On business models - scale or revenue?
Antti Vilpponen
There’s been some discussion on the American entrepreneur blogs about Twitter’s business model. Apparently the discussion spread first on Twitter, then blogs started picking it, such as the CenterNetworks, A VC, Jason Calacanis and even Evan Williams himself (founder of Twitter).
The general concensus among the opinion seems to be that you don’t need a business model as long as you can scale and build a mass of million. Calacanis even goes on to say, “Running a startup is NOT about revenue anymore–it’s about critical mass.” However, in the next paragraph he states something that applies to Finland quite well, “…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.”
The fact that venture capital is very limited in Finland, many Finnish startups need a viable business model a lot sooner than startups in Silicon Valley. I think this is something that European startups in general face a lot more than their US counterparts as our domestic markets are culturally very fragmented and thus building mass is more difficult in Europe.
In Finland, the most successful startups have had viable business plans and done relatively well revenue wise. Even if you look at the fastest growing startups that have been successful in the recent years, they have all had a business model in place. Dynamoid (ran IRC-Galleria), that was bought by Sulake, has a business model and it’s profit margins were in the 30s percentage wise (source). Sulake Corporation hasn’t been turning a profit yet, but has income in the millions (source). Another good example is Futurice (source). The only one that didn’t have a viable business model in place from the early days is Jaiku (easily comparable to Twitter), which was acquired by Google October last year.
So am I alone in my thoughts about business models and Finnish startups or is there someone who agrees? I am not judging which way is better - scaling or building revenue streams, but merely making a statement. Which ones do you see more viable or applicable in Finland/Europe - do we have a choice?
Update: Just wanted to add that all these startups I talked about above are internet companies. Futurice perhaps the least, but they do have business online.
January 4th, 2008 at 1:08 am
What about blogilista? It has been bought twice already…
January 4th, 2008 at 7:06 am
Blogilista indeed is a good example. They have been scaling up relatively well and I believe they cover relatively well the active Finnish blogmarket. Then again, a few thousand blogs might not be enough to create a sustainable and viable business model. Although the web property is of great interest, as it has been sold already twice.
January 4th, 2008 at 3:03 pm
I would guess that an idea for a ‘business’ without a revenue model (doesn’t business by definition have a revenue model?) is very hard to sell to a Finnish VCs, at least to the traditional ones. One one level I even hope they are hard to sell, because I like to believe that Finnish CVs are competent enought to want to see a revenue model in whatever they put their money into. On the other hand, I would personally argue, that most of the ideas that change the world do not have a revenue model until the later stages. Think for example Sergei Brin’s and Larry Page’s initial idea of back links that lead to page ranks.
In this respect I greatly admire Jyri Engeström’s ability to get funding for his idea for Jaiku, which if taken at face value is one of the hardest concepts I could imagine to sell to a traditional CV without any precedent from a such service. (Disclaimer: I don’t have the slightest clue about the actual process of how Jaiku got it’s funding …so making just assumptions here)
January 4th, 2008 at 3:58 pm
I agree about the world changing ideas. For example, Google didn’t have a business model when it started nor did Facebook.
January 5th, 2008 at 7:49 pm
Are you sure Google didn’t have a business model? Surely they figured that, like Altavista, Hotbot, Lycos and even Yahoo, they too would become an advertising company.
It was just a matter of building an advertising network that people could stand - the textual ads compared with the stupid animated GIFs of the day was maybe not revolutionary, but quite genius in its simplicity and implementation - as seem to have been the majority of their products (though this may be changing)
Making $1 from a million people who already use your service in one way or another seems to be far easier than making $1 million from 1, 10 or even 100 people. They made their moneymaking services accessible to everyone, and as such, had a pretty decent user base fairly instantaneously - unlike any of us.
As for Facebook, does it (even now) have a business model? I sure haven’t noticed them trying to make me pay for my subscription, although I accept that they are probably monetizing the vast amount of information that I and millions of others put in to their system far more than I realize.
