A VC - Latest Comments in When Talking About Business Models, Remember That Profits Equal Revenues Minus Costs

Re: When Talking About Business Models, Remember That Profits Equal Revenues Minus Costs

Foliovision — Thu, 27 Aug 2009 10:31:38 -0000

Good point about Flickr and Apple. On the other hand, one should keep one's eyes open for that lode of ore in what one is doing or could be doing.

The alternative is to spend a lot of energy and time on project which aren't really going anywhere.

If you go, go big is what Flickr and Apple did. Once they dipped their toes and found the water to their taste, they dove straight into the deep end. In Apple's case, even if another company had Apple's exact business plan for digital music two years ahead of time, I don't think they could have executed (possible exception Sony).

Re: When Talking About Business Models, Remember That Profits Equal Revenues Minus Costs

Foliovision — Thu, 27 Aug 2009 10:27:34 -0000

That's a little bit unfair to say that the information is wrong Fred but that you will only discuss it in private. Why start the conversation then?

Re: When Talking About Business Models, Remember That Profits Equal Revenues Minus Costs

sarahva — Fri, 31 Jul 2009 11:19:02 -0000

Great post, I agree. I think a great addition that might help others would be learning how to outsource. It’s really helped my business. I found a free outsourcing mini coarse and I learned a lot from it. It’s amazing what you can do when you can hire someone for $4 per hour to help you run your business. outsourcing strategies

Re: When Talking About Business Models, Remember That Profits Equal Revenues Minus Costs

Venture Presentation — Sat, 18 Jul 2009 22:24:03 -0000

If anyone needs a template for a business plan or a financial model, you can check out Venture Presentation (www.venturepresentation.com).

Thanks.

Re: When Talking About Business Models, Remember That Profits Equal Revenues Minus Costs

Pankaj Taneja — Mon, 13 Jul 2009 15:25:24 -0000

With internet businesses neck deep in the "free" culture, on-premise software vendors have been ranking in the billions. Now with the internet becoming an increasingly important medium to deliver even business applications (SaaS). Since many of these SaaS applications will be replacing traditional costly on premise software, business consumers will be pretty open to paying up for these web based products.

SaaS companies could make for pretty straightforward business models by simply charging for their products rather than looking for alternate models. Early SaaS companies have built very financially viable businesses by following this simple model. All this will work, unless biggies like Google ruin it all by using their incredible economic clout to offer free business products and run loss making business units, and compensate for it from profits from other business units (advertising)

Re: When Talking About Business Models, Remember That Profits Equal Revenues Minus Costs

slowblogger — Sat, 21 Feb 2009 09:45:13 -0000

Good insights. I think perception and ego are also factors why companies tend to get bigger. I wrote a related post. Thanks for the inspiration.

Re: When Talking About Business Models, Remember That Profits Equal Revenues Minus Costs

Paul Hassing — Sun, 15 Feb 2009 17:02:14 -0000

Interesting analysis, refreshingly devoid of hype. Thank you for the info & insight. P. :)

Re: When Talking About Business Models, Remember That Profits Equal Revenues Minus Costs

Alan Lewis — Mon, 09 Feb 2009 16:07:44 -0000

Nice post. And basic business sense that most people -and business - seem to have forgotten, or never learned.

But what is interesting, is that the web seems to have forgotten lessons learned in the bricks and mortar world. I read a few comments and a few stick in the mind

"not possible more than 5 years ago to outsource legal, HR, development". Um, in the UK we have been doing that for more than a decade! Without the web.

Various comments about how "thye dont get it" - an example being Facebook having naff photo capabillities. Well, there is an old adage the UK about plumbers always having leaking taps at home, and mechanics always having a broken car. There is also the old adage about a new,small company able to bring a product to market in days (or make a change to product), whilst a large company [ie IBM in legend] takes years. Guess new industry suffers the same. Does facebook or ebay or Google listen to users? Nope (I have an idea that could double googles revenue, but they dont want to know)...

Good article.

Re: When Talking About Business Models, Remember That Profits Equal Revenues Minus Costs

fredwilson — Sun, 08 Feb 2009 13:25:11 -0000

I'd address you by name but like a lot of people who post antagonistic
comments, you don't use your real name. So I'll just call you hypocrisy
finder.

I do practice what I preach.

I currently work on 12 companies for the two firms I help manage (Flatiron
and Union Square Ventures):

Alacra Flatiron
Ibiquity Flatiron
Return Path Flatiron and Union Square
Boxee Union Square
Disqus Union Square
Etsy Union Square
Infongen Union Square
Outside.in Union Square
Targetspot Union Square
Twitter Union Square
Zemanta Union Square
Zynga Union Square

None of those companies had material revenues when I invested in them (Etsy
and Alacra had a little bit)

Now eight of the twelve have revenues and in almost each case, the revenues
are between $10mm and $100mm per year with a few exceptions.

We are early stage investors, we don't expect the companies we fund to have
revenues and we work with them to develop business plans and business models
and then execute them.

The point of the post was not that every company should have revenues day
one, it was that as you build the business, focus on keeping costs low so
that you can build value without having to build huge revenues.

That's what we try to help all of our companies do. Some work better than
others, but its our goal.

Re: When Talking About Business Models, Remember That Profits Equal Revenues Minus Costs

Hypocrisy finder — Sun, 08 Feb 2009 13:10:03 -0000

Fred, I'm almost positive many of the companies you invested in were not living on revenues when you invested. Twitter still isn't. Discus isn't. How many others in your portfolio still aren't living on revenues?

http://www.unionsquareventu...

Practice what you preach bud.

All the examples of companies who are doing a lot with a little are not in your portfolio. Digg, Craigslist and Facebook are nowhere near your portfolio. Those in your portfolio that are close, still aren't making any money.

For crying out loud.

There are lots of small companies out there who are living on revenue with a small number of employees and yet you don't invest in them? Why? You call them "lifestyle" businesses. You call them opportunities that won't grow exponentially, yet every example in your list that you invested in that have grown exponenetially did it with a product they were selling for exactly free.

If facebook started charging, how many would flee? If disqus charged to have their little comment window on your blog, how many would have it? None, it's too easy to biuld a comment window Fred.

If twitter started charging, how many would tweet? How many would subscribe to other people's tweets?

Nobody Fred.

My mama taught me a little rule when i was growing up and that rule went like this, "Practice what you preach."

Otherwise, you lose credibility and you've done that with this post.

Re: When Talking About Business Models, Remember That Profits Equal Revenues Minus Costs

Fraser — Thu, 05 Feb 2009 21:36:14 -0000

Well said. Constraint as social engineering is a wonderful thing.

Re: When Talking About Business Models, Remember That Profits Equal Revenues Minus Costs

fredwilson — Thu, 05 Feb 2009 20:33:19 -0000

This is a fantastic comment Narendra

I love that you were doing freemium well before the word came into vogue

Re: When Talking About Business Models, Remember That Profits Equal Revenues Minus Costs

thewalrus — Thu, 05 Feb 2009 11:38:37 -0000

Interesting. I've always thought of many web services (social especially) as night clubs.....they come and go because they inevitably lose the cool factor. However, the breweries keep selling beer to whatever opens next. I think FB understood this early and have been trying to make the leap from nightclub to brewery ("social utility") ever since.

UserID = beer

Re: When Talking About Business Models, Remember That Profits Equal Revenues Minus Costs

Amit Pradhan — Wed, 04 Feb 2009 08:42:14 -0000

If that happened ostermayer, the calculation would be more like 1.5million users x $10/yr = 15 million a year. And you are right, it isn't the mindset of the average facebook user. They'd have to figure out what the free and paid users get and if free and paid can co-exist in the same friend circle, for instance. Clearly, a can of worms they've probably looked at but definitely do not want to open, as-is atleast.

Re: When Talking About Business Models, Remember That Profits Equal Revenues Minus Costs

fredwilson — Wed, 04 Feb 2009 06:47:11 -0000

I've never been contacted by forbes in all my years in the vc biz about this survey. Apparently they only query well known sv vc firms who have pr people to flak them. Ugh. I am taking a groucho marx position on this thing

Re: When Talking About Business Models, Remember That Profits Equal Revenues Minus Costs

VCR — Wed, 04 Feb 2009 01:15:23 -0000

Fred- Below is from Zyngas investor page, about one of your coinvestors.

Krassen- Freds not on the list because he has never been one of the top 100 VC investors based on the returns of the companies he has backed.

Sandy Miller
Institutional Venture Partners
IVP is one of the premier later-stage investment firms in the United States. Sandy was recognized by Forbes Magazine as one of the leading venture investors in the U.S. by inclusion in the 2007 and 2008 Midas List. We believe he will bring that touch to Zynga!

