How can startups quickly get to millions in monthly revenue?

The ’05/’06 vintage of web 2.0 startups took advantage of much lower development costs and faster iteration cycles to build compelling products and sizeable user bases without thinking too much about monetization right away. For companies like Youtube and Facebook, this approach worked incredibly well and led to very fast value creation, often in advance of revenue growth.

One of the hallmarks of some of the current generation of “hot companies” is an early focus on business model and revenue generation. This is a cross genre phenomona, including social gaming companies like Zynga, Playfish and Playdom (a Lightspeed portfolio company), flash sales companies like Gilt, Ruelala and HauteLook, local deals sites like Groupon and Living Social, and subscription businesses like LifeLock or Zoosk. All of these companies have seen revenues grow into the millions per month within 12-18 months of launch, which is a pace that has not been seen from previous generations of internet startups.

The success of Zynga, Playfish and Playdom has been well documented. Zynga is doing 10s of millions in monthly revenue, and Playfish and Playdom in the single digit millions per month, all within 24ish months of launch.

In the Flash Sales category, last July Business Insider said of Gilt:

Yesterday, we reported the impressive success of Gilt Groupe, a two-year old ecommerce company that expects to generate about $150 million in revenue this year…

First, growing from $0 to $150 million in revenue in two years is pretty fracking impressive, no matter how you look at it.  That’s way faster than Amazon grew in its first two years, for example.  (Yes, the Internet is much bigger now).

The fact that Gilt’s US business is reportedly cash-flow positive is also very impressive.  It’s one thing to generate a lot of revenue.  It’s another to generate a lot of revenue with enough margin to put the company in the black, which Gilt has reportedly done in the U.S.

Part of the company’s cash-flow generation is the magic of the online sales cash cycle: When you sell online, you often collect cash for your product sales long before you have to pay the vendor you bought the products from.  Amazon benefitted heavily from this dynamic in its early days, and was cash-flow positive long before it started to generate net income.  But part of the cash-flow success is also the power of the business model.

Gilt thinks it can get to $500 million in revenue next year, which seems plausible.  The company is expanding both horizontally into other product categories (it started with fashion, and is now moving into kids, travel, etc.) and other geographies (it already has 20 employees in Japan).

The Economist reported in September that RueLaLa wasn’t far behind:

Ben Fischman, the boss of Rue La La, which started in 2008 and expects to have revenues this year of around $130m, thinks the “theatrical environment” of his site keeps customers hooked. He says retailers became complacent during the boom years and failed to make the most of new technology.

Groupon is on a similar growth path. Since they put  the number of sales and price of each day’s groupon on their website, it is relatively simple to estimate their revenue by adding the implied daily revenue across each of their cities. They went from around $100K in revenue in January 2009 to around $10M in revenue in January 2010 – a 100X increase in just twelve months.

Atul Bagga, Internet Equity Analyst at ThinkEquity, recently published a report based on an interview with the CEO of Zoosk where he notes:

Zoosk is a multi-channel global online dating service with presence on major social networks, online, mobile Web, iPhone application, and desktop client with 50 million registered users/14 million monthly unique users, a $2.5 million monthly revenue run-rate (as of October 2009) and a 20% month/month revenue growth. The company expects its revenue to be more than $200 million by 2011.

Of course, not all the current “hot” companies have taken this approach. Some, like Twitter or FourSquare, have seen enormous growth in usage that has outpaced their revenue growth.

But the categories I outlined earlier are all taking advantage of one of Lightspeeds consumer internet predictions for 2010,  that direct direct response advertising is getting more efficient. A bad time to sell ads is a good time to buy ads. All these companies are taking advantage of relatively low customer acquisition costs.

If you understand your customer lifetime value, and you can acquired customers for 20-30% of the lifetime value, you are going to make money. Understanding lifetime value is hard for media companies, but it’s easier for gaming companies, ecommerce companies and subscription businesses. They have predictable customer behavior cohorts that can be extrapolated from a few months of data from a representative sample.  Running an aggressive positive arbitrage while online media is cheap has allowed all of these companies to grow revenue very fast once they get the micro-economics right.

I get really excited about these types of companies. If you’ve got microeconomics that work like this, email me!