bugs is the main point of a private beta).  There is only so much research and planning that a marketer can do before the marginal benefit drops below the marginal cost of their time.  Managing a private beta, even a very successful one, takes relatively little time. And optimization is usually irrelevant during private beta, because most early adopters enjoy figuring out particularly tough product installations.

I’ve heard some argue that marketers offer little or no value pre-launch.  I would strongly disagree with this.  However, I am coming to the realization that it probably makes more sense for marketers to be project based consultants during this pre-launch stage.   As the product gets very close to public beta launch, the marketer can join in a full time intensive role.   Before that, they can spread the cost and benefit of their expertise across multiple startups.  Their ultimate selection of a startup to join full time will be based on an actual understanding of the market and experience working with the team.  This knowledge will help them make a better choice.

This is a change from my earlier recommendations on the ideal marketing process for startups.  I have approached my current role with the goal of figuring out an optimal marketing process – rather than applying firm preconceived ideas of the perfect way to bring a company to market.  I still believe marketers should specialize in either early stage startups or companies that have already achieved firm traction.  Mastering the first part is nearly impossible without lots of repetition and focus.

CNet Buzz Outloud jumped on the negative bandwagon about the Blockbuster/Circuit City merger in yesterday’s podcast. Rather than a private conversation with my iPod, I figured I’d blog about why I think the merger actually makes sense – at least from a marketing perspective.

It boils down to this:

Blockbuster = store traffic

Circuit City = impulse purchases (when enough foot traffic)

A perfect analogy here is movie theaters and malls.  Movie theaters pay much lower rent per square foot than retailers in a mall because they add value to all the other tenants.  The retailers that receive the bulk of this value are those that sell impulse purchase items.

Personally I rarely go into an electronics store without making an impulse purchase.  Also, every time I go to Blockbuster, I get bored standing around as my kids take a long time picking out a movie.  If I could browse a section of electronics (think Sharper Image type stuff) while my kids are browsing movies, I’d likely make some impulse purchases.  Of course this requires putting smaller cheaper electronics near the movie rental section to draw you in… Occasionally I’d even wonder over to the bigger ticket items.

Jamie Siminoff recently suggested I check out the sign up process for TripIt.  I highly recommend you go check out the TripIt sign up process if you haven’t already.  It is absolutely brilliant and highlights how important it is to think about marketing as you are building your product.

Here was the comment I posted on Jamie’s blog comment:

One word – “Smooth!”

I’m blown away by the signup process. Very easy, low commitment. After you have received some value, they encourage you to register – to get more value.

Also some interesting viral marketing/social networking angles. Just when I thought I wouldn’t be tempted to join another social network, I think this one would actually be useful. I added you as a friend, so it will notify us when we are in the same city.

Thanks for pushing me to finally check out TripIt. I’ve been hearing about it for a while. Definitely some stuff to learn from these guys.

It has been hard finding time to make blog posts recently.  As anyone who has been through a startup knows – there are never enough hours in the day.  To make things even more challenging for me, I moved up to San Francisco to join Xobni while my wife and kids stayed down in Southern California to finish up the school year.  So most weekends I’m down South and most weekdays I’m up in San Francisco.  That pretty much rules weekends out for blogging – I have a lot of missed time to make up for with the family.  But I’ll definitely be posting as often as I can – it’s fun and helps me to crystallize my thoughts…

“Can this startup be marketed profitably?”
“Can the profitable marketing scale?”

Of course you can’t definitively answer these questions until you try marketing the product.  But, if you aren’t pretty confident that the answer to these questions is yes, you shouldn’t launch the business.   Too many people start trying to build a product and believe they’ll figure out the marketing piece later.  Some get lucky, but the majority fail.

If you start your business with these questions in mind, you are much more likely to build a successful business.

Building the right team is critical to the success of any startup.  You can pay a significant premium for proven talent, or take a risk and get a deal on unproven talent.  My best hires have usually been relatively unproven when they joined the team.

But how do you gauge the potential of these people?  I may have figured out a critical interview question to ask when hiring unproven talent (and maybe proven talent too).  The question is: “How would you react if you felt like you were underpaid in your position?”

I came up with this question based on a conversation with my younger sister.  She was recently promoted and very disappointed that she didn’t get a pay raise with her promotion.   Most people would lose motivation and begin putting less effort into their work.  A few of us though would take the exact opposite approach.  Defying logic, we would actually work harder, figuring that our salary will eventually catch up to our valuable contribution.  We understand that being underpaid gives us enormous leverage and eventually a smart employer will give us a raise for fear of losing us.

From the inception of my career, I have always taken this approach when I felt underpaid.  And I’ve always preferred to be underpaid than overpaid (much better job security).  I have a feeling that this is a key characteristic of most people that have had success in their career.

It will be interesting to hear the reactions when I use this question in interviews.