
The only two ways to build a $100m business - bwertz
http://versiononeventures.com/the-only-2-ways-to-build-a-100-million-business/
======
bornhuetter
> Too often I have seen entrepreneurs believe that customers will
> automatically flock to their cool new service, completely underestimating
> how tough it is to cut through the noise and build an audience.

I usually think the opposite. Most of the time when I come up with an idea for
a start-up I think "How the _hell_ am I going to get users on this thing?"

~~~
arkitaip
How do you go about to answer that question?

~~~
s_henry_paulson
By making sure you're building something that is intuitive and that people are
interested in.

------
ryanackley
I could be missing something but I find this article a little ridiculous and
devoid of any useful information.

I work for Atlassian. It's a $100M business. It wouldn't fall into either
category. We've gotten there by selling a lot of software over the internet.
We spend hardly anything on customer acquisition. There is no viral effect to
our products.

Another successful business I can think of off the top of my head is ZenDesk.
They have to be approaching $100M. Their main sales channel is the internet
(low customer acquisition). They have zero viral effect. You either have X
support staff or you don't therefore you will need an X-user ZenDesk license.

~~~
fabricode
_There is no viral effect to our products._

You certainly know your market better than I do, but it seems to me that you
are taking advantage of a viral effect. As people use Jira (for instance) and
they move around from one company to another, they're likely to recommend
using Jira at their new places when they get sick of Rational, Remedy,
Bugzilla, etc.

People using Jira and realizing that there is a bug tracker that doesn't stink
are very likely to bring that message to their next company. The word about a
great product spreads... like a virus, albeit a slower moving one than pet
rocks.

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zacharyvoase
I should just mention that there’s yet another way to build a $100M company,
but it involves starting with a $1B company.

~~~
nikcub
the original line, from Warren Buffet (probably a misattribution), is:

"How do you become a millionaire? Make a billion dollars and then buy an
airline"

~~~
imp
I'm pretty sure that was Richard Branson.

~~~
vidarh
Yes, it was specifically about Virgin Atlantic, which at one point stretched
his finances to the point where he was forced to sell Virgin Records to free
up the cash to keep it afloat.

~~~
s_henry_paulson
Which is sad, because he won a lawsuit the next year for the exact amount he
sold that company for.

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ChuckMcM
So $100M is the new $50M? I used to hear VCs talk about "We don't want to
invest in something that isn't going to be at least a $50M business."

The other question is this, "Valuation or revenue?" If I can build a business
with $30M/yr in revenue and 16% net income I shouldn't bother talking to a VC?
I don't know, seems like you leave too much money on the table with this world
view of $100M or nothing.

~~~
001sky
If so its a side effect of two things. One, is fund sizes have gonve from
$100-200m to $500M+. So, the partners need to put more money to work. Second,
early stage valuation inflation. $10-$20MM cap notes. And all that.

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bravura
"Generally speaking, there are two ways (and only two ways) to scale a
business to hit that $100 million threshold."

Actually, there's another way to hit >= $100M.

Be a strategic acquisition target. (Route two: The viral effect can overlap
with this.)

I forget who blogged this (Dixon?), but the idea is that that to hit a >=
$100M valuation, you should not be thinking of the standalone value of your
business, but instead the value it provides to potential acquirers.

Sitting on crucial patents is one approach, but extraordinarily tricky.

More importantly, if your existence presents a strategic challenge to a larger
player (e.g. Instagram), then your business is worth a lot of money.

~~~
001sky
Best rationale for why Twitter is @ $6-$7B.

\-- They have the potenital to _destroy_ N-times more value than they can
create.

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finkin1
I'm more inclined to build a stable business that makes me enough passive
income to continue to work on it. Building a $100M company sounds exhausting.
37signals has definitely influenced me in going in the direction of small and
lean instead of big and greedy. However, I find the insight into the way VCs
think fascinating.

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zwieback
I know this is HN and we can assume certain things about the businesses being
profile but I wish that the headlines reflect the narrow niche the articles
talk about. There are certainly other ways to grow a business outside of the
software/online space.

