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The 2 ways to build a $100 million business August 2013

With tens of thousands of new start-ups being created every year, the potential of a company to truly scale and become a large, stand-alone business is more crucial than ever before. A great product is always the foundation but a clear distribution strategy becomes essential to cut through the noise. So most early-stage VCs have started to evaluate investment opportunities with an imaginary benchmark in mind: can this company become a $100 million opportunity?

Generally speaking, there are two ways (and only two ways) to scale a business to hit that $100 million threshold:
1. Your business has a high Life Time Value (LTV) per user, giving you the freedom to spend a significant amount of money in customer acquisition. High LTV can usually be found in transactional or subscription businesses.
2. Your business has a high viral co-efficient (or perhaps even a network effect) that lets you amass users cheaply without worrying too much about the monetization per user or spending money on paid acquisition.

Unfortunately, many consumer internet startups find themselves stuck in the middle of these two strategies: they have a low monetization per user and limited viral effects. That unfortunate combination makes it rather difficult to reach the $100M mark.
As the consumer Internet space becomes more and more crowded, every startup founder needs to be thinking about these two ways to scale a business. Too often I have seen entrepreneurs believe that customers will automatically flock to their cool new service, completely underestimating how tough it is to cut through the noise and build an audience.

To build a standalone company and capture the attention of investors, you need a viable way to scale your business. The earlier you figure this out the better, since it may require you to build your product differently. While the $100 million mark may seem far away in those early days, it’s important to begin thinking about paths to reach this threshold from the start.

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The 2 ways to build a $100 million business August 2013

  1. The only 2 ways to build a $100 million business Boris Wertz | August 2013
  2. Why $100 million?
  3. “VC fundable” (but you can a build great company without VC)
  4. some VC math -  $20 million seed fund -  return target 3-4x = $80 million -  5% stake at exit > $1.6 billion in exit value needed on 20-25 investments
  5. LTV > CAC (ideally 4-5x at scale)
  6. high LTV / user (SaaS, e-commerce > transactional businesses) 1
  7. SaaS example -  ARPU: $70 -  Monthly Churn: 2% (> 50 months) -  LTV: $3,500 1
  8. 1 CAC acquisition channels WoM SEO SEM Tradeshows Outbound sales
  9. Increasing LTV -  increase ARPU: upsell, enterprise accounts -  decrease churn: increase utility of product, customer success 1
  10. viral effect (social networks, platforms > often advertising businesses) 2
  11. Facebook -  ARPU / year: $6 -  MAU: 1.15 billion -  Other examples: Twitter, YouTube, Instagram, Snapchat, Wattpad 2
  12. virality & network effect -  virality: sharing / WoM (e.g. communication products, social games) -  network effect: additional user = additional value (e.g. Craigslist, Indiegogo, Twitter) 2
  13. stuck in the middle (most start-ups) 3
  14. e.g.: news curation -  low viral co-efficient -  low monetization (advertising) 3
  15. e.g.: low-utility SaaS -  combination of low ARPU ($30) and high churn (7-8%) – e.g. marketing tool for SMB s -  resulting LTV of around $400 too low to use most acquisition channels 3
  16. e.g.: one product e-com -  low repeat purchase frequency = low LTV -  competing with multi-product retailers like Amazon on customer acquisition 3
  17. take-aways -  $100m opportunity = “VC fundable” -  2 models to get there: high LTV / high CAC or low LTV / low (=zero) CAC -  think about distribution early on
  18. thank you bwertz@versiononeventures.com twitter: @bwertz
  19. about me •  early stage investor through Version One Ventures •  40+ investments in consumer & enterprise co s - 6 exits (Twitter, Groupon, Google, Salesforce) •  entrepreneur: co-founded JustBooks / AbeBooks (sold to Amazon in 2008) •  co-founder of startup accelerator GrowLab •  BC Angel of the Year 2011 / Pacific E&Y Entrepreneur Of The Year 2005 •  Masters and PhD in business administration

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With tens of thousands of new start-ups being created every year, the potential of a company to truly scale and become a large, stand-alone business is more crucial than ever before. A great product is always the foundation but a clear distribution strategy becomes essential to cut through the noise. So most early-stage VCs have started to evaluate investment opportunities with an imaginary benchmark in mind: can this company become a $100 million opportunity? Generally speaking, there are two ways (and only two ways) to scale a business to hit that $100 million threshold: 1. Your business has a high Life Time Value (LTV) per user, giving you the freedom to spend a significant amount of money in customer acquisition. High LTV can usually be found in transactional or subscription businesses. 2. Your business has a high viral co-efficient (or perhaps even a network effect) that lets you amass users cheaply without worrying too much about the monetization per user or spending money on paid acquisition. Unfortunately, many consumer internet startups find themselves stuck in the middle of these two strategies: they have a low monetization per user and limited viral effects. That unfortunate combination makes it rather difficult to reach the $100M mark. As the consumer Internet space becomes more and more crowded, every startup founder needs to be thinking about these two ways to scale a business. Too often I have seen entrepreneurs believe that customers will automatically flock to their cool new service, completely underestimating how tough it is to cut through the noise and build an audience. To build a standalone company and capture the attention of investors, you need a viable way to scale your business. The earlier you figure this out the better, since it may require you to build your product differently. While the $100 million mark may seem far away in those early days, it’s important to begin thinking about paths to reach this threshold from the start.

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