And then there were 8 business selection criteria!

A few months ago I wrote about my 9 business selection criteria for evaluating business ideas. After some deliberation, I have decided to relax the selection process. Specifically, as long as the idea has massive mass market appeal, I am now willing to start businesses where the business model may not be clear and understood from the get go.

While relaxing the criteria, makes the project riskier, strict adherence to the philosophy would mean that I would have passed on Google, Facebook and MySpace. Again, this conclusion is highly personal. To some extent I have already succeeded and as a result am willing to take more risks in order to increase the probability of a home run even if it decreases my batting average.

My willingness to take more risk is clearly demonstrated in running OLX and funding Allmydata – the former is in an extremely competitive market with entrenched incumbents, the later is also in a competitive market whose size and viability is yet to be proven – even though both of them, a priori, have clear business models.

A first time entrepreneur may want to keep the selection criteria to increase his probability of success and set the stage for future successes.

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  • Fabrice – I think it’s a great idea to drop number 2 off the list. It was one of the most restrictive. It’s reasonable to assume that a product that you give away free, but have a huge audience for, can somehow be monetized. Eyeballs and users are valuable.

    In the web world, monetization plans are pretty generic: ad-supported, pay-per-view, or subscription plans are the options. You don’t need to figure out the exact scheme right from the get-go. Keep up the good work, Gabor

  • I am not so sure relaxing the selection criteria is a good idea, especially when it comes to the business model (which I felt was almost one of the best criteria you had).
    Yes, your criteria might have resulted in you passing on a prospective Google, but then again you wouldn’t have sunk your time and money into a hundred other more asenine ideas.
    To use a baseball metaphor (which really doesn’t sit well with a european..): do you want to have a high batting average, or strike the ball out of the park once or twice every season?
    The latter might be more spectacular, but the former is bound to have more success.

    As for all the talk about eye-balls and huge audiences.. Am I the only one getting 1999-flashbacks?
    It feels like there might be some “irrational exhuberance” going on..
    Are you sure you are not getting carried away with the general sentiment of the current times, and trying to rationalize it?

  • Wille,

    I definitely agree that things are bubbly right now – valuations are high, everyone is looking at traffic numbers of sites like Youtube and Myspace rather than profitability, and a lot of the web 2.0 companies are features rather than products.

    That said, there is now a valid business model around Internet advertising that allows for the monetization of large audiences (though that does not mean paying crazy valuations for the traffic).

    My desire to hit home runs is more based on the following analysis: hitting a few more singles or doubles (and let’s say making another $20-30 million) does not change my life anymore and does not put me in the position to influence the world for the better on a large scale. One of my few chances of doing that is to hit a home run and make a few billion. Besides, it’s more fun to think big 🙂

  • I appreciate your desire to hit homeruns.
    But does skipping a valid business model really increase the likelihood of doing so?
    A lot of very successful “homeruns” have innovated through business-model innovation, not necessarily a “previously proven” one, but still a business model that was well thought out (ie Priceline of the past bubble).

    I am somewhat sceptical of the “no business model besides eyeball”-businesses, because of the mere rules governing it:
    1. To be a homerun, you must have a truly massive mass-audience (although advertising revenue may be there, it is not massive per eyeball by any stretch of the imagination).
    2. To get a mass-audience, there is an inherent attraction to become more generic and less focused in terms of target audience and functionality.
    3. Less focus means less likelihood of people being attracted in the first place, and furthermore of those people being loyal to you (note the demise of Friendster and many other “social networks”).

    On a side note, obviously no business model is set in stone, we changed ours something like three times in the last startup I was involved in. But it doesn’t hurt to at least have a general idea..

  • I agree that it is more fun to think big. Unfortunately, a newbie out of the box has to struggle harder to get the attention the idea is worth. In the meantime, individuals with more access to capital are biting away at the market, and getting closer to understanding the megamillion possiblity of “your” idea. Needless to say, it is frustrating to see the potential without getting the backing.

  • Helen,

    I agree with you that’s why for the first startup going after an idea that has low capital requirements and a higher probability of success (e.g.; an understood business model from the get go) is a good idea…

    We’ve all been there – struggling to get something off the ground, failing to raise money, staving off bankruptcy in any way possible, realing in credit card debt…

  • The capital needs for me are less than $50K. Most of the work, I’ve done on my own. But when I explain that to individuals who have had a chance to look at the short form and hear my pitch, they begin to ‘nay say’ me with “Nobody is going to look at an investment that low”, at the same time they are telling me it has enormous potential. Very frustrating.
    Nevertheless, I refuse to give up.

  • Helen,

    With an idea with low capital needs (sub 50k) but with good “ramp up” surely finding the right angel investment won’t be so hard if the return is good enough.

    My question would be is this the amount to get you to proitability or merely to get to market? If the latter then increase the amount you are looking for and raise all at once. If the former use Debt instead, its cheaper although with the right angels its about added value.

    Fabrice, do you think that there is a Window of about 6 months to build something that doesn’t have a business model, just because Valuations are good now? My view is that by incorporating a business model (or thinking of more revenue generators in addition to ads) valuations will be a lot better if you fall outside this funding window, which is likely to happen if you are building product now.

  • Sumon,

    There is an interesting window right now where valuations are frothy so I would recommend raising as much money as possible right now.

    You are also correct, understanding your business model will yield a much higher valuation.

  • I would add to #4 that even on a competitive market, a new comer can always outshine a leader if they find a way to do the job better -> e.g. Skype vs. Netmeeting, Google vs. Yahoo hmmmm…or Zingy vs. Moviso? 🙂

  • Fabrice,

    I definitely agree with you on this point. And, I would definitely add YouTube to your list of services you identified (Google, MySpace, Facebook) as lacking an initial business model but generating so much user traction because of its mass market appeal that it is easy to see that a revenue model could be applied later.

    NBC recently signed a deal with YouTube to show certain content on its site (and to allow its users to spread the content virally through widgets on MySpace and Facebook). You’ve even seen how NBC is partnering with YouTube to leverage their fan base – by soliciting viewers of The Office to submit their own promotions of the show in a competition on YouTube.

    I’ve blogged about YouTube and MySpace in a couple of entries:

    http://zenrob.typepad.com/zenrob/2006/05/the_widgets_on_.html

    http://zenrob.typepad.com/zenrob/2006/06/the_new_new_vir.html

    I’m definitely looking forward to seeing what will be the next home run to be hit in this space.