This cartoon summarises the concept very well – The Online Business Model To Get VC Money
Web ventures backed by VCs are notorious for focusing predominantly on acquiring users first and leaving revenue on the back burner during the early stages. The perfect examples are YouTube, Twitter and Facebook.
TechCrunch reported today that Facebook Is Not Only The World’s Largest Social Network, It Is Also The Fastest Growing – of course not mentioning revenue since the article was not about that.
Their team deserves tremendous credit for what they have achieved.
However, 99% of entrepreneurs can’t go about building their business this way because they don’t have millions of dollars from VCs to burn through while they figure out a way to actually make money.
YouTube is still having trouble monetizing their audience and few entrepreneurs ever get that kind of big payout like Chad Hurley and Steve Chen. Repeating what they did is possible, but extremely unlikely (except during a bubble of course).
Twitter did not have a business model when it launched and still doesn’t have one, but it is growing amazingly quick and I am confident they will find a model (well maybe with Summize they now have one). They have been able to do this because they have raised over US$20 million from VCs – without a business model and a clear plan to generate cash flow.
The only sad part of this is that other entrepreneurs look at these case studies and try to do the same with their startups, except that they take out loans and use their credit cards. It is virtually impossible to use the YouTube/Facebook/Twitter model without VC money and succeed.
You most likely will end up with tons of debt – I am speaking from personal experience and still have the debt to prove it 🙂
Normal entrepreneurs must focus on generating revenue because cash flow is the life blood of a business, especially a startup. Study these ventures and learn from them, but understand what you can and can’t adapt, otherwise you are setting yourself up for failure and some serious debt (we are sitting on around US$65,000 from the first failure when we were busy chasing users and VCs).
Have a cash flow plan early on so that as you add customers/users, your cash flow improves – you might just not need those VCs in the end.