@Calacanis RE: "The business model comes AFTER you get to scale."

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/