How to Build A Billion Dollar Company (A critique)

A recent post called The Surest way to build a billion dollar company by James Slavet tries to look at data from the past to explain a plan for how to be a billion dollar company (And thankfully he never uses the i-word once). If you like his premise it’s a well written article with insights into how companies have achieved this in history:

The first observation in looking at billion-dollar consumer Internet companies is that there aren’t a lot of them. We’re approaching the twenty-year mark of the commercial Internet. Amazon and Yahoo were both founded in 1994. Yet from a recent scan of the public markets, there are currently only twenty-four publicly held U.S. based Internet companies that are worth $1 billion or more. That’s about one company per year for the past twenty years…

A full two-thirds of the 24 publicly traded U.S. Internet companies worth more than $1 billion are digital transaction firms. The billion-dollar club includes a heavy dose of travel, local and real estate businesses. The list includes Priceline, Expedia, TripAdvisor, HomeAwayGroupon, OpenTable, Yelp and Zillow. Other transaction-focused businesses that clear the threshold include AmazonEbay, Netflix, Vistaprint, Shutterfly, Ancestry, Bankrate and IAC/Match.com.

But there are fallacies lurking in the premise.

  1. The surest way is not very sure. It’s very unlikely any company grows this large, even successful ones that are well run. Most new companies fail and even successful ones likely see normal levels of growth year to year.  Even if Slavet’s advice is sound and followed, it doesn’t improve the likelihood much. It’s not as if we’re talking about the surest way to get a job, or the surest way to tie your shoes. Of course even a 1% improvement in odds is worthy if the stakes are high.
  2. History is an unreliable predictor of the future. He accurately points out that most of the billion dollar companies of the last decade are transaction companies, suggesting that’s the domain with the best odds of becoming a billion dollar company. That may have been true in 1996, but it’s possible the abundance of these types of companies makes it a mature playing field, moving the domain of opportunity elsewhere, somewhere harder to predict. The next few billion dollar companies may look little like the last ones.
  3. Most factors are beyond your control.  The reasons why each of the companies mentioned (Google, Yahoo, Amazon) succeeded had much to do with forces those entrepreneurs didn’t control such as: how many competitors were there, how proficient were those competitors, how did their market change, which key people were available to join the company (or not), which technologies they depended on improved, etc. Entrepreneurs by nature discount forces they can’t control which helps them take on big risks, but those pivotal forces are also typically discounted in analysis of the past and the present.
  4. Many billion dollar companies don’t start with the specific goal to be worth a billion dollars. I could use someone to check my history here, but I don’t think any of the companies he mentioned set out with an explicit goal to be a particular size or net value. They were all small companies started by people inexperienced with entrepreneurship  who mostly wanted to create a viable business based on their ideas. They had projections of possible growth which their investors likely demanded, but when exactly were those projections made? Before they began or after they had a fledgling, but functioning service? Of course, given #2 and #3, the fact that they did or didn’t do something may have had little bearing on the outcome they experienced.
  5. Bigger risk ventures have higher payoffs but lower success rates (maybe?). I don’t have data to support this claim, but a hypothesis is the factors you need to put in place to go after a billion dollar business, by design, increase the general risk of the venture. For example, buying a popular sandwich shop has very predictable returns, low risk, but modest growth potential. Starting a new web service in a new market has hard to predict returns, high risk, and high growth potential (if the market lasts). You can chart risk vs. reward for different ideas and look for sweet spots.
  6. Potential for scale is the goal.  A better framework for evaluating Amazon, Google, Expedia and others is they are businesses that had high potential for scale. They could create one product in one place and serve the entire planet, assuming the entire planet was interested. It’s very hard to predict exactly how big a market will grow, but you can build a business with plans for scale, and how to grow scale quickly to match a fast growing market. An interesting analysis of billion dollar companies is which ones simply out-scaled or outpaced their competitors, competitors who may have had other advantages over them.

You can read Slavet’s article here: The Surest Way To Build A Billion-Dollar Internet Company | LinkedIn.

8 Responses to “How to Build A Billion Dollar Company (A critique)”

  1. Phil Simon

    Posts titled “The surest way to build a billion dollar company” only serve to annoy me. You could follow every tip, check every box and still not achieve your goal. For reasons like you point out, there’s just no guarantee. That Instagram “formula” can’t’ be replicated. Dumb luck is as big a factor as any.

    Reply
  2. Kim Miller

    There are so many academic difficulties with taking past financial performance to predict anything because our data set has so many hidden biases.

    In this example companies that have been acquired are specifically excluded. I would expect there to be many times more companies acquired by larger companies (or taken private) than those that remain public – it’s a function of their financing.

    That’s even before taking in to consideration the points Scott raises. Foolishness.

    Reply
  3. josh

    I hate post titles like this. You didn’t explain us how to build a billion dollar company at all. This could’ve been written by a 14 year old. Wast of my time.

    Reply
  4. Sean Crawford

    Josh,
    Post title? Hated? Look up “critique” in your dictionary. If you don’t have one—how careless—you might discover one is on your computer.

    For the rest of us:
    Too bad we feel we have to say critique, too bad “criticism” has taken on a negative connotation, for the denotation is neutral. A professor’s criticism of Picasso or Shakespeare is apt to be quite praise-filled.

    Reply
    • Scott

      Sean/Josh: This is partially my fault. The initial title of the post was “How to start…” but I added the (critique) at the end later. Josh must of commented before that change, and Sean you’re seeing the post afterwards.

      Next time I’ll make sure to note in the comments if I’ve modified the title. Apologies.

      Reply
      • Sean Crawford

        Sean says: oops.
        Oh well. Life goes on.

        Meanwhile, as for criticism being neutral: If more people could see it neutrally then they could have “professional boundaries.” I wrote an essay once where I said that when J.Jonah Jameson yells at Peter Parker he is only yelling at Peter’s work, for emphasis. Jameson may think Peter is a fine fellow and a credit to his aunt: the yelling is only at the work.

        Reply
  5. Snorkasaurus

    I wish we could live in a world where people are more interested in working cooperatively with others than generating great personal wealth. If there were a way to quantify the amount of energy people have invested in trying to get rich, I am sure it would add up to something that could cure cancer, feed the hungry, or put shelter over the homeless.

    Reply

Pingbacks

Leave a Reply

* Required