4 Problems With Facebook’s Business Model That Would Kill Any Other Startup
This article originally appeared on BusinessInsider.com
According to Wikipedia, the odds of being struck by lightning over the course of a lifetime are about 1 in 3,000.
Assuming that lightning strikes are independent events, the chances of getting struck by lightning 7 times in one lifetime are about 1 in about 2.2 trillion trillion (that second trillion is not a typo, the number is really that big). Despite incomprehensibly long odds, this is exactly what happened to a man named Roy Sullivan between the years of 1942 and 1977.
Granted, Sullivan was a Park Ranger in Virginia and spent quite a bit of time outdoors, but my point is that the world is a very big place and highly improbable events happen all the time. The law of large numbers says that with a big enough sample, many highly improbable events are bound to occur, like when a woman won the New Jersey lottery twice in a span of four months (odds are about one in 17 trillion). Or like when a college student coded a web site that now has over 500 million users and is worth upwards of 20 billion dollars. The name of this (former) college student is Mark Zuckerberg and the company is, of course, Facebook.
I am not trying to take away all of the credit from Mark Zuckerberg and his team. Just like Roy Sullivan increased his chances of being hit by lightning because he worked as a Park Ranger, Zuckerberg increased his chances of hitting the entrepreneurial jackpot through his intellectual prowess and unbridled ambition. The law of large numbers definitely deserves its fair share of credit for Facebook’s success, though, and every decade seems to produce a couple of companies with Facebook’s level of success. Even if you reject my premise about the role of chance in Facebook’s success and claim that Mark Zuckerberg’s superhuman business acumen provides a sufficient explanation, the fact remains that Facebook is a rare exception to the general rules of business.
Because of Facebook’s status as one of the shining examples of meteoric business success in the past 10 years, naturally many entrepreneurs will look at Facebook’s business model and company history as an example of what to do. I wish there was a way to put a “Don’t try this at home” disclaimer on their business model just like you see before every episode of the Jackass TV show. Unfortunately Facebook will be used as a retort to criticisms about flimsy business models for many years to come.
But why is Facebook such a bad example to follow, you may ask? There are several aspects of Facebook’s business model and path to success that are not easily replicable and if emulated will most often lead a business straight into the ground.
In the late 1990’s, there was a proliferation of internet businesses built on the notion of “eyeballs.” The idea was that if you build something cool, no business model was necessary. All you needed to do was drive enough people (as measured by page impressions, or eyeballs as they are sometimes known) to your web site and you could make money via advertising.
The problem with companies that have free business models is that they are often indistinguishable from companies with no business model at all, or companies that have a model but just a very bad one. Unfortunately with business models that are built on a free service, it is very difficult to tell that the business model is bad until the company is relatively mature (after all, you can’t use revenue or profitability as a sign of the health of your business) and so failures of this type of business are often of the more spectacular sort.
And because free services usually can’t survive “in the wild” during their early years, they need some other form of sustenance. Thus these services typically give rise to our second deadly sin of entrepreneurship: the need for large amounts of outside funding.
Facebook has raised over $850MM in funding.
Raising money in and of itself is not a bad thing, but statistically it is very unlikely that an entrepreneur will be able to raise VC funding, so creating a business that depends on outside funding usually guarantees that a business will never get off the ground in the first place. Additionally many VCs, like banks, prefer to give money to companies that don’t need it.
Most entrepreneurs will be best off if they create a business that is profitable (or at least generates solid revenue) without outside funding. That way outside funding becomes an option rather than a requirement. There are some industries, such as biotech, where large funding rounds may be necessary. Industries like that are outside of my area of expertise so I cannot comment on them except to say that many businesses can be started with less funding than you might think, if you get creative with your business model.
While no idea is completely new, Facebook was a pretty novel concept, filling a need that most people didn’t even know they had. Every once in a while, an idea comes along that creates a whole new category for productivity and communication. Examples include personal computers, cell phones, instant messaging, and online sites like Facebook or Twitter.
The allure of these revolutionary ideas often tempts entrepreneurs to try to come up with business ideas that have never been tried before. Unfortunately, most ideas have never been tried for a good reason. I advise aspiring entrepreneurs to forsake the temptation of doing something completely new in favor of entering an existing business category and capturing a portion of that market through solid execution and top notch service. Starting and running a successful business is hard enough when there is a proven market for your services. It becomes exponentially more difficult when you are in unknown territory and may very well fail even if your execution is perfect.
This advice applies especially for first-time entrepreneurs. If you are already a multi-millionaire after having sold a previous business, do whatever you want. You’ve earned the right to swing for the fences.
Could Facebook have been successful, or even solvent, if it topped out at 100,000 or even a million users? I don’t think so. Most advertising-based businesses need to reach a certain scale to attract the attention of advertisers. If a content site cannot get sufficient traffic, it is stuck serving low margin ads through content networks like Google AdSense.
Also, user generated content sites such as Facebook or EBay tend to be “winner take all” businesses, since people want to be on the network that everyone else is on. Most entrepreneurs would do well to ignore this example and to start a business that has a safety net, so if the grand vision for the business doesn’t come together, they are still left with a successful small business rather than just a stack of credit card bills.
In summary, Facebook is a great business that provides a very valuable service to its users. Without it, how would I ever keep up with people who I barely talked to during high school and learn about what music they are listening to or what they plan to cook for dinner?
Just like Ray Sullivan, the man who was struck by lightning 7 times in a span of less than 40 years, Facebook’s success is a story that captures our imagination and is a phenomenon at which to marvel. But before you go outside during a thunderstorm and grasp onto a tall metal pole, remember that we hear about these stories because they are remarkably uncommon and if you follow in their footsteps you are likely to get burned.
This article originally appeared on BusinessInsider.com and was written by ShareFile Founder & Chief Executive Officer, Jesse Lipson