Startup Business Models (for thought)

In really thinking through a start-up, and I have had this conversation about a dozen times in the past year, you have to make a specific choice as to what your business model will be.

Sounds simple… Well, if you have read through some of my other blog posts about start-ups, there is a bit of a gotcha that a lot of entrepreneurs run into. That gotcha, that wall, is common knowledge. Sometimes common knowledge is not that common. Because Zuckerberg did it with Facebook or Gates did it with Microsoft or your buddy down the street did it, doesn’t mean you can do it, at least the same way. What worked for one person, may not work for another. Get this in your head before making a business model decision!

Just when it seems like you know something, because you read something, does not mean you really understand the economics of why something is working or not working.

Ok, so you are thinking of starting a website… Actually almost 1 in 10 people (especially young people) have the ultimate or their idea of a website that they would create and a start-up business. I was walking through the mall the other day, stopped and chatted with a guy selling phones in one of those kiosks and he and I got to the point where he was telling he, his buddies are going to be creating a website startup. Ah-ha.

Let’s start by looking at these models based on risk vs. reward. Well, let’s start by identifying the business models (The ones I know of):

1. Advertising – You make money by visitors clicking on links.
No explanation needed. Google, Yahoo, lots out there, few successful.

2. Product/Service Sales – You sell products and deliver physically or virtually.
No explanation needed. Amazon, Best Buy, Target, Wal-Mart, abc distributing.

2. Membership – You make money (every month) by people joining your site.
You know, pay for monthly services to use,view your site.

3. Commission Exchange – You make money whenever a person trades, sells, works, with another person. Ebay, LogoTournament, lots of others.

4. Sponsorship – Basically a twist on advertising, but more than advertising, you get paid no matter what the traffic, so non-click based advertising.

5. Virtual Business To Business Services – You sell backend services to other business. Good examples are Constant Contact, iContact, hosting, chat, etc…

6. Lead Generation
You collect the leads and sell them to a third party. In fact, you control the information flow somehow and set the information price… Good examples are World Avenue, Autobytel, etc.

Risk vs. Reward

I am sure there are about 10 other business models out there (that are real clever), but this list is pretty much the ones that make sense on the web. And when it comes to risk and reward you have to weigh the chances of your success versus the reward. Remember, not everybody is going to make a billion dollars on their first venture. I say be happy with a million. In fact be happy with quarter of a million… I say just be happy with success, meaning staying in business.

So, as you set out to create your new web business, even a new business model, you have to weigh your chances of survival. How to you weigh your chances of survival:

1. Your Track Record
If this is your first time, then reduce the risk by succeeding in ways others are not…

2. Your Capitalization
Often website developing is not about revenue, but about staying in business. Having the resources to do it, is critical. By resources this is man-power really in the end. Everything else, including hosting is dirt cheap now.

3. Your Talents
If you are not a programming, your chances of making a successful run at a web business model that is not retail are remote…unless you are fully capitalized. Being a programmer you have an advantage, saving thousands on programming.

4. Your Ability To Schmooz
Getting others to work for nothing is a talent. Getting partnerships in place to make it happen is a talent. Having an ability to convince others to give you money is a raw talent. A god given sales talent, but quite dangerous as well… I will give some reasons why this is a negative as well in another post.

5. Your Tenaciousness
This may be a moot point if you don’t have any of the other things above. Since if you are broke, not a programmer, not a great networker/presenter and haven’t done this before, your tenaciousness may seem more like agressiveness. So back-off and make a small success first before lighting the world on fire.

The Personal Analysis

So, you need to look in the mirror and take your idea and go through an analysis. Typically new, unique ideas start with the entrepreneur saying I am going to create this really cool site, like for instance a good example would be a local news blog site… And I am going to make money by advertising sales… Well, good luck. In fact I tell entrepreneurs, the quickest way to fail is relying solely on advertising sales. I believe that you will have to generate a million visitors a month to make something like $50,000 a year on the click through dollars… Remember most click-throughs are paying GOOGLE the money, not you. You get a percentage of clicks, and you are not in control of the ad networks, Commision Junction, Google, Yahoo, AOL and others have a heavy hand in control already. So get it out of your head that the ad model is your model! Ad models on the other hand like Facebook and others are high reward if you make it big. Chances of that happening are like 10 million to 1…

So, then you say, well my local blog can be a membership… Sounds good, and in fact if you can find a way to get people to pay, you are going to be in the money. Not a lot of members per month paying to make a million dollar a year site in revenue. I think if you had 10,000 members paying $9 a month you are a million revenue site. So this is more of what you need to be thinking about. I give you a 1 in a 1000 chance of surviving with a membership model… If you do, you will profit nicely.

There there is the back-end model. If you get it rolling, you will get hopefully month or period payments, so it is a very similar model to membership. I will give you a 1 in 25 chance of survival in this model, because it is business to business and businesses need help online!

The exchange commission model is really dependent on your technical know-how and luck. Choose the right model and you could hit it big like eBay. My odds of success are 1 in 100,000. So not so good, but who knows, it is a big payoff model like advertising, so you are either out of business or a billionaire.

Finally retail online model is a medium reward and lower risk. You can make it well enough if you have the talent. If you don’t and are new you still have a chance, but it is risky as well. Knowing your product is everything and if you do know a product well, you may be in luck. I think the prospects of becoming a billionaire are low, but my odds are about 1 in 10 will make some money.

