With tens of thousands of new start-ups being created every year, the potential of a company to truly scale and become a large, stand-alone business is more crucial than ever before. A great product is always the foundation but a clear distribution strategy becomes essential to cut through the noise. So most early-stage VCs have started to evaluate investment opportunities with an imaginary benchmark in mind: can this company become a $100 million opportunity?
Generally speaking, there are two ways (and only two ways) to scale a business to hit that $100 million threshold:
1. Your business has a high Life Time Value (LTV) per user, giving you the freedom to spend a significant amount of money in customer acquisition. High LTV can usually be found in transactional or subscription businesses.
2. Your business has a high viral co-efficient (or perhaps even a network effect) that lets you amass users cheaply without worrying too much about the monetization per user or spending money on paid acquisition.
Unfortunately, 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. That unfortunate combination makes it rather difficult to reach the $100M 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. 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.
To build a standalone company and capture the attention of investors, you need a viable way to scale your business. 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, it’s important to begin thinking about paths to reach this threshold from the start.