Entrepreneurs Should Go For The Quick Buck

John Greathouse is a partner at Rincon Venture Partners, a venture capital firm investing in early stage web-based businesses.

Similar dilemma

Many entrepreneurs encounter a similar dilemma. They often identify expeditious ways to make money in the early days of their adVentures, which allow them to reduce the amount of capital they must raise from outside investors. Unfortunately, such at first alluring business models can ultimately result in their ruin. In doing so, entrepreneurs must decide when to stop listening to the Sirens' song of a quick buck and position their company to take advantage of long-term, sustainable business models.

WebEx's management was understandably hesitant to modify their pricing because the company's shares were publically traded at that time we launched GoToMeeting. They knew that price restructuring would significantly impair their gross earnings as then as their net income, which would dramatically impact their stock price. They were effectively hooked on the bad profits which were seductive when they at first launched their service. Although WebEx in the end modified its pricing, it was too late. GoToMeeting took advantage of WebEx's inhospitable pricing and emerged as the ubiquitous online meeting solution.

Campus Explorer earns most of its revenue through lead-generation.  When they launched the Company, the lead generation market was based nearly exclusively on arbitrage. Companies purchased keywords, placed ads and sent emails in an attempt to entice users to complete a lead form. They at that time sold the leads for more than it cost to generate them. For several years, this was a lucrative business model - the sirens were singing loudly and many companies answered their call. The founders knew that such profits were fleeting, as market efficiencies in the end eliminate such "buy low / sell high" opportunities.

Cloud computing pioneer RightScale is a prime example of a company which utilized a consultative go-to-market strategy as a means of funding its initial operations. In order to create a SaaS platform which acts as the "last mile" to public clouds, RightScale began operations by providing consulting services to companies who wanted to access Amazon's EC3 services.

However, the Founders understood the inherent limitations of a services business. The size and scope of law firms, medical practices and consulting firms are all constrained by the number of employees they can hire and keep gainfully billing hours. Though such service businesses can be highly profitably from the start, they are difficult to scale, hence they are often referred to by the derisive term "body shop." You can only increase revenue by hiring more employees, but each time you hire a "body" you incur a step cost earlier you invoice a client for a single billable hour. 

Seed Investor

As a Seed Investor and addVisor, I witnessed firsthand how RightScale's Founders avoided the structural limitations of a body-shop business. The company artfully repurposed the tools, dashboards and scripts which it delivered to its initial consulting customers and created a SaaS solution. Management wisely retained the intellectual property associated with these "works for hire," which they in the long run combined to form the foundation of RightScale's initial Minimally Viable Product.

As with many emerging markets, the Facebook advertising ecosystem is relatively inefficient. Similar to the state of the lead generation market at Campus Explorer's outset, these inefficiencies have spawned profitable arbitrage opportunities. In spite of the compelling reality of these quick-buck opportunities, Clark and his Co-founder James Borow are evolving their business into a SaaS offering. In this way, GraphEffect has largely foregone nearly-term arbitrage revenue in order to focus on building a software platform that can be effectively used by third parties to optimize their social media ad expenditures.  This latter approach affords greater predictability and scalability during creating more enduring long-term value.