Lead Generation if you pursue this money is about a 1 in 30 chance in my mind of making it. It is possibly a good pay off as well. Every store, sales rep in the world needs leads, so this is a great place to start as well.

Hopefully you get my point in this blog post about web business models and risk and reward.

The Startup Chasm

Currently I am in the middle of my own start-up, called “Take It National“. And apart from my own business, I am quite often chatting with others about their start-ups, or just having conversations with people about start-ups in general. Now that I am in the middle of my own, and not just an outsider looking in, I am experiencing some new feelings and empathy for those taking this journey, that I would have not really taken too seriously. So these are just some of my recent thoughts about start-ups and small to medium sized Internet companies, good and bad, for those who are already in the know or just want to have something to think about. (I know when you work for a large corporation, often the lament is to think you should run your own business and do your own thing. Acting on going on your own is only for the strong-hearted, seriously!) So these paragraphs below use big company life vs. small company life and some of the start-up ups and downs as discussion points.

Freedom Pays Less But You Are Happier

Well, lets start out by saying quite often freedom means no pay (at first). I am noticing that while I am, of course, feeling the stress of getting my business off the ground, I am generally less stressed than at a big corporate job. Who knows why, but I am much happier in my own business. I would often get all stressed out and unhappy about having to be at a meeting at 10:00 AM (a time most software developers abhor), to discuss very little with people you really don’t want to be in the room with. In fact the lack of getting anything done was downright pissing me off in my corporate life. It is a fact of life in corporate life. Accomplishing something everyday is a happier way to go for me. I will of course have to get back to big company life one day where we hang around the coffee room, but for now I have to get things done!

Freedom Is Not Really Freedom

Just a reminder point that freedom is not really freedom. This counter point is just the reaffirmation that we all have to report to someone and a start-up person has to face the music, every day.

Indeed…Indeed

A small tinge of self-doubt is apparently always there in being an entrepreneur who was an ex-corporate person. I was telling somebody recently that my hands start typing Indeed.com, when I start to feel the burn of not having revenue flowing in my business yet… You can liken this to the experience of giving a major speech to a very large audience. Everybody feels the nerves of a speech and everybody feels the pull of going back to a soft cushy company job. But like a speech, you have to just make sure the audience doesn’t really know you are nervous, and like in “You Got To Be Believed To Be Heard” by Bart, you just have to make sure the audience does not know you are nervous. Believability is everything. You have to convince your mind you are on the right path, and quite often you are.

People Suck

Another reality check with start-ups is people. These people, who, if they took the time to read this blog post, are the people you do work with on a regular basis. In a start-up you are constrained for time and money, and often because you don’t have the big money, you have to take what you can get in certain areas, and often these people lack the training that people have at big companies. Not that they all suck, but you have to just accept the fact that they are not going to be perfect. I am talking your partners, your employees, your customers, everybody sucks. Sorry, but get over it and just let them do what they got to do (Even though you feel like doing it yourself…)

You Thought You Knew Something But You Didn’t

I love this article that came out in the late 90s about a Stanford class of young ladies who made thousands picking stocks… Gailbraith was asked about this group and he basically said they were lucky. Those successful the first time and even sometimes both the first and second time often are unlucky the third time. Luck still has something to do with success and nobody has a perfect record in the end (I know a few, and they were extremely lucky). Have the attitude that you don’t know everything and do not get emotionally attached to your ideas! Have the attitude that you can flex to survive or pull the plug and take a parachute out. Don’t go down with the ship! If you see the hurricane ahead get out of the way. You know what happened to the WindJammer Cruise Ship that defied common knowledge and attempted to sail through a hurricane from the Yucatan to Miami years ago. The boat is gone without a trace along with the crew…

Mimicking Has Its Limits

There is this mimicking business theory I am understanding and adhering to more and more, especially after being introduced to the concept of your story by David Tyreman and World Famous “Branding Experts”. You got to be yourself. You have to develop your own brand and niche. Every time some company makes it big, either Yahoo, Google, Twitter, Meetup, Facebook, Digg, etc, you see a sea of mimicking companies. What else are thousands of programmers to do, but make a Twitter Copy… What they did not understand is copy-cats have their limitations. If you are going to be the next Twitter, just quit now! You have to be your own company and your own thing. Being the same as others is not a winning strategy, with a few minor exceptions. Those exceptions have to do with commodity markets, like 4 gas stations on a corner, where nobody can identify the brand… Other than that, your web start-up needs to be unique and have its own story, or it will fail. It may just fail as well if you are a niche and have your own story, so this can’t be guaranteed, but it is a start towards success. Be yourself.

It’s The Asset Value, Stupid!

Online start-ups need to be accessed and valued for their asset value and not revenue. This doesn’t mean I believe in advertising models… I do however believe in the following as assets:

Monthly Unique Visitors
Number of Valid Email Addresses
Number of Online Members
Software Code
Patents, Trademarks, etc.
Resources Such As People (Networks, Contacts)
Building And Physical Stuff
Revenue & Net Income (of course)

In an online start-up it may never be about revenue or net income if your membership is enormous. The valuation is all about critical mass. It is counter-intuitive to old time accounting, but this is where the value is, at least in selling your business off.

Good Luck!