Karl Hughes

Karl Hughes

Where Have All the Business Models Gone?

Where Have All the Business Models Gone?

When I wrote this article in April of 2012, Instagram had just been bought by Facebook. The hype around consumer web was at its peak since the dot com crash of 2000, and like a lot of people I was sick of it.

With Snapchat’s IPO coming soon, this still feels relevant. Fortunately, much of the online business world has caught on, and I hear a lot less hype around consumer web and apps. I have a feeling SaaS is the next bubble in tech, but at least much of that seems to have tangible revenue streams behind it.

I made the mistake once of telling people that I can build websites.

Ever since it became public knowledge that I can write code, I get 3 offers per week from “idea guys” to build websites for their imaginary company that’s going to kill Facebook, Amazon, or some equally outrageous claim.

Now, I like big dreamers. I’m certainly a dreamer at times, so these “idea guys” aren’t all bad. The simple problem is that most of them DON’T HAVE A BUSINESS MODEL.  When in the history of entrepreneurship did it make sense to create a product, get millions of users, and never make a dime?

Call me old-school, but isn’t that what entrepreneurs do? Make money?

Please, Have a Serious Model Before You Drag Others Into Your Scheme

Would I have said “yes” to joining the Instagram team a year ago?  Probably not.

In hind sight, I would have kicked myself if they had asked me, but at the same time, it wouldn’t have made any sense to me. Now we know that Instagram’s exit was in large part due to previous connections with Facebook’s investors. They were built to sell; not built to make money, and you already know how I feel about Facebook’s long term success as a company.

Instagram aside, it seems like every college kid and unemployed yuppie is working on a “killer app” or social network that has no business model aside from getting millions of users and crossing their fingers for a big sale to another bloated web-based company.  When did this become entrepreneurship?

The Stark Reality

The truth is that unless you’re backed by high-level VC connections in Silicon Valley, you have about a snowball’s chance in hell of making the next Facebook. Does that mean you shouldn’t try? No. It just means that you need to find a way to conquer a revenue-generating niche of the online market first.

You have to look at your startup as a lean, yet sustainable business. What if no one buys your idea before you make a profit? Will you generate enough revenue to pay yourself or your employees? VC’s aren’t easy to get, so what if no one invests? Are you able to run this thing super-lean if you have to?

The first question I ask these “idea guys” who try to court me is, “where’s your business model?” Followed quickly by “who is your customer?”  Not surprisingly, most of them can’t even answer those two fundamental business questions.

They Bought Into the Internet Hype Machine

Popular media has glorified web entrepreneurs to the level of pop musicians. They tell you rockstar stories of guys like Mark Zuckerberg, Sean Parker, and now Kevin Systrom, but they conveniently leave out the millions of entrepreneurs who went broke chasing their tails. They also leave out the hundreds of success stories from men and women who built strong, sustainable businesses online, but never quite made that “rockstar” status that the previous founders did.

As an entrepreneur, you can’t buy into this idea that the Internet is an open sea of get-rich-quick schemes. In reality, it’s not. It’s an extremely competitive environment, where millions of companies are vying for the same limited number of scrutinizing eye-balls. You have to look at a web-based business, the same way you would any tech-based business. The same questions apply:

  1. Who is my customer?
  2. Where is my target market?
  3. How well defined is my product/service?
  4. How many sales do I need to make in order to break even?
  5. How can I scale this back and make a profitable company without outside investment?

And many more.

Conclusion: No, the Internet Did Not Kill the Need for a Business Model.

Don’t kid yourself.  Your business model is the #1 most important thing in your startup business.  It comes before your technology, before your marketing, and before you will ever get an investor on board.  Please spend a little time thinking about it before you try to recruit talent.

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