One of the things I hear quite commonly is that the "old days of the Internet" were totally different from today. The claim is that multiple distribution channels were wide open (email, SEO, SEM), so it was trivial to build a business without spending any money on customer acquisition.
Although there are many companies that grew without spending a dime acquiring customers (Google, FB, Twitter), when I think back to the original Internet bubble, there were lots of companies that seemed to thrive due to their raising tens of millions of dollars to build brand and acquire users in what was a very noisy environment.
Indeed, there are a number of companies that were able to scale *because* they spent tens of millions of dollars buying users.
- PayPal (who paid $10 per user to join the PayPal network)
- Monster.com (remember the superbowl ads?)
- Amazon.com (went public in 1997 and wasn't profitable until 2001, with costs here were spent on, amongst others things e.g. logistics and market share)
I think there is a fundamental class of business that could be very successful emulating the bubble days approach to building a userbase. In particular, there are a number of entrenched businesses with strong network effects (e.g. eBay) or brands (e.g. Amazon) or logistical advantages (Amazon). The lean startup approach may never overturn these apple carts. The way to challenge these incumbents is to spend a lot of money to build brands or acquire users in order to overcome these effects.
Where To Spend $100 Million?
- Buy enough of a network to flip it.
- What are business with network effects/liquidity needs? Examples of these are eBay & PayPal. Try and calculate the costs - how many users do you need in a network for the network to "flip" to your product? If you buy 1 million or 10 million users at $10 each can you create enough of an effect to drive the rest of the network to you?
- Totally crazy example idea - chose a vertical on eBay and buy all the goods on that state/vertical pair and then resell them at a slightly lower price point on your vertical marketplace and lose $n per item. How long do you need to do this bulk buying before people start coming to you instead of eBay for this vertical?
- Crazy example idea 2. Or, take advantage of media buying/intent buying and outbid everyone in a specific vertical or product category and saturate the vertical with your ads. You may lose money on every transaction, but in parallel may build enough of a brand and liquidity to sustain yourself long term.
- When Google powered Yahoo! search, Yahoo! lost market share to Google. But the results from an end user perspective were basically identical. Calculate the SEM or other media buying/lead/intent buying budget you would need to drive in N users, and then compare that to the brand building exercise and the number of recurring users you would drive in via additional channels with a big budget. What is the more economical long term strategy?
I think the whole lean startup movement has some good aspects to it, and when I was working on my startup Mixer Labs (which Twitter acquired in December) we ran very lean and mean. But I do think too many people "think lean" which often ends up also meaning "think small" these days.
So, I ask you this - who is going to raise $100 million to build the next massive Internet business?
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