There are Only Two Ways to Build a $100 Million Company, Boris Wertz Says at GROW

Tens of thousands of startups are founded every year. Without real potential to truly scale and become a large, stand-alone business, the vast majority of these companies whither on the vine.

Great products forge strong foundations while effective distribution strategies cut through the noise. When an early stage venture capitalist evaluates an investment opportunity, he often has an imaginary benchmark in mind: can this startup become a $100 million business?

According to award winning Canadian superangel Boris Wertz, who spoke Wednesday at GROW in a brief but knowledge-packed session, there are only two ways to scale a startup to hit the $100 million threshold: your business either has a high life time value per user, or your business has a high viral co-efficient. Let's take a look at these two paths to success.

As Boris puts it, "the exact definition of a 'high' user LTV depends on the specific vertical, so it’s typically better to analyze the ratio between Customer Acquisition Costs (CAC) and the Life Time Value of the customer." In his experience, having an LTV that’s three to four times greater than CAC makes a business (and potential investment) interesting.

"As a VC, the biggest challenge in evaluating LTV models is that metrics can dramatically change at scale," Wertz says. "For example, Customer Acquisition Costs often increase once the more efficient marketing channels are maxed out and the company needs to find new users through less efficient means. In addition, churn tends to rise as a company grows. Early users of a product are often strong advocates and company ambassadors, while those users acquired through paid marketing channels down the road show far less loyalty."

The other way to scale a business is through a strong viral and/or network effects that lets businesses grow to tens of even hundreds of millions of users, the Vancouver-based superangel affirms. "With this model, user acquisition is generally close to free," he explains, "and monetization per user is often low (advertising-based or freemium businesses)."

According to Wertz, many businesses built in the early days of the Facebook platform (like Zynga) benefited from a huge viral co-efficient and scaled very rapidly. Even more interesting are businesses that create network effects like marketplaces or social networks, the investor says: "not only do they acquire lots of users for free due to viral effects but also create important barriers to entry and lock-in effects as the network grows over time."

Unfortunately, as Wertz notes, many consumer internet startups find themselves stuck in the middle of these two strategies. "They have a low monetization per user and limited viral effects," he says. "That unfortunate combination makes it rather difficult to reach the $100 million mark."

As the consumer Internet space becomes more and more crowded, every startup founder needs to be thinking about these two ways to scale a business, Wertz argues. "Too often I have seen entrepreneurs believe that customers will automatically flock to their cool new service, completely underestimating how tough it is to cut through the noise and build an audience."

His concluding advice? "To build a standalone company and capture the attention of investors, you need a viable way to scale your business." Boris says that the earlier you figure this out, the better, since it may require you to build your product differently.

"While the $100 million mark may seem far away in those early days," he concludes, "it’s important to begin thinking about paths to reach this threshold from the start."


Version One Ventures
Vancouver, British Columbia, Canada

Above everything else we invest in entrepreneurs, not businesses. We love passionate entrepreneurs with deep domain knowledge. Entrepreneurs with great product and design instincts. Entrepreneurs who want to change the world but know that in order to do so, they need help. And yes, we love to help, when and where ever we can. Besides the founder team we look for a few more things when... more

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Knowlton Thomas

Knowlton Thomas

Knowlton is the managing editor of Techvibes and author of Tempest Bound. Based in Vancouver, Knowlton has been published in national publications and has also appeared on television and radio. Previously he was an editor for New Westminster weekly The Other Press and served on its board of directors. When not working, Knowlton enjoys hiking, tennis, and martial arts. more

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