Exactly. You could also make $1M tomorrow by selling gas for $1 a gallon. You'd have more customers than you'd know what to do with. But you'd lose $2M in the process. Many entrepreneurs confuse revenue with income. Positive revenue does not mean positive income. There was a good article on this regarding Ecomom's demise as a company because, in their case, getting more revenue meant necessarily incurring more losses. They didn't realize it until it was too late. They were better off not selling anything at all rather than selling something that increased their losses. In many ways, it wasn't a business. It was basically a charity where they subsidized the cost of a product for their customers without any upside for them.
It's easy to point out how $2mil a year might be only 1% or even 0.001% of the total size of some particular market, but that's irrelevant. No amount of business is guaranteed. $2mil is still $2mil, it's still x number of people each ponying up y number of dollars, for pretty significant values of both. Without a compelling product and a solid brand you have no guarantee of that. There's no such thing as a business venture that makes $2mil in a worst case scenario. The worst case is always losing money.
It seems like the question is talking about large, zero-revenue startups. Ecomom definitely doesn't fit here, since they were collecting over $1M/month in gross revenues. Of course, they were discounting so much that each order had a negative margin, but that is a different story.
I think the most dramatic example of this (other than WhatsApp) is Snapchat.
>In startups and small companies, the problem has been exacerbated by a relatively recent obsession with growth uber alles. Growth, growth, growth, with little regard to whether growth is sustainable, or to how costs scale with revenue.
This is absolutely true. I'm getting downvoted farther down on this thread for a similar observation, and for attributing this obsession to the SV culture, in particular.
This article is attempting to assert that Mr. Sherman was literally incapable of understanding basic math (i.e. the concept of margin). I think it's more likely that he was well-aware of the definition but was focused on growth at all costs.
It's funny, because you look at companies like Twitter and Pinterest which come up to scale with absolutely no revenue model, let alone revenue. That seems to be "normal". Nothing to see here. But, when a company with actual revenue deeply discounts products to scale up, it's somehow shockingly bad.
I'm not arguing that Ecomom had the right strategy here. I actually think they did not (partly for the reasons you mentioned). But, then in the same universe Pinterest could become the darling with millions of users and no revenue model?
It's funny how twisted things are without people seeming to notice the contradictions.
I'm not making that point, but I can at least defend it partially. With revenue comes sustainability, even if only partial. That means that if valuations are out of control, it is the investors that lose. Without any revenue, everybody loses, as it was all just a fantasy to begin with.
Of course, if you have revenue but with negative gross margins, as I suspect a lot of current startups(especially delivery oriented) have, then your revenue is an illusion as well.
This is a really ignorant thing to say. If you have a hearty revenue stream but no profit, you can tweak the model to make it profitable. Some profits aren't possible at small scales, so having revenue proves you have demand and can lead to safely risking big bucks to get to a profitable scale.
This seems to be an indication that maybe we're getting past the bogus math of the first dot-com era. In that time a lot of companies were built on the following "business plan": enter a market worth X (where X is large) dollars, posit that even a tiny percentage (say 1% or 0.1%) of X is still a very large number, enough to support a company with many employees, wait for the investments to pour in. The problem with this line of reasoning is that being able to capture any part of a market is difficult, regardless of its size. Earning a million dollars is a difficult proposition whether the market size is currently non-existent or even if it's a trillion dollar global industry.
And that logic transfigured itself in the "web 2.0" and "social" era to something like the following: grow business to X (where X is large) users, posit that even a tiny per-user monetization (say $1 or cents) still results in large revenues, wait for investments. The fundamental mistake is the same. Indeed, consider that a homeless man on a busy street has the same exposure to "potential customers" as a billboard on that street does, but neither are guaranteed to generate even a single dollar in revenue.
It turns out that what's important is pretty much what's always been important in business. Does your company do something valuable? Are people willing to pay for it? How effective is your company at turning potential customers into actual customers? The better your company does those things the more likely it is to be successful.
