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December 20, 2005

Flip to Revenue

In the context of Don Dodge’s and Dare Obasanjo’s conversation about flipping a web startup to one of the major internet players (Google, Yahoo, Microsoft, AOL), Greg Yardley writes about the “build-to-flip” mentality which seems to be circling these days:

“But if you’re deliberately planning to quit your day job and start a business from scratch, why go with a zero-revenue model that’s going to be sold for $50 million tops when you could pick a business model with the potential to generate some really, really serious cash?

With all the Web 2.0 competition out there, the chances of your built-to-flip start-up selling to Google or Yahoo or Microsoft are slim. Instead, take the time to find a compelling revenue-generating model - run correctly, it’ll require as little or less VC than a built-to-flip one, and the upside is an order of magnitude greater. If you’re going to take the risk that comes with entrepreneurship, don’t ask yourself what you need to do to get sold to the usuals - ask yourself what you need to do to bring in some serious money.”

There is a very legitimate argument that the sole initial focus of a startup should be developing a viable product first. And if a company delivers true value, a revenue (and business) model will subsequently follow. Many of the startups we are currently seeing are consciously following this route, which is understandable.

However, I completely agree with Greg’s assessment that there is danger in completely concentrating on the service (after this initial phase) at the expense of any revenue attention whatsoever. There are certainly some out there with a “build it and get bought” mentality which Greg challenges above. However, my suspicion is that some startups aren’t thinking about revenue not because of this mindset, but rather because of the team’s genuine and relentless passion for the product itself clouding the vision.

Whether in web services, enterprise software, or other technology-enabled service, the trick is to find the right balance between devoting resources to pressing sales/distribution of the product and development of the next rev. It’s certainly not an either/or proposition, and my opinion is that unabashedly ignoring revenue is a high-stakes game. I’m excited when I meet entrepreneurs who want to build a great business, not just a great product.

Of course, if the right acquisition offer comes along in the meantime, by all means, hit the bid. But don’t count on it.

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