Never let it be said my blog post titles aren’t polarizing.
I was chatting it up with an old friend this weekend who is considering a high level role at a small startup. She asked me for an opinion on the startup, to which I predictably answered “ok, what’s the pitch?” As she proceeded to give me the scoop, it became apparent that the business value proposition was based on cost savings due to increased efficiency. My advice was to keep looking.
Sounds harsh, and it’s not that these types of businesses are not viable per se, it’s just that they’re not likely to become explosive growth businesses because of an inherent weakness in their business model. As I was drafting this post, I came across a blogger who provides solid advice for such startups: “The efficiency in and of itself isn’t the key, it’s the value gained through the efficiency that matters.”
I agree with him, but even startups who follow his advice are disadvantaged because they have to contend with a fixed ceiling on their revenues. To illustrate: Say your startup is providing spreadsheet software which is so well designed it leads to a 10% reduction in time spent. Any buyer even remotely thinking about buying will simply take the cost of accounting personnel time, divide that by 10%, and then further divide by an ROI factor (typically 2-3x). That’s the revenue ceiling. Does Twitter have such ceilings on revenue? How about Google?
There are better models out there, namely those based on revenue growth(Google), or the creation of an entirely new market (Facebook, Google), or business model based on providing customers a better life or lifestyle (Apple, Tesla). Do yourself a favor and found something without efficiency based “speed limits”.
Agree? Disagree? Let loose in the comments.