I have been in the business for a short while compared to some of the old dogs in the financial technology (fintech) sector, and it may be my greatest strength. I find myself in an interesting position: not totally out of the traditional business world nor totally immersed in the startup world.
Each day I learn new things about startups and sense that starting a business is increasingly becoming a different science, which takes the concepts taught in business books, stretches them to the limit, blends them like an alchemist, and pours out multifaceted principles and best practices which are simply outstanding.
Is starting a business a science? It is certainly becoming one.
Breaking the Startup Model Mold
At Equidam, we believe this science also includes financial modeling and valuation, based on the constant investigation of market trends. There are few exceptions which escape the model of startup science as I envision it. Or so I originally thought!
But how could we define phenomena like Yo (the simple app that sends a “yo” to your friends, and closed $1.5 million in seed funding with a $10 million valuation) or Whatsapp (i.e., Facebook’s acquisition of the mobile-messaging company for about $19 billion and the largest deal ever for a venture-capital-backed startup)?
You read that correctly … people invested $1.5 million in an app that just says ‘Yo’ …and “Facebook didn’t buy the company for its revenue. WhatsApp had only started to monetize its user base. Facebook bought WhatsApp for its 600 million active users.” (Source: Business Insider) According to Re/Code, “Facebook CEO Mark Zuckerberg has said on numerous occasions: Revenue won’t be a priority for WhatsApp for the next few years.” (The rest of the collective business world rolls eyes.)
Exponential Growth, Vague Business Models
I couldn’t figure out what convinced investors to back a venture with sure exponential growth, but vague business models. To make sense of this, I have attempted to define a model where various exceptions are gauged within a certain kind of business model.
Before diving into my analysis, I need to introduce a definition. Product: a product can be a service or an item. It can be in physical, virtual or cyber form. Every product is made at a cost and each is sold at a price.
Keeping this in mind, let’s discuss two ways of starting a business.
The first consists of a product offering and sales; this represents 99% of all the companies started, regardless of location; problem-solution and demand-supply. The second consists of a product offering, period. No price tag, even if the production costs are greater than zero.
The Rise of ‘Startup as a Product’ ™
You may ask yourself, “How could the latter be a business? Isn’t it simply a donation?” Economic theory, thus far, has no model for this kind of market. And the answer may not be what you imagine.
The startup itself is the product. How is the startup the product? The startup represents a new channel for other companies to discover a new, loyal demand for their products.
Whatever is offered via such channel is indirectly blessed by the creators of the startup and, as a consequence, is trusted more. The startup works as a lead generator, an intermediary with valuable connections. It’s the fixer 2.2.
The ‘Startup as a Product’ ™ (SAAP) is specifically offering a service: a vehicle of marketing, a pipeline of leads and brand power to leverage with yours. That’s why VC’s back exponential growth. Get users, treat them well, get in their minds, learn their behavior if able and sell the package. Here you go. Enjoy your SAAP!
This article has been edited and condensed.
Gianluca Valentini is the Co-founder of Equidam, a a cloud technology and financial services company providing tools for SME evaluations; helping both entrepreneurs and professionals gain access to better data analysis tools. Valentini studied Economics and Law at the University of Padova (Italy) and graduated cum laude from the MSc Finance & Investment at the Rotterdam School of Management. His aim is to work on seed capital and early stage transactions by improving capital allocation to innovative ventures. Connect with @Equidamtweets on Twitter.