Startups Need to Make Money
Rob Go, a Venture Capitalist I follow, posted a very interesting article the other day that discussed the influx of VC funding for companies that seem to lack a business model. I found this post incredibly useful and interesting considering the inordinately large amount of funding that start-ups are generating. This article reached into my mind and plucked out a very question that commonly circulates: “How is that possible given that the company isn’t making any money and doesn’t have any business model?”
I think it is a safe assumption that because VCs care about generating a return on their investment, most would care about a company that can generate some type of revenue. Rob Go and Lee Howard agree with this thinking and discusses three all encompassing business models that every single Internet based company can possible have. Pasted directly from their posts, they are:
1. Media Models (primarily monetized through advertising)
2. Transaction Models (including e-commerce but also lead-generation)
3. Premium, User-Paid services
While I previously decided the only existed 2 valid Internet business models were advertising and a payment service, the distinction in my latter model between Transaction Models and User Paid services clarifies products. These three business models cover every end goal method of generating revenue and holding a substantial business model. I truly believe that every organization that is trying to be a company should have a goal to have a sustainable business model. Unfortunately, that is not always the case because there is another exit option. This “4th Business Model,” if you will, is to be acquired.
Rob’s 3 business models encompass every END GOAL method of generating revenue, but not every startup is actually interesting in being a sustainable business. Many startups are building a product that fits as a perfect tool to a very profitable corporation, but have no real way of generating revenue by itself. These startups scream to be acquired.
Then, there are also other startups that do not understand Rob’s 3 business models. Some only have the goal of generating a huge user-base, but have no feasible idea of translating this into revenue. Combine this with VCs who fund many startups with the end goal of being acquired, and we see a huge presence of hungry entrepreneurs starting companies with a product that will never have a business model. I believe every startup should aim for one of the three models; the fourth sets a dangerous precedent of potentially wasted talent and capital.
From.Us, a 500 Startups company that aims to revolutionize the process of gift giving, is an example of a company with a business model that I think I can understand. Users looking to buy gifts will very readily click through for relevant advertisements; From.Us will more effectively monetize through the media model than many other chatting apps. Given the proper partnerships, From.Us may even monetize off the transaction model by skimming a portion off facilitated transactions. This attached excel model quickly looks at the population of the United States and estimates the amount of gifts each person may receive in a year. If From.Us is able to capture .1% of all monetary transactions of online gifts, whether through advertising or e-commerce, they may generate over $7.7 million in revenues. Barring flaws in my assumptions in estimating the market and the actual company’s ability to perform, From.Us may possible make a sizable amount of revenue. Besides providing value for their users, startups should have a very clear way to eventually make money.