5 ms·

In the brick and mortar world, it's extremely difficult to secure financing, investment, or even revenue if you're more than 50% dependent on an outside entity

by edw519 16y ago

In the brick and mortar world, it's extremely difficult to secure financing, investment, or even revenue if you're more than 50% dependent on an outside entity for your survival. Yet in the digital world, 100% dependency on another entity is becoming more and more common. Sounds like a high wire act without a net. Best to find other distribution outlets before you lose your balance.

tastybites 16y ago
On credit applications our business bank specifically asks if more than 25% of your revenue came from one source in the past calendar year. If you think about it, a typical brick and mortar gets its money from hundreds if not thousands of customers every year (restaurant/cafe, auto mechanic, etc).
- byrneseyeview 16y ago
  Right, but these companies have lots of customers. They just get them from one place. It's like renting a particular location: it's technically true that you could lose your lease, but that's only a risk to your business's long-term viability if your lease is artificially cheap (otherwise, you'll just move to another place on similar terms). And if your location is a particularly good deal, you should take it, even though losing it would suck. Online, the same dynamic applies, but with lower transaction costs.
  - tastybites 16y ago
    lots of customers A customer is not necessarily someone who uses your product or service. That's a user. Think of a venn diagram....
- lallysingh 16y ago
  Your restaurant/cafe may have lots of customers, but they may be coming to you b/c you're across the street from the movies or a mall. If a primary store in the mall closes (or as in my hometown, a stabbing in the mall scares away customers), your business is pretty dead.
  - tastybites 16y ago
    That's why the smart thing to do is open several locations, which is what restaurateurs generally aspire to, for that very reason. Sometimes it backfires, usually it doesn't if the restaurateur knows what they're doing.
- code_duck 16y ago
  You can get revenue from many sources, as in many individual customers, but be dependent upon a single source for your product. The situation of startups who depend upon an external large business like Facebook, Amazon or Twitter is analogous to a car dealership that only sells one kind of car - say, Saturns. If Saturn stops selling to you or goes out of business, you're going to have to make some major changes.
Silhouette 16y ago
To me, that is the surest indicator of a bubble-like market. I think some of the recent valuations for companies with many users but no profit nor any obvious business model are dubious at best. However, I think the valuations for companies that depend exclusively on one framework/inftrastructure base provided by another mega-valued company are downright crazy. Companies like Facebook have come and gone before, and when they go, they often disappear into relative obscurity pretty quickly after losing critical mass. Investing heavily in a company built on that foundation is compounding two very high risk strategies, which doesn't sound very smart to me. But then, I'm not a billionaire VC, so maybe I just don't get it. :-)
- SoftwareMaven 16y ago
  That's probably a bit overstated. Many, many companies are completely dependent on the Microsoft framework or the Oracle/Sun framework, yet there is not an issue with that. The bigger issue is they are dependent on frameworks that are still evolving at very high rates. Rapid changes brings a lot of chaos into the equation, which is dangerous from an investment perspective, but that same chaos can lead to unexpectedly strong results as well.
  - kolektiv 16y ago
    But the difference is they're not dependent on the Microsoft presence. If Microsoft ceased to exist tomorrow (localised meteor strike, let's say), the code running on .NET, Windows, etc. will still work. If Facebook is down, so are you.
    - deleted 16y ago
      [deleted]
    - dougws 16y ago
      That isn't really true. If Microsoft somehow ceased to exist, business would switch away from Windows and products written exclusively for that platform would be toast. The difference is really that for internet/cloud platforms, temporary outages can lead to lost revenue--which everyone developing apps on those platforms hopefully recognizes, especially given Twitter's former reputation for instability.
lallysingh 16y ago
In the brick & mortar world, you have a lot more capital risk up-front. Digitally, your costs are your minimal-viable software product and your computer resources. The latter you can get pretty cheap and elastic.
philwelch 16y ago
There are many companies 70-100% dependent on a single outside entity; defense contractors.

by edw519 16y ago

tastybites 16y ago

On credit applications our business bank specifically asks if more than 25% of your revenue came from one source in the past calendar year. If you think about it, a typical brick and mortar gets its money from hundreds if not thousands of customers every year (restaurant/cafe, auto mechanic, etc).

byrneseyeview 16y ago
Right, but these companies have lots of customers. They just get them from one place. It's like renting a particular location: it's technically true that you could lose your lease, but that's only a risk to your business's long-term viability if your lease is artificially cheap (otherwise, you'll just move to another place on similar terms). And if your location is a particularly good deal, you should take it, even though losing it would suck. Online, the same dynamic applies, but with lower transaction costs.
- tastybites 16y ago
  lots of customers A customer is not necessarily someone who uses your product or service. That's a user. Think of a venn diagram....
lallysingh 16y ago
Your restaurant/cafe may have lots of customers, but they may be coming to you b/c you're across the street from the movies or a mall. If a primary store in the mall closes (or as in my hometown, a stabbing in the mall scares away customers), your business is pretty dead.
- tastybites 16y ago
  That's why the smart thing to do is open several locations, which is what restaurateurs generally aspire to, for that very reason. Sometimes it backfires, usually it doesn't if the restaurateur knows what they're doing.
code_duck 16y ago
You can get revenue from many sources, as in many individual customers, but be dependent upon a single source for your product. The situation of startups who depend upon an external large business like Facebook, Amazon or Twitter is analogous to a car dealership that only sells one kind of car - say, Saturns. If Saturn stops selling to you or goes out of business, you're going to have to make some major changes.

Silhouette 16y ago

To me, that is the surest indicator of a bubble-like market. I think some of the recent valuations for companies with many users but no profit nor any obvious business model are dubious at best. However, I think the valuations for companies that depend exclusively on one framework/inftrastructure base provided by another mega-valued company are downright crazy. Companies like Facebook have come and gone before, and when they go, they often disappear into relative obscurity pretty quickly after losing critical mass. Investing heavily in a company built on that foundation is compounding two very high risk strategies, which doesn't sound very smart to me. But then, I'm not a billionaire VC, so maybe I just don't get it. :-)

SoftwareMaven 16y ago
That's probably a bit overstated. Many, many companies are completely dependent on the Microsoft framework or the Oracle/Sun framework, yet there is not an issue with that. The bigger issue is they are dependent on frameworks that are still evolving at very high rates. Rapid changes brings a lot of chaos into the equation, which is dangerous from an investment perspective, but that same chaos can lead to unexpectedly strong results as well.
- kolektiv 16y ago
  But the difference is they're not dependent on the Microsoft presence. If Microsoft ceased to exist tomorrow (localised meteor strike, let's say), the code running on .NET, Windows, etc. will still work. If Facebook is down, so are you.
  - deleted 16y ago
    [deleted]
  - dougws 16y ago
    That isn't really true. If Microsoft somehow ceased to exist, business would switch away from Windows and products written exclusively for that platform would be toast. The difference is really that for internet/cloud platforms, temporary outages can lead to lost revenue--which everyone developing apps on those platforms hopefully recognizes, especially given Twitter's former reputation for instability.

lallysingh 16y ago

In the brick & mortar world, you have a lot more capital risk up-front. Digitally, your costs are your minimal-viable software product and your computer resources. The latter you can get pretty cheap and elastic.

philwelch 16y ago

There are many companies 70-100% dependent on a single outside entity; defense contractors.