I’ve tried to recognize this when building my own sets of numbers for my business(es) plans. All my spreadsheets allow me to determine things like how much each customer will (theoretically) cost (I always assume retail pricing), therefore how much I should charge based on the amount of employees I will need, plus other expenses that might be incurred, taxes, insurances - the standard stuff.
My trick is, that I can instantly multiply the numbers by whatever I want in order to determine the scalability of the business. Having 10 guests a week with 1 employee might be fine, but 500 guests with 50 employees or 1000 guests with 100 employees might not work out so nicely.
I would consider it my duty to know that the expansion of my business will still allow profitability, as opposed to turning it in to a sinking ship, which seems to happen only too often.
January 6th, 2008 at 2:09 pm
Based on the reading I’ve done on Google, I was able to argue that they didn’t have a full thought out business model. They might have had some idea that advertising is the way to go, however HOW they harnessed that is the key in my opinion.
Offering targeted ads with the search results is a very clever way to position those ads.
January 9th, 2008 at 5:41 pm
By reading “The Search: How Google and Its Rivals Rewrote the Rules of Business and Transformed Our Culture ” and by talking to some of my friends who joined the company before its IPO, I believe that Sergei and Larry cared more about the mathematical sexiness of page ranks than they did about the possible business applications. Another interesting feature of the people who are involved in taking the bigger leaps is that they are never the MBAs who know their Porters and Christensens, rather they tend to be people who love what they do. ‘Make no evil’ is hardly something Gordon Gekko would be putting in his well thought out Harvard proof business plan.
Thus, I tend to believe that, contrary to the universal HR ‘truth’, money and salary are lousy motivators when trying to do something remarkable. Dreams and passion are what makes the world go around, and I believe that companies that recognize this will have a huge advantage in employee retention, creating company culture, making great products, beating the competition …all the things that make successful companies. In some businesses this is easier to do than in others. For example, if you ask a bike shop should not hire anybody but bike fanatics. Why? 1. Cuz they will be better and more informed employees who work longer for less money than the non-bike fanatics 2. They love their job.
This is ‘a short cut’ to getting great employees that every entrepreneur should recognize because when bootstrapping you can rarely rationalize the type or the amount of the work done or the hours that you spent away from your family and loved ones doing it.
If you do remarkable stuff, the money and people will follow.
January 12th, 2008 at 5:09 pm
First of all, I’d rather make a distinction between the concepts ‘business model’ and ‘revenue model’ based on software business literature. Business model incorporates also much more than just revenue logic (that is, servicing and implementation model, sales and marketing model, product development model).
According to what I’ve heard, many Finnish VCs indeed tend to be after revenues right from the start. But at least in mass-market consumer services the “product” could be easily imitated by someone else, and thus timing is critical, and you have to expand as fast as possible not to be outrun by some emerging competitor. You could perhaps easily get a few euros from very few people, but what would be the point when the real money comes with masses. And as mentioned, every bit of time, energy, and money spent on mooting the revenue model is away from scaling.
If you don’t have the money available to expand fast enough internationally, then you’re probably better off focusing on some strong niche that you can build profitably country-by-country and hold strong against competition.
It would be actually really interesting to know if there is any research or collected experiences comparing differences in building mass in US vs. Europe. At least localization is a must in Europe, e.g. Facebook hasn’t really made much progress in Germany or France. But provided you have the localization handled, how much will “cultural differences” affect scaling in Europe, as Antti mentions?
Ville, you’re of course dead-on regarding the need for dreams and passion - many times it’s hard to justify the spent effort otherwise, and I agree the money and people will likely follow if you really show your love for what you’re doing. Often it may even just take one enthusiastic engineer to get a startup going.
January 15th, 2008 at 4:31 pm
[...] of funds in Europe and the US. The problem was again tied to the post I blogged some time ago: scale or revenue. The Finnish VCs usually wanted to see revenue and a potentially profitable business model compared [...]