Don’t copy the high profile speculators when building your business.
The problem with speculation is that you never know what the endgame will be. Will you make money if you invest in an early stage business idea? Or not? Some are clearly appealing and it is easy to buy into a “high concept” business idea if there is a good story behind it. It is a bit like being pitched a film script: here goes – “I have this great idea for a movie- Danny De Vito and Arnold Schwarzenegger are Twins. What do you think?” Some people would have said it was a mad idea but in this case, it worked out pretty well. John Travolta, making Scientology-driven Battlefield Earth, probably seemed a good idea too, at the time. (If you don’t know, it is considered by many to be one the worst films ever made.)
A few months ago I listened to the (apparently) prematurely measured reasoning of 23-year-old Evan Spiegel, the CEO of Snapchat. If you don’t already use it yourself, Snapchat is a photo messaging app where the photo, or video, will disappear within 1 to 10 secs of being viewed, from both the receiving device and Snapchat’s servers. (As I write this I think Evan may be wishing that he had also developed “Snapmail”, after last week’s embarrassing email revelations from his college days.) The reason I mention him here is that he said something along the lines of “in Silicon Valley, we put ubiquity before profit”. Wonderful, eh? I almost need to repeat it to myself – Ubiquity Before Profit.
This notion, let’s call it UBP, underlines a lot of high-concept investment thinking these days. In part, that is because the promoters of this thinking tend to be “early money” and they are well protected early in the lifecycle of a business like Snapchat, when its UBP apology for a lack of profit draws in later rounds of funding, and probably an IPO too, before making any, or much, profit. Whilst achieving ubiquity must surely create opportunities to make money, even if the original concept stalls a little, it is, for me at least, far from a certainty. I got to thinking about this as I read about the musical chairs in the Twitter boardroom these days. Several of the “old guard” have moved back from the front line leaving the CEO struggling to (hopefully) manage a transition to another phase of user growth. Its current sluggish progress towards the user base target that justified its flattering IPO valuation leaves room for doubt that it will ever make much of a profit. Twitter currently has 255M users (cf Facebook’s 1.3Bn) and the user base is “only” growing at 6% per quarter which is less than was anticipated prior to IPO.
If you are placing a bet on a future revenue stream you really do need to remember that the future is uncertain and you need to pay particularly close attention when the business exhibits signs of distress, as we see in Twitter Inc right now. Although a somewhat risky strategy, you can make a lot of money by betting on high concept businesses, which have no real hope of making any real money in the end, as long as you have an instinct for the right time to get out. Without some magical rethinking of its proposition Twitter may well see a lot of its current investors deserting it pretty soon to put their cash into a more boring business, one that leverages a proven business model and makes more predictable returns. This idea, that it is OK to invest a lot of money into a business before seeing a decent return, is in part a speculator’s trick, to entice naïve money into the high concept world of speculative investment, but it is also making people think that this is what you need to do to grow your business; give stuff away until you have proven your worth. For most of us, this really isn’t so, in fact, you need to do the complete opposite, to prove your business model at its smallest possible scale, and by that I mean it needs to make a profit before you get too carried away with being ubiquitous. For most of us, it should be profit before ubiquity every time.