The Kool-Aid Business Plan

March 9, 2008

Many well respected entrepreneurs and smart VC’s argue that startups need to get to scale before wasting precious energy worrying about monetization. This creates a very tempting situation for entrepreneurs: stuff is a whole lot easier to give away than it is to sell. If the money folks aren’t expressing concern about profitability, why should I? The argument goes: what’s important is to get the business to a scale that makes monetization easy. If you don’t have scale, you’ll never have a business, so don’t even think about a business model until you have some magic number of unique visitors (1 million? 10 million?) We can see this thinking in practice too: Brightcove had better technology and a clear business model, but the relatively crappy service YouTube got the $2Bn valuation for providing a free service. Here’s how we’re supposed to look at it:

startup-growth-1.png

The idea is that your business won’t get to scale as quickly if you have those annoying ads or if you’re distracted by the demands of paying customers. So at any point in time (represented by the red line) if you extrapolate out actual revenues, the business looks much less interesting than if you can extrapolate from growth in non-financial metrics. Now I’m not saying that this imaginary valuation is just a fantasy. If a business model does work with your scaled-up business, you can have a real winner.

But what if that red line represents the time that the company is running out of cash? And let’s suppose that your backers were not hoping for the traffic growth you have achieved, but a steeper slope entirely:

startup-growth-2.png

Management may think growth is acceptable, but if the backers don’t that’s when they start changing things like strategy and leadership. Now the founders could be looking at losing control (and perhaps ownership) of the company. What I’d like to argue is that it’s just as important as you experiment with product and audience development that you experiment with the revenue generation model. Right now ved.io is an interesting technology with many promising monetization opportunities. The only thing I can say for sure about our business model is that we probably won’t get it right on the first try. The time to get creative and try things out is now, thinking of business plan, product, and audience as a three part equation; not when wild expectations aren’t met and panic sets in.

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