Why You Should Ignore the Success of Facebook and Uber
Some entrepreneurs try to replicate the magic of today's blockbuster companies. They shouldn't: Those companies are built on an extremely shaky business model, or no model at all.
This article is included in Entrepreneur Voices on Growth Hacking, a new book containing insights from more than 20 contributors, entrepreneurs, and thought leaders.
Your chances of winning the Powerball grand prize are about 1 in 292 million. So, while that happy event is certainly not impossible, you probably wouldn’t want to stake a business idea on those kinds of odds.
Those odds, by the way, are not that different from the probability of a college student’s yearbook-themed website attracting more than 1 billion users and surging to a valuation of about $350 billion.
Still, the underlying challenge that Mark Zuckerberg faced and so many wannebees after him still face hasn't stopped countless would-be entrepreneurs from attempting to re-create the meteoric success of the Facebooks and Ubers of the world. It’s easy to see why, with Facebook raking in about $9.1 billion in advertising revenue during the first three quarters of 2016 alone. That’s more than media stalwarts such as CBS, Disney and Comcast.
It’s great to see young entrepreneurs inspired to seize success, but some of them are trying to replicate the magic of blockbuster companies that launched without working business models, instead, offering a free service before miraculously pivoting to profitability after gathering millions of users.
But maybe these young entrepreneurs should scale back their idealization of Facebook, Uber and Snapchat, because those companies are the exception, not the rule.
And they set a risky precedent: While traditional businesses, in the past, aimed for small-scale profitability before attempting to scale up, modern businesses seem designed solely to scale and to not turn a profit until they've reached some absurb threshold. And that means they can employ people for only a few months or years before having to close because they've run out of seed money and failed to reach unrealistic growth goals.
At that point, they'll disappear silently into the night.
Related: Underdogs Can’t Win Being Copycats
But before that happens, they present eerie similarities to the dot-com boom -- and crash. People at the time talked about the dot-com bubble just like they do about these modern startups: They make fantastic promises, but no profits.
The only difference is that today's situation is of much greater magnitude.
Making money without charging a thing?
Numerous young professionals have been led astray by the incredible success of companies such as Facebook, Snapchat and Instagram. They see how seemingly simple it was for these ventures to build critical mass and cash in, neglecting the countless copycats who fell flat on their faces.
But entrepreneurs still determined to emulate Facebook et al. -- by building critical mass and cashing in -- should check out an ongoing study by analytics firm CB Insights. Its researchers compile startup failure postmortem insights from founders and investors. An example? Political startup Poliana, which offered CB Insights the following nugget of wisdom: “The sad truth is that it’s very hard to make money on something that deserves to be free.”
Society largely considers the big-name internet companies to be successful, when the truth is that few are actually making any money -- Twitter, for one, has struggled to capitalize on its massive audience for years. Just because a company is well-known doesn’t mean it has a sound business model.
So, rather than mimic these rare and highly publicized success stories, would-be entrepreneurs should focus instead on established practices and prudent entrepreneurship to build their businesses. Here are a few steps to get started:
1. Find a market before you create anything.
Entrepreneurs sometimes get so excited about their idea that they create a product without considering customers. They might have mountains of market research, but it often focuses only on the size of their market and potential competitors.
When I lecture at Oklahoma State University, I stress the importance of finding a product-market fit. This fit can be determined only by first identifying what customers believe and how they behave. Entrepreneurs must offer them something they value on their own terms.
Will Caldwell, co-founder and CEO of mobile app developer Dizzle, is someone I mention in this context. Caldwell iterated several unsuccessful versions of the company’s product before finally changing his approach.
When he finally focused less on offering "bells and whistles" and more on providing value to his market, things finally clicked. Customers were able to explain the product to him instead of the other way around, which helped him realize he had nailed his product-market fit.
2. Involve customers in product development.
When trying to determine a strong product-market fit, be sure to involve customers from day one.
By involving customers in product development, you can target your product to a customer "persona" with a proven interest, high "problem awareness" and a willingness to pay. Research shows that customer participation in new product development has a positive effect on innovation, speed to market and financial performance.
So, when you choose a customer profile, make sure it offers profitability to your startup at a comparatively small volume. This will allow your business to scale by either expanding into other products for this same customer or by shifting the product to appeal to still other customers. Just don’t try to do both at once.
I touch on this advice extensively in a course I teach on entrepreneurial thinking and behavior. I have my students conduct interviews with potential customers. And while they initially hate the experience, many say it becomes rather eye-opening over time. The students go through plenty of frustration during the learning process, and they often need to pivot in the face of empirical evidence contradicting their previous beliefs.
3. Be as hands-on as possible.
Entrepreneurship is the opposite of secrecy and armchair philosophizing. To maximize your chances of profitability and impact, be hands-on with your product and customers to learn what they value. Nail down the problems they see and the solutions they might consider, to help you develop and launch a profitable product.
The origin of Swiffer provides an illustrative example. As the story goes, Procter & Gamble leaders were looking for ways to increase the company’s mop sales. And, as part of this research, they had design consultants visit with people in their homes to figure out ways to encourage customers to use mops more frequently.
During one of these meetings, a customer spilled coffee grounds on the floor. Instead of reaching for a mop, the elderly man picked up a damp paper towel to clean things up. When the consultants asked him why he didn’t use a mop instead, he said the small pile of grounds wasn’t worth the hassle of lugging out a mop and bucket.
This lone exchange served as the impetus for the concept of a “damp paper towel with a handle” -- and an evolution of the standard mop.
Go your own way.
Gambling on a startup venture is always a risky proposition: Some estimates suggest 90 percent end in failure. But the odds are definitely not in your favor if you try to mimic the rare rise of companies like Facebook or Uber.
Instead, employ the truly smart tactics likely to safeguard your startup. They include: carefully studying your market, involving customers early in the process and getting out of your office, incubator space or garage to interact with your audience one-on-one.
Entrepreneur Leadership Network Contributor