jump to navigation

How can startups quickly get to millions in monthly revenue? April 8, 2010

Posted by jeremyliew in Ecommerce, gaming, local, subscription.
trackback

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!

Comments»

1. Tweets that mention How can startups quickly get to millions in monthly revenue? « Lightspeed Venture Partners Blog -- Topsy.com - April 8, 2010

[…] This post was mentioned on Twitter by Charles Hudson, Sachin Rekhi, jeremy liew, Dan Stuart, iPhone Wonder and others. iPhone Wonder said: How can startups quickly get to millions in monthly revenue …: Zoosk is a multi-channel global online dating ser… http://bit.ly/bLnpRV […]

2. MoeJoe - April 9, 2010

If P.T. Barnum were alive today, then he would be an internet billionare.

3. Jay Gould - April 11, 2010

Jeremy, can you list more companies in this category that have scaled their revenue’s this fast?

jeremyliew - April 12, 2010

Crowdstar. Cash4Gold. Shoedazzle. Would love to hear about others from readers

Jay Gould - April 12, 2010

What about TheLadders or SecondLife?

4. Trip Foster - April 13, 2010

Both the efficacy and reliability of performance marketing (online direct response where you pay only for results) has improved dramatically recently. There are several firms in the space that are working hard to make sure both advertisers and publishers are compliant with their online activities so the consumer is not taken advantage of.
Couple this less risky proposition with a VERY attractive pricing model and you see the results you referenced above. Online media pricing in the future will likely all be performance based…impressions will eventually be a brand building benefit of a well executed direct response campaign.

5. Daniel - April 13, 2010

as of Shoedazzle, I like the business model, but I dont like the fact that I “cannot” click in BBB logo

6. What’s the Secret Success of Groupon? - April 21, 2010

[…] to Jeremy Liew from Lightspeed Venture Partners, Groupon went from around US$100,000 in revenue in Jan 2009 to […]

7. Why Lightspeed invested in ShoeDazzle « Lightspeed Venture Partners Blog - April 28, 2010

[…] is one of the companies that I was thinking of when I wrote about startups that can quickly get to millions in monthly revenue: … are all taking advantage of one of Lightspeeds consumer internet predictions for 2010, […]

8. Why Lightspeed invested in Living Social « Lightspeed Venture Partners Blog - April 29, 2010

[…] like a chore, crossing things off of a list. Some of the newer commerce models, the ones that are quickly growing to millions in monthly revenue, help users discover great deals and great items that they were not explicitly looking for. By […]

9. feboo - May 26, 2010

Just wanted to give you a shout from the valley of the sun, great information. Much appreciated. 12:16

10. Dennis Lawson - June 10, 2010

Start-ups are like kittens; everybody wants one. But I think an area that’s under-examined are companies that have a few years’ experience and growth under their belts, and where we can see market growth potential.

One of the areas I’m looking at is companies manufacturing 3D equipment, since growth in that category is bound to be exponential. Another one I’m beginning to get interested in is neuromarketing. What I’m seeing is that some major multi-nationals are adopting this. Can’t be too long before one of the suppliers is taken public.

11. How can you improve LTV and CAC? « Lightspeed Venture Partners Blog - June 15, 2010

[…] improve LTV and CAC? June 15, 2010 Posted by jeremyliew in CAC, ltv. trackback A lot of the startups that have quickly reached millions in monthly revenue rely on the arbitrage of being able to acquire customers through paid marketing for less than the […]

12. Isas - August 25, 2010

Great Post, I’ll be definitely coming back to your site. Keep the nice work up.

13. Groupon – The Undisputed Daily Deal Champ? | DJAVAHERI - October 19, 2010

[…] In the last year, you would be hard pressed to find anyone who has not heard about Groupon, the online coupon site. Daily deals are increasingly becoming more main stream and Groupon is the leader in this market. According to Jeremy Liew, Groupon’s revenue grew from $100,000 in January 2009 to $10 Million in January 2010. […]

14. Why Lightspeed invested in Bonobos « Lightspeed Venture Partners Blog - December 16, 2010

[…] Value. As I’ve mentioned before, companies who understand these customer level economics can quickly reach millions in monthly revenue as they can confidently spend on marketing to grow their customer base. Our investment into Bonobos […]

15. Why Lightspeed Invested in Bonobos - business-newz.info - December 16, 2010

[…] Value. As I’ve mentioned before, companies who understand these customer level economics can quickly reach millions in monthly revenue as they can confidently spend on marketing to grow their customer base. Our investment into Bonobos […]

16. SocialNexus Social Media Consulting » Building a Social Site – A Look at Groupon - January 28, 2011

[…] in almost every international market and is still growing at an exponential rate. According to Lightspeed Venture Partners, Groupon went from $100k in revenue in January 2009 to $10M in January […]


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: