Editor’s note: This article was first published in June 2014. It describes the situation then: Groupon and Twitter not yet profitable (Twitter is now X and posted annual profits from 2018), Google+ as an active rival to Facebook (shut down for consumers in 2019), and WhatsApp as a recent acquisition by Facebook.
When you think about building a business worth millions in a very short time, it is no secret that this goal is easier to reach on the internet. But just as with brick-and-mortar companies, building a highly profitable business requires a strategy and taking the right steps according to the strategy you have defined.
Without a doubt, every entrepreneur’s dream is to have an idea and see it bought by Google or Facebook for a few billion. That model is the most profitable, but also one of the hardest and riskiest, because very few people will have that kind of “luck”.
So below we set out the most common strategies depending on the business model you have in mind, and at the end we offer some advice recently gathered in Mashable’s DBA section, which features the views of major fund managers and leaders in business management and risk.
The most common internet business models
1. Turn an idea into a project that the tech giants will want
Many entrepreneurs study the gaps and analyse which next steps the tech giants might be interested in. That was the case of FeedBurner, which was bought by Google in its day, or WhatsApp, among hundreds of other companies. The good thing about this strategy is that you do not necessarily have to make the business model profitable. You only need to build something with the idea of selling it to a big company, which is the one that can then make it profitable.
2. Have a “controversial” idea, collect the profits quickly and leave
Plenty of websites and business models are born to deliver high returns in the short term, even though their founders know they will run into trouble in the long term. The secret to succeeding here is to build a system (one that sometimes plays at the edge of legality) and, when you see the problems coming, shut down before you have to face multimillion fines that eat up the profits you made.
In the United States there have been many cases of websites whose service could be fun for some users while offending others, so it was known that the business would not last; in the meantime, though, they were making money. This model included, for example, WhatsApp Spy, created by a Spaniard who made a lot of money scamming half of Facebook by making users believe they could spy on other people’s WhatsApp.
If the young scammer had pulled out in time, he would have come out on top with a lot of money in his pocket, but his greed will probably land him in prison, because he kept scamming people after the warning signs had appeared.
The same system includes the smartphone giveaways on Facebook and Holland Performance Telecom, a company that takes advantage of the passivity of the Spanish authorities to deliberately sign you up to premium services.
3. Offer something for free and monetise it with advertising
You can start a blog, reach hundreds of thousands or millions of visits and earn a high income from advertising. Likewise, you can build a free app with the idea that millions of people will download it, and monetise it with ads. This kind of business model requires more patience and more work. Later on, your app may be bought, or you can launch a premium service that users pay for if they want features the free version does not have.
4. Offer something of value and charge for it
Along the same lines as the previous model, you can build a more specialised app and charge every time someone downloads it. What kind of apps would users pay for? Here are some apps that users pay up to 1,000 dollars to download.
5. A scalable business model
Finally, there is the most widely used business model, and probably the most profitable in the long run. It consists of building an internet company that offers products or services and where the business can scale. In other words, you will have repeat customers, you can win new customers, and you can expand your business idea all over the world. A clothing store, an innovative product or dozens of products for sale. This group includes companies such as Amazon, eBay and hundreds of online stores selling all kinds of products. (See: 10 internet business ideas that work in other countries.)
See also: The future of making money from private lessons online lies with Google Helpouts
Once you know what kind of business you want to build based on these possible models, the big question arrives: how much do you need to be profitable? (Read: How much a business needs to grow each year to be profitable.)
Once you accept that your company is not going to be bought by Google, do not fool yourself into thinking you do not need to be profitable just because other entrepreneurs sold their companies without making money. Groupon and Twitter, to name two, have not yet managed to become profitable companies, and it is easy to think you will end up listed on the stock market even if you lose money every year. But as the Mashable experts rightly say, if you start your own startup, the only way to survive in the long run is to pursue profitability.
Advice from the experts
We have said several times that when you start your own business, whatever you put in your business plan, the estimated costs end up multiplying, the expected revenue falls, and the time it was going to take to get up and running ends up longer than planned. Count on it, and that way you will not have to abandon your business idea halfway.
Get your product to market as soon as possible
The product must quickly reach the hands of real consumers. You can keep improving it over time, but it will be hard to keep the company alive if you do not reach your customers early as well.
An entrepreneur who created a payment solutions product says his product was “crap” when it went to market. Later they added new features and functions, but the key to their success was getting to market quickly, even though the product was not as good as it eventually became. That way, the customers themselves also suggested ways to improve it.
This entrepreneur says he has seen many companies with very good products, with far more functionality and features than their competitors’. But they failed because the competition got to market first.
Example: I am sure many entrepreneurs today could build a much better social network than Facebook, more complete, with more privacy and many more features, but they could not compete with Facebook. In fact, not even Google+ is overshadowing Facebook, despite Google’s strong interest.
On the internet, the best does not always win. Often the first one wins, and then becomes the best.
Human capital
The mistake most tech entrepreneurs make is that, if they are programming geniuses, they look for another programming genius and all kinds of people with the same skills. It is a big mistake, and one you learn over time, when you realise you need to diversify knowledge and abilities. If you are a programming genius, perhaps you should hire someone who has no idea about programming but is good at sales or finance.
There are no successful teams unless they are diversified. You need a goalkeeper, defenders and forwards if you want to win a football match. Having 11 good forwards is no use.
The tough decisions
There comes a point in a company’s life where many entrepreneurs fall because they do not know how to make the leap to growth. The jump from small to large company is the one that causes the most failures, since some companies choose to seek more outside capital instead of using internal capital, or vice versa. Sometimes you have to choose which type of financing would be most suitable, when to ask for more capital, or whether it would be better to expand by other means or create some kind of synergy with other companies.
Another tough decision is knowing where to invest and where to cut costs. Creating a successful business model is a series of decisions, but there are even more decisions to make in order to keep it sustainable over time.
Further reading
Featured image: Michael Rivera, CC0 1.0, via Wikimedia Commons.
