Do I Have a Domino Rally Business Model?September 25, 2006
I’ve become a big fan of venture capitalist Josh Kopelman’s blog Redeye VC, although I wish he’d post more frequently. Last week he offered a post titled Domino Rally Business Models that centered around startups that require everything to go exactly right for any chance of success. He used this example of a business model that requires that all the dominoes fall perfectly:
“If we can negotiate a deal with the top 10 publishers on the Internet AND cost-effectively convince millions of users to install a co-branded plugin AND convince advertisers to buy a new form of advertising THEN we have a billion dollar business”
That’s a lot of “ifs” required to reach the final “then”. As a VC, Kopelman wants to see fewer dominoes that must fall, more than one path to big revenue, or solid plans that make domino-toppling more likely.
Kopelman offers a concrete example of the latter when he was building Half.com:
When we started Half.com our two major dominos were (1) can we get sellers to list inventory, and (2) can we get consumers to buy stuff. To offset the risks of the former, we went out and signed contracts with dozens of used book, CD and movie stores to list their inventory — launching with over 1 million items available. To offset the risks of the latter, we launched with partnerships with all the major price-comparison shopping engines, providing us with quick access to millions of price-sensitive consumers. While we didn’t eliminate the risks, we were able to credibly convince our investors that we were able to position the dominoes in the right place.
The obvious question for me is: how many dominoes is Bessed requiring fall into place?
Let’s see. Our challenges are three-fold (maybe more, but these are the biggies):
Create enough content – Because it’s a human-powered search site, can we create enough search result pages to reach critical mass, which means…
Driving Traffic – Getting people to a site is always a challenge, but I think much of number 2 is wrapped up in #1. Creating a lot of content should drive traffic, but there has to be a LOT of content.
Monetizing the traffic – Right now we’re just using Google’s AdSense program, which maybe 500,000 other sites are doing. Adding other ad options could mean higher revenues, but I’m more concerned with traffic and content right now, which is of course what makes Adsense so attractive to me and others. But of course you need people to actually click the ads.
Here’s some numbers for you. If you have 1 million page views per day, but only get $1 CPM ($1 per every thousand page impressions, which can easily happen depending on the content of the pages in question), you end up with only $1,000 per day, $365,000 per year. If your site can get a $10 CPM, you’re talking $10,000 per day, and $3,650,000 per year. That’s still pretty small potatoes unless you’re content with being a small company, and let’s not forget that you need a million page views per day, which isn’t exactly easy.
Using these numbers, what does it take to have a $100 million company? Being generous and using the $10 CPM, which I think a site like Bessed could probably get as we drill down to content that brings higher CPMs (such as financial products, luxury retail, etc.), here’s the equation, drawing from my high school algebra:
($100,000,000/365 days) = $273,972.60 per day
X number of page views / 1000 x $10 CPM = $273,972.60
I can’t remember how to solve for X, but I can do a workaround to tell you that it would be necesary to serve up roughly 27.4 million page views per day to reach $100 million in revenue. Looking at this page, that’s roughly the number of searches that the MSN search engine does each day. Less than Google or Yahoo, but still, you’re talking the big, big leagues.
Now you can of course think a bit smaller. $50 million in revenue only takes about 13.7 million page views each day (which is about what Ask.com does in # of daily searches, according to the site linked to above).
Thinking even smaller, 2.74 million page views per day gets you to $10 million in revenue. Much more doable, but still we’re talking wikipedian proportions, so we’re still talking major traction.
And, of course, to get to those numbers under our current business model means many, many, many pages created by a combination of real human editors and visitor submissions. A tremendous amount of work done by a tremendous number of people, almost all of who do not work for us today and will not work for us tomorrow unless we can get this built on a small scaller scale, show it’s feasible, and then go after investor dollars.
That’s a tall order, with unlikely success. I’m going to do it anyway.