~~~
bwertz
yeah, but we are talking tech / software on HN

~~~
acdanger
Not all tech ventures rely on bits alone. There are a fair number of tech
products that are physical, too.

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dreamdu5t
In consumer space sure, but not in B2B or enterprise.

~~~
dave1619
B2B/enterprise would likely be covered in his first point about having a high
LTV so you can invest in user acquisition.

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callmeed
I'm surprised he doesn't mention TAM (total addressable market) at all. A high
LTV doesn't matter if you're just selling things to _male cat breeders in the
Northwest between the ages of 27 and 33_.

For the high LTV option, can one put a specific number on this (i.e. $1,000)?
Or is it simply having the ratio of LTV to Acquisition Cost is greater than X?

~~~
bwertz
a large addressable market is always a pre-requisite for building a big
business

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joncalhoun
Are these two ways really that different?

Essentially all the article states is that a profitable business needs to have
profits per user that scale according the cost per user acquisition. Viral is
cheap acquisition, so profits can be less. Non-viral costs more per user and
typically has a smaller market, so profits per user need to scale accordingly.

~~~
bornhuetter
Completely different.

To put the article another way, there are two ways to make big money:

* Make lots of money per user

* Have lots of users and have low expenses.

No-man's land is having a £1 app that you will never realistically get more
than 5,000 users on.

~~~
jeremyjh
Does method 1 even exist for consumers? Small businesses, sure. But apart from
a few gold mines like TurboTax its hard to get consumers to spend any money on
SaaS.

~~~
webwright
Dropbox, Flickr, Apple, etc-- all sell to consumers with a high ARPU. Also,
cell providers, insurance companies, car companies, etc.

Good rule of thumb-- anyone who advertises heavily to consumers has a high
ARPU.

------
loboman
Wow, this doesn't cover models that have worked for companies like Microsoft
or Apple. Were they viral, or did they depend on big LTV? Not completely. LTV
helps (people buying iPhone again and again), but they are not subscription-
based companies. I think this model falls short to describe business.

~~~
mrcapers
MSFT and AAPL both benefit from immense network effects, which translate into
high LTVs (Windows/Office platform, iOS ecosystem). The presence of a strong
network effect can often be a strong driver of virality, if not a prerequisite
for viral acquisition for a lot of businesses because the incentive to share
is directly correlated with the value delivered to the user/customer.

~~~
michaelt
...and even more impressive, they did it before the terms 'LTV', 'network
effect' and 'virality' had even been coined.

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lionheart
As he mentions in passing, marketplaces seem to be a good solution to both of
these options. Once you reach a critical mass you potentially have a large
viral effect, user lock-in, and a high lifetime value as users get used to
purchasing on a regular basis.

The only trick is conquering that chicken-and-egg issue.

~~~
bwertz
agreed - marketplaces are probably the most attractive business models once
you get through the initial traction challenge

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mason55
Or number 3, leave the boring B2C world and go enterprise

~~~
retroafroman
That just means the customer acquisition cost is even higher. You're not
paying for Google ads, you're you paying salespeople to go out, wine and dine,
and get new customers. As a result, the margins on products needs to be higher
to support the sales process.

~~~
runako
This used to be a lot more true, but it's hard to apply it as a blanket
statement anymore. Some counterexamples come to mind:

\- 37 Signals

(because you're going to object that they're the only ones, here are some
more)

\- Fog Creek

\- Atlassian

\- Rackspace

\- SoftLayer

\- Amazon EC2

\- Balsamiq

\- Heroku

\- ZenDesk

\- Visual Website Optimizer

To my knowledge, none of them have travelling salespeople. Acquisition cost is
likely higher than with consumers, but likely nothing like the costs
associated with an outside sales force (or their prices would have to be
higher).

Everyone says 37 Signals is an exception, but I think that's just lazy
thinking. There are lots of enterprise businesses that don't do expensive
outside sales.

There are different risks selling to businesses, but B2B businesses don't need
massive scale to be able to pay their rent. So if you're bootstrapping, B2B is
likely to have a higher probability of non-failure.

~~~
berkay
Vast majority of the companies above make products for developers/designers,
and that is not a coincidence. Developers/designers live on the web, seek and
find solutions themselves. Rest of the enterprise market is quite different
and much harder to reach, hence drastically higher customer acquisition costs.

~~~
runako
I posted products I know, and I happen to be a developer. If you google
(space) SaaS, you'll find bootstrapped companies serving many other parts of
the enterprise.

~~~
berkay
Agreed. I am working on one :) I just meant that if you are addressing
developer market, sales costs are lower as developers live on the web and
there are many mediums to share information such as hacker news.

I find that other parts of the enterprise market are surprisingly harder to
reach. In enterprise companies information sharing is often discouraged, many
folks working in the enterprise are hesitant to mention what products they use
let alone promoting (or criticizing) them. Successful SaaS companies
addressing the enterprise seem to either gain traction elsewhere and then try
to penetrate enterprise or spend tons of money for marketing and sales.

------
Zenst
Anything that claims there are only X ways of doing something will always have
somebody come along and +1 it with a new approach.

I'd also say that anybody setting out to make a 100m company is somebody who
has already made a sucessful company already. But software is the new music
thesedays as how whats the most a single application has sold for compared to
what the best single song has made and I'm thinking Instagram even compared to
tbe beatles on a app compared to one of there great songs will still win.

I will also correct the title for programmers and say: "There are only 10 ways
to build a $100m business, FF if you include exceptions"

------
wmeredith
"Error establishing a database connection"

~~~
joncalhoun
Refresh worked for me.

------
rootedbox
Let me summarize. The 2 methods.

1\. Have customers who come back frequently and spend money. 2\. Have a lot of
new customers who spend money. They tell there friends to come, and spend
money. Rinse. Repeat.

~~~
bgilroy26
Another brief takeaway for me was that businesses that grow quickly either

1\. see an __extremely __reliable 4x return on advertising expenditure

Or

2\. do not have advertising expenditures at all.

One caveat to the article is that it is not in every business's long term
interest to grow quickly.

------
dave1619
Interesting article and insights. I'm wondering if there's a hybrid model
where you can enjoy both - high LTV AND high viral co-efficient. Or if that's
unrealistic. Maybe Ebay?

~~~
jonnathanson
Amazon probably qualifies. eBay, sure. iTunes (sort of; arguably, the hardware
drove everyone to iTunes originally, and the hardware was not cheap to produce
or bring to market; but once the install base became stable, it grew VERY
quickly through word of mouth).

Also: a high viral coefficient does not necessary = social, even though that's
what people assume these days. I think the world has seen way too many
businesses in recent years that are "social" for no other reason than that
social is supposed to have magical network effects. The reality is that not
every product, experience, or piece of content is truly social by nature.
Trying to tack social onto a use case that doesn't support it is not going to
yield a viral coefficient.

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bazookaBen
what about having a 5 million/yr revenue run rate. With "valuation" multiples
of 20s, you can get to a value of $100 million.

~~~
eddy_chan
In my experience of being part of the acquiree, you can get acquired for a
gross earnings multiple of between 30 and 40. So as long you're only spending
2.5m per year to get your 5 mil run rate then yep, find the right acquirer and
you can get that 100m valuation but there's a lot luck involved.

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its_so_on
more broadly, i've often said that there are two ways to build a massively
successful business (e.g. $100m business, or one worth a billion or billions):

1\. don't fail.

2\. don't fail to massively succeed.

bootstrapping is all about completing mission number one. not going bankrupt.
not falling apart. not having a bubble pop from under you when you need it for
your business plan.

but people all too often forget about #2, and think they will just magically
be a $100m company. It doesn't work like that. If you want to be a $100m
company, do two things: don't fail; don't fail to be a $100m company.

this is genuine advice and I can give more details if anyone is unclear about
anything.

