Startup thoughts I
For reasons I’ll never understand, people ask me for startup ideas. I work at a company that’s over 30 years old, forever in software company terms, so I have to assume it’s because I spend part of my day worrying about other people’s startups.
Making a Profit is Nice but…
The classic startup doesn’t need to be profitable really — not in the short term, at least. what you really want is profitability to scale better than linearly.
Consider coffee shops, if you build 2 coffee shops rather than one you’ll make twice as much money (roughly) and spend twice as much to get it, so your profits will be twice as much. The profit scales with the investment — yuck, you’ll never get rich that way. Even worse, you need to be profitable from the beginning to make any money too.
With chains though, there’s a reason that there are 32 768 billion Starbucks. Things are cheaper in bulk, not only ingredients but advertising and design. You also get a little bonus from people being more comfortable with your brand. So in the case of chains you get something like this:
Certainly better. But if the first one’s not profitable, you probably won’t build 20 more.
Software makes people rich because the first copy costs a million dollars, but the next million cost a dollar and sell for the same price:
So you don’t need to make a profit at the beginning to make a billion dollars in a few years.
But that’s so 1976, it’s the WEB 2.0 and since it’s not a point release we’re breaking backwards compatability with old business models.
Metcalfe’s Law states that the value of a network scales with the square of the number of participants. So let’s run these numbers; say you spend $1000 to develop something, and each user on the system gets one thousandth of a cent of value (on average) from every other user of the system. When we’re talking about tens of users, I have to add a glow to the Value line so you can tell it’s not zero.
With hundreds of users, it still isn’t making financial sense:
But with thousands or tens of thousands of users we’re actually creating some value here:
It’s worth mentioning this is value we’re creating for the users, we haven’t made any money yet. It’s not hard to make something useful for other people, the hard part is getting them to give you more money for it than you spent making it. But when we get in to hundreds of thousands of users, there’s so much value being created that it becomes a lot easier to shave off enough of that value to create a profit:
Maybe we’ll sell ads, maybe our users will baffle me by spending $1 to send tiny pictures to each other. But most likely at this point we’d sell the company to another company that has a proven track record of making money and let them worry about it.
