Jason’s main point, with which Fred agrees

Business models!?!?! The business model comes AFTER you get to scale.

As an investor I’m sure (and hope that) Fred wouldn’t agree with this comment out of context. For me, scale is important for some business models but you certainly can’t state that all business models come after scale. That statement alone doesn’t make good business sense to me.

Mind you, it’s pretty easy for Jason to make such statements because he’s managing to get scale for Mahalo based on his personality. There’s no way in the world that Mahalo would get as much attention if it wasn’t for Jason.

Setting aside my opinion about Mahalo, as Jason and I have met twice to discuss possible collaboration. Hopfully we can both give it the thumbs up. In short, Mahalo would read our Content Labels to annotate each search result so users would get more information about the suitability of the content contained on each site. In return, our Firefox extension would have Mahalo as its default search engine. Mahalo wants to enable more relevance in search results. Segala wants to enable more trust based on Content Labels.

More about that another time if we decide to work together or not.

Why I don’t think scale comes before business model (for most)

Take Segala as an case in point.

Body shop, deploying contractors

In 2002, Segala was born as a body shop. This means we supplied contract mobile phone and software test engineers to clients based on project demand.

Building a brand

Still in our first year of trading, the company naturally evolved into a consultancy and later, a managed services provider. This meant we didn’t have to live hand to mouth and worry about the next project coming in. It also meant that clients were placing trust in our brand. Products tested by ‘Segala’ (as opposed to specific contractors) were deemed to be high quality and trusted to work. At our peak we employed 24 consultants and a handful of admin personnel.

In year one, our revenue was £1.6 million and all achieved without pitching for a project, well, with the exception of our very first project. (till date, 100% of our work has come from referral)

Had we decided to continue as a consultancy, we’d easily have an annual revenue somewhere between £10million and £15million today. However, that’s ‘ok’ if you want to run a small business that’s reliant upon it’s people and therefore not scalable.

Placing value in the brand, removing away from ‘people’ dependency

In 2003, we made a strategic decision to evolve the company into a Certificate Authority by productizing our testing services and offering a Certificate and visual Trustmark to Web sites so organisations could demonstrate their commitment and conformance to Web Accessibility standards and legislation. Our clients were already referring to Segala as their Certification Partner, mandating other suppliers to seek certification prior to releasing new mobile products and software applications, so the transition was both natural and managed.

Changing our business model to achieve global scale

In 2006 we decided to change our business model, even though it would have the expected impact of reducing revenue in the short term. We knew that it wouldn’t be possible to achieve mass scale worldwide as long as Segala had to hire more people to match demand for the Trustmark (Certificate). Productising services alone wasn’t enough.

So, similar to VeriSign’s business model for the resale of SSL Certificates, we decided to build a Partner Programme to sell our Web Accessibility (and now mobileOK) Compliance Certificates. After building the necessary process over a 9 month period, we tested the water in late 2006 by allowing companies to join our programme (we did no PR or marketing). We now have a few (50+) partners across 8 countries, of which, some are the biggest digital agencies in the world. They have started to certify Web sites (including banks) with Segala only required to spot-check to maintain quality. We’re aiming for a conservative figure of 7,000 Partners worldwide by end of 2011.

Creating vital answers for the ‘why Segala’ question

The vast majority of 2007 was dedicated to the creation of various W3C standards for which we provide certification. For example, we are co-author of the W3C Mobile Web Initiative conformance document called mobileOK with Google. We also invested quiet heavily in making sure that our Semantic Web method of classifying content (Content Labels) became a ratified W3C standard, to help ensure we gain mass adoption. This is expected to happen in the next 3 months and replace PICS; the old standard still used by Internet Explorer today for filtering content.

Currently partners consider their partnership with Segala as a unique selling point as accessibility standards compliance is now a legal requirement in countries such as the UK, US and Australia. However, if Content Labels gain mass adoption it will mean that the sites they certify will be more prominent in future search results. This will encourage more companies to become partners.

Other pieces of the ecosystem to help achieve scale

There are many other pieces to the puzzle but I’ll spare you the detail. I’ll save it for the Venture Capitalists so we can secure funding to grow the partnership worldwide and sell more certificates amongst other things.

The moral of the story

The point I’m trying to make is that all of this was managed because we generated revenue, reinvested profit and between my business partner and I, invested approximately £300k of our personal money.

Had we not generated £1.6 million in year one and continued to sustain relationships with key clients whilst building our brand, there’s no way we’d be able to act as an agile company evolving our business model to adapt and take advantage of new market trends.

There’s no way we’d have been able to build an entire ecosystem to help ensure we gain mass adoption for Content Labels in order to make it more compelling for Partners to certify Web sites for Accessibility and mobileOK compliance, through which, we intend to generate the vast majority of our revenue.

Had Segala gone for scale through a partner network on day one, there’s no way we would have been taken seriously. It has taken time and a lot of effort, to indirectly encourage design and build agencies, not to mention direct competitors (usability companies), to award our Trustmark and Certificate through the Partner Programme.

My advice to budding entreprurners

So, my advice to any startup is to strive towards generating revenue so you can sustain the business. Only then can you afford to change, adapt and modify your business strategy based on a changing market or new competitors coming to market. Only then will you last long enough to gain scale.

It might be that investors will only be interested in your company after you have achieved scale. But you’ll never get the opportunity to have that conversation if you go bust, or continue to sell a dead horse because you can’t afford to change direction. Generating revenue to help build a better strategy will probably help you gain greater scale in the end.

[Update: 3rd January 14:06] I later found a very interesting post by Dennis Howlett on this subject. I fully agree when he says

I lobbed a Tweet out that more or less said: Twitter is a feature, a gr8 feature but as such it should be built to scale and then flipped. This would be very much in the tradition of Skype. But, I argued, ignoring the building of a business where there is money involved is highly risky, leading as it does to models more aligned to consumer advertising which most folk I know hate.

Isn’t it obvious that ‘ignoring the building of a business where there is money involved is highly risky’? How on earth can Wilson disagree with that, as Dennis suggests in his post. Read Dennis’ full article.

Share it

This the best version I’ve read to date. My favourite quote is ‘think Hollywood for geeks’.

Why is anybody comparing an entire continent to a specific metropolitan area?

Silicon Valley is a geographically proximate group of related tech industries, and the institutions that support them. It includes a large pool of entrepreneurs and engineers with many different technical and business skills, along with investors, law firms, accounting firms. Also, big tech companies who buy startups.

Silicon Valley works because everyone is so close together, and because everyone shares the core sense of entrepreneurialism. The place feeds on itself. Think: Hollywood for geeks.

Europe is a continent. It is comparable to “the US” or “North America.”

If you want to compare something to Silicon Valley, you need to compare a city or region.

That said, I don’t think Europe is comparable with North America as Eirc suggests. Europe also has borders, language barriers and of course, cultural differences. Oh and different laws and taxation systems for different countries.

Share it

The TechCrunch post to which I’m commentating on is entitled “Dear VCs: Look at the idea, not the postcode”

Here’s the letter which forms the basis for Mike’s post

Hi Mike

I am just dropping you a quick email to help expose what I think is a serious issue with the UK tech industry. As a developer I have been working on a web based product for over a year. There is a huge (untapped) market for this product, it requires minimal overheads and has potential for a massive amount of growth.

So, what’s the problem you may ask?

Unfortunately I am based in XXXXX, which has virtually no VC organisations. Therefore I am having to approach VCs in London. The problem is that they do not have the slightest interest in talking to people such as myself, unless you are refered to them or meet them personally. This is a very big problem from my location! I am taking the time to travel to London in November, but getting VCs to meet you is an even bigger problem.

I’m sure you have lots of other issues and topics to address, but people in this industry exist across the country and its very hard for us to break into the market.

With your position at TechCrunch UK, you have a lot of influence and if you ever have the time to address this problem with the correct people, you would have the support of a very large number of entrepreneurs / developers / CEO’s from north to south.

Many thanks for your time.

Mike’s response in part

But what really makes me boiling mad is that he is not getting a fair hearing from potential backers. Yes, maybe he is barking up the wrong tree and doesn’t need VC funding. Maybe he just needs a friendly push towards a different