Business Model Success is a Terrible Teacher

I recently heard a theory about the current tech landscape that piqued my interest: we are currently in a lull of tech company creation, especially when compared to the first decade of this century. Although I am not 100% convinced this is the case, it does bring up a decent observation - there seem to be less companies with absurdly explosive growth being started today than there were in the recent past. While this is probably just a case of recency bias, one of the supporting arguments for this theory did stand out to me: companies who were successful during the mid-2000’s (google, facebook, etc.) did so using a very specific model. As the theory goes, are trying to achieve those same levels of success try to mimic the business model of those who came before them- most of which are very adtech intensive and ad-revenue driven.

While I am a pretty big fan of adtech in general and I am bullish on the industry as a whole, I do think this raises a decent point. Just because something worked for Facebook, doesn’t mean it is going to work for the next social media platform, and, maybe more importantly, it does not mean it is the only possible business model. Something that every founder and startup needs to keep in mind is that business model differentiation is one of the main keys to some of the greatest success stories in venture capital history. Also, as the trope goes, failure is truly one of the best teachers, whereas what makes one startup successful might not work for another company.

One company that is experiencing pretty incredible growth while forgoing the grow-at-all-costs model is Calm.com. Calm is probably one of 2018’s bigger success stories as far as venture capital fundraising is concerned. The Company raised over $25 million in 2018 at an approximate valuation of $250 million. This Series A financing came after a modest total of $1.5 million in financing to date. The most recent estimates have Calm’s annual revenue to be ~$60 million. The Company was founded in 2012 and is clearly experiencing explosive growth - so what’s so remarkable here? The way that Calm makes money is through consumer-based subscriptions. You can use the app for free at any time, but in order to get access to the full library of content and the full experience, a consumer has to pay an annual fee of $60 (there are various pricing structures, but this is the most common). The other thing to take note of here is that Calm.com is not necessarily solving a “hair on fire” problem - it started as a guided meditation app and has grown into a full-fledged wellness-focused media company.

You could argue that consumers have a predisposition for paying for wellness services (gym memberships, psychiatrists, etc.), but I don’t think anyone would have told you in 2012 that people would be paying for this service to meditate instead of just finding a free solution on YouTube (or some other corner of the internet). But there is a level of professionalism and trust that is implied when you are paying for a service. Calm.com has vetted the meditation and has no one to answer to but you, their consumer, unlike ad-enabled platforms that have advertisers to think about at all times. Paying for the service means customers are truly bought-in to the product and are likely much stickier.

There are plenty of other business models that current upstarts are taking advantage of that fly in the face of traditional ad-driven growth. Epic Games, the maker of Fortnite, probably the most important video game in the past decade, has experienced explosive growth and its main source of income is not ad revenue or even game purchase, but in-game spending. Players purchase skins and other virtual accessories (none of which actually make you a better player). In a study of 1,000 Fortnite players, nearly 69% made in-game purchases, averaging $84.67 each. The company made $3 billion in profit in 2018. While they did give their product away for free, they didn’t do it on the backs of advertising - they found a unique business model (albeit one moderately in-use in the gaming community before this). I am not saying everyone should try and be the next Epic games (because who knew that Fortnite would be so popular) but even a media company is not relying on advertisements. Their real success is based on their innovative business model.

Epic and Calm are not the only companies that are utilizing creative, innovative business models to unlock growth and profitability. But they are prominent examples of successful startups that could have gone down the Facebook path and not turned out as well. Maybe part of the problem is just that not enough people know about the successes of non-ad-driven startups, which some would argue is because of the decline in the size of the public market and a lack of meaningful tech IPO’s. While that may be a dubious claim to make, there is truth to the notion that companies don’t go public at the rate that they used to. And without the public information available in a SEC filing, it is hard to tell what business model is working and which ones aren’t . Also, much of the tech industry focuses on FAANG (Facebook, Amazon, Apple, Netflix, and Good), three of which are media companies. The slightly unhealthy obsession with this crowd may lead many to think that the only way to achieve success is to follow the FAANG methods.

So what does all of this mean? It’s impossible to know in the moment, but I think it means that we need to be fostering and encouraging companies that are utilizing innovative, interesting, and unique business models. The “grow to 1 billion users and achieve scale and then sell” method is probably not as likely anymore in this marketplace. If you are an entrepreneur reading this, blaze your own trail. If you are an investor, look for the next big thing, not the next same thing. And if you are somewhere in between, be creative and build a better business.