Re: When Talking About Business Models, Remember That Profits Equal Revenues Minus Costs

Joel Brown — Tue, 03 Feb 2009 19:13:02 -0000

I think the basics of what it comes down to is that while some companies have realized the potential of staying smaller and profiting from the internet because of the ability to work on a small business model. There is still a large majority that seem to be working under the impression that this needs to be big to look like a real company.

Or the other, we need to be spending more then we earn, to look like we are growing.

Re: When Talking About Business Models, Remember That Profits Equal Revenues Minus Costs

Brad — Tue, 03 Feb 2009 19:05:21 -0000

www.secondmarket.com

Backed by First Mark Capital

Re: When Talking About Business Models, Remember That Profits Equal Revenues Minus Costs

fredwilson — Tue, 03 Feb 2009 16:51:20 -0000

So that explains why I could never find the comments. There's a pretty standard UI convention for comments out there

Re: When Talking About Business Models, Remember That Profits Equal Revenues Minus Costs

mary hodder — Tue, 03 Feb 2009 16:37:57 -0000

I found the comments tab. I think it's very weird that they would post it near the title, in another tab. It separates the comments so far away from the article (instead of below, which has the effect of causing the connection to seem "below but related and less important but still important to the article discussion") and within another tab that to me, the tab conveys that comments shouldn't be terribly associated with article, and instead are sort of ancillary and not terribly important.

But at least Chris can see my view here of why I think the distinction between FB/YT and Digg seems misleading or in error to me.

Re: When Talking About Business Models, Remember That Profits Equal Revenues Minus Costs

mary hodder — Tue, 03 Feb 2009 16:33:23 -0000

I was thinking of the word, "make" as in normal conversation, not accounting lingo. YT, FB and Digg all make revenues, not profits. To me, you made a distinction between them, and I don't see one, other than that YT and FB have in the high hundred's of employees and Digg doesn't. All three have the same problem, they can't make enough revenues to cover costs.

Re: When Talking About Business Models, Remember That Profits Equal Revenues Minus Costs

mary hodder — Tue, 03 Feb 2009 16:27:38 -0000

Yes, I get that revenues aren't the same as profits. But if that's the case:

"Meanwhile YouTube is still struggling to match its popularity with revenues and Facebook is selling commodity ads for pennies after its effort to charge for intrusive advertising led to a user backlash. And news-sharing site Digg, for all its millions of users, still doesn't make a dime."

Then comparing YT and FB to Digg is apples to oranges. YT and FB don't have profits either. They have REVENUES. And that's my point. To me, it's misleading to say that Digg doesn't make a dime. They do make dimes, just not profits. I think Anderson's stmt is in error because it implies that YT and FB do "make money" and Digg doesn't.. whether you count that money as "profits" or just "revenues."

All three services do make some "revenues." None make profits.

Also.. thanks for pointing out the WJS comment style. I've never seen comments at the top of a post before.. just the bottom, so I didn't know to look near the title of the article. Nice that WSJ has stayed with the comment convention design-pattern developed over the past 10 yrs across the internet where the comment section is noted just after the article. Would also have been nice if they'd linked from the bottom as well as the top, since they've made their own convention away from the norm.

Re: When Talking About Business Models, Remember That Profits Equal Revenues Minus Costs

Julien Le Nestour — Tue, 03 Feb 2009 14:59:12 -0000

Hi Fred, for me, a lot of business models could be improved by using smartly the enterprise market in conjunction with the consumer market. Even, if not mainly, for consumer web startups. Here's what I've written following your post:

"While anyone has ideas on what business models could work for a number of websites, the enterprise market is almost never part of the answer. Yet, using it in combination with the consumer market rather than as two separate silos can yield startups dramatic improvements on both sides of the profit equation. "Consuprise" plays should be surprisingly powerful.

If you are a start-up with a pure consumer play web application enabling one activity in a simple and elegant way, then you might want to exploit the enterprise market. Strategically, it can be used with different angles, but we'll focus on the simplest in this post: take one offering focused on the consumer side and developing a new revenue stream on the enterprise side.

Consumer applications have unique competitive advantages for the enterprise market

Google Apps for large enterprises is an example of a consumer product being scaled in the enterprise market. The largest deployments need a specific sales force and system integrators involvement. But the mid companies market does not add any costs to Google, with self-service online subscriptions.

Most web applications will be served as a service, thus lowering the costs for enterprises. But they have other and unique competitive advantages. Their usability level and User Interface design are generally of much better quality, because they competed for individual consumers before enterprise buyers. While the former are their own decision-makers, based heavily on design and usability, enterprise decision-makers are not the end users and focus on enterprise infrastructure aspects. This is critical in terms of user adoption and time to proficiency for new tools rolled out by the corporate IT function.

Change Management processes are an order of magnitude easier with a web application which has earned its reputation in the consumer market. This competitive advantage is growing more acute as a larger base of employees are exposed and using to standard "web 2.0" applications. Although not entirely fitting our starting definition, Gmail is a perfect example: give a young employee Gmail, and it will be business as usual. Give her Outlook, and you will wait for a long time before she is fully confident with it.

Economies of scale in the enterprise market

Network and viral economies of scale are mostly thought of as attributes of the consumer market. But the enterprise market is not made of individual clients without any relationships with each other. The interweb of personal relationships and professional associations make it possible to achieve such economies of scale on the enterprise market as well. Not using the exact same dynamics, but achieving the same effects. The scale is smaller, but each head is a paying customer.

True, organizational contingencies and political agendas add overhead to any sales, making it scary for consumer companies. But if you develop a large base of opportunities at a low enough cost, you can let those opportunities mature and evolve at their own pace. You do not have to increase your burn rate other than marginally to achieve this.

You don't have to customize

The main objection to this line of thinking is: "When entering the enterprise market, each company will request some customization, and that will increase our costs proportionately with any additional revenue." Indeed, it makes no sense strategically to customize your offering, as this will lower your profit margin drastically. But you don't have to customize to win in the enterprise market.

True, companies will often request customization. Just state your position and refuse to do it. You will be surprised how quickly they will accept to use your standard offering. Of course, this is not valid for all consumer web applications. But if your product:

caters to a standard need which is the same in all large organizations
enables an isolated workflow
needs little to no data integration
...then customization is not a requirement.
If you are concerned about the customization requirements or simply want to improve your competitive positioning, offering a public API or becoming a platform hosting plug-ins, applications or widgets will work positively just as well as in the consumer market.

I'm convinced, any practical advice ?

Of course, there's still work to do, but the ROI should be worth it.

Authentication and account provisioning: you need to provide integration with the systems used by your clients, such as LDAP or Active Directory. You need to (re)-architecture your application to support easily these systems. Even if such systems are quite standard, for each new client, you will have to do some quick manual work. My advice: set expected revenue limits to avoid a barrage from small clients, charge it at cost (enterprise are used to this) or waive it for larger clients. This is the single most important point as the main danger is unauthorized access from a former employee to the application. If your "enterprise" is expected to become large, hire a specialist that will whip through the manual phases without problems.
SSO: nice to have, but not 100% required. Employees are used to their credentials by heart and if the cost to input them outweigh the benefits of the application, the problem is much bigger.
Web security: must have of course. Enterprises will want to make sure your application, accessible from the internet and hosting their data, cannot be hacked easily. Those audits are fairly standard as well, and after 2-3 large clients, you will probably have to provide the results from past audits, not perform new ones.
Data segregation and security: of course, you will have to come clean on those points. Segregation is your responsibility, as well as choosing a hosting provider you can trust.
Note that these points do scale: once in place, there will be little costs to add more corporate clients. They also benefit the consumer side of your business.

Accelerate and reduce the cost of Product Development

If you focus on a standard enterprise need, take advantage of an early partnership with 2 or 3 representative clients. Most will welcome the opportunity to provide you with their needs and requests, even if the product is still being developed. That will cut your development time as well as improve your product. And chances are your consumer side will benefit from the same improvements.

Enterprise plays provide a unique opportunity to refine your product safely, even before you take it to the consumer market in fact: large organizations avoid litigation risks by all means. So you can be sure your IP is in safe hands, they won't take any risks. Such partnerships are beneficial for both partners.

So if your a large organization: are you organized to take advantage of this new wave of offering? And if you are a consumer web startup: how can you leverage the enterprise market to improve your profit margin and your competitive position on your core consumer play?"

Full post here

Re: When Talking About Business Models, Remember That Profits Equal Revenues Minus Costs

Mo Koyfman — Tue, 03 Feb 2009 09:30:40 -0000

i think that is absolutely correct. great leadership requires incredible instincts and clarity, most importantly around on people and capital allocation. and experience is key to getting better and better at this. i think quality entrepreneurs/CEOs are the most important and hardest thing to find.

Re: When Talking About Business Models, Remember That Profits Equal Revenues Minus Costs

Merra Lee Moffitt — Tue, 03 Feb 2009 07:21:17 -0000

Thanks for helping voice the difference between revenues and profits.