Why are most startup Entrepreneurs out of sync with reality?
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Most entrepreneurs are optimistic, and almost everybody who starts a business dreams of building that billion dollar company. Unfortunately, most of these dreams are castles in the air. The first thing any business owner needs to look at are the numbers on the ground.
It is not uncommon to hear conversations where entrepreneurs are talking about a product or an app that they’ve built which could be a great acquisition play for Facebook or Google. A senior gentleman aged about 50 years was recently heard discussing with a friend at a café, “If I don’t eventually sell this product to Facebook for at least $1 billion, I’d be very upset.”
On further investigation, I realized that he’d spent about $25,000 on building the product, had another $50,000 in marketing money (that was yet to come), and he didn’t really have any other marketing plan in place. He was looking at an exit within 24 months. Now, if we start working backwards, valuations depend on a few factors:
- Number of users
- Number of unique visitors
- Revenues and Earnings (Both present and perceived future earnings)
- Strategic fit with the acquirers business
Now, let’s take a look at some of the billion dollar acquisitions in the last five years, and the number of users they had when the acquisition happened.
- Whatsapp bought for $19 billion had 450 million users
- Skype $8.56 billion, acquired by Microsoft, eight million paying users
- Tumblr $1.1 billion, 173.4 million blogs
- Instagram $1 billion, 30 million iOS users
By analyzing the above numbers, we could infer that a product needs at least 30 million users before it can get snapped up for a billion dollars by one of the big guys. To reach this number, the product needs to catch traction in the market which is not always in the entrepreneur’s control, he can only hope to make the product visible, and expect it to gain acceptance in the market.
Another number to look at is the cost of acquiring a customer, if the industry average is $50 a customer and entrepreneur is looking at acquiring a user for $5, he should have a marketing strategy to outsmart the industry average.
The cost of acquisition can vary depending on the product. After initial tests, businesses can get a fair idea about the acquisition cost per user.
If my friend at the café wants to sell his product to Facebook for $1 billion, at an acquisition cost of $5 per user, he’ll need at least $150 million to acquire 30 million users. He’ll have to start networking and raising capital sooner or later before he sets up that meeting with Zuckerburg.
A dream has to always be backed up by a solid plan, strong work ethics and an understanding of the dynamics that drive business.
My suggestions in this article is an oversimplified model, it’s only a start to encourage newbies to start digging deeper. Although, most ideas don’t go on to become billion dollar plays, they do have the potential to provide life changing learning experiences.