So true the philosophy that you can give things away free or generate near 0 revenue are unrealistic. If a business/service can not pay for itself then it requires debt(VC for example) which leads to dilution and in many cases the same result, a failed business/service. If you can make something the market will buy and the revenue sustain and grow the business/service then you have a real business/service otherwise it's just an artificial reality. It's so harmful the belief that you can make a business that is not profitable from the beginning and achieve success. You are already doomed to failure with this thinking. Learned this the hard way from several businesses and ideas in the past.
No one cares about your revenue. So many startups purchase their revenue by essentially giving away their product at below-market prices, hoping to destroy the competition, like Uber did with taxis. It very rarely works. What's your company's net profit? Oh right, it's just around the corner...
Generating $5K/month in revenues is a respectable achievement for a new business. It's more traction than many new businesses will ever achieve, and of course most new businesses will fail.
If you're talking about spending $5K/month in costs to run your business, and then presumably on top of that the value of the time that you and your friends are putting in, then you need way more than $5K/month in revenues to make a significant profit.
If it was that easy, everyone would be doing it. Unfortunately, as others have said, a lot of the assumptions implicit in your post are wildly unrealistic.
Doesn't make sense. If you have 10 engineers building a product and you sell one subscription for $100 you won't be profitable. When you sell a million you will have generated $100M, with have a far greater probability of being profitable.
The failure is that start up founders and investors fail to recognize that revenue is your KPI to optimize for in the long run, with a goal of making a profit in the not so distant future. Business is not a social network, and success isn't measured by how many friends/users/downloads you have. Money is the bottom line.
Of course if you give something away for free or sell it cheap enough at a loss, you'll get a lot of "customers". I could do the same by opening a free taco stand on the street. But it is in no way a sustainable business model.
It kind of is though. Maybe a founder is happy making 90k a year off a small band of loyal customers. By all means, that's a viable business.
Maybe the business wouldn't be able to run profitably with anything less than 1000 users and one founder can't make it happen in their budget while another can, or another yet decides to raise money.
I would agree that without context one can't know which set-up has the most potential. However, such potential is by definition just hypothetical funny money until it's realised, if and when it ever is.
You contend that your business A has proven it can get orders of magnitude more customers. Well, yes, it has: in fact, it's proven that it can get exactly 1,000 active customers instead of 10. But if you're going to infer from that statistic that business A can therefore get 2,000 active customers, then why can't I assume company B can go from 10 to 20 by the same logic?
If anything, I might put more faith in the latter, simply because a lot of people are going to drop $10 without thinking much. Very few people are going to drop $1,000 without careful consideration even if it's someone else's money they're spending, and if I were a betting man I'd rather back the product that I know for sure stands up to scrutiny and still gets bought. But either way, getting to relatively modest milestones like those you mentioned doesn't tell me anything in itself about the total size of the target market, how much of it I could realistically convert in the near future, or how well my product will stand up to competition for those sales.
That being the case, it does sound a little crazy to me to argue that it's actively better to have a higher sales volume even if it means a substantial drop in profits, unless you've at least got strong evidence that the higher numbers are expected to return an overall greater profit within a reasonable period of time.
Oh, totally true. But its also possible to build a startup where you get customers contacting you that they love your product daily and its almost impossible to monetize.
By that logic, as long as you're growing you'll always be losing tons of money and never be profitable? How is that a good business model? I mean we're only talking about revenue vs sales and marketing spend here -- the business has a load of other costs too.
Tons of profitable businesses raise money. Sometimes it's the best way to scale to the next level or expand into a new market. It's wrong to assume they aren't profitable.
$1B in rev but $3 mm in losses without profitability in sight.
You can create a pretty "massive" company pretty quickly if you basically sell $10.00 for $9.97
Their size actually works against them. Lots of companies lose money in the early days, but are able to justify / demonstrate why and when they'll be profitable. If you already have $1 B in sales and are still operationally unprofitable ... how much more will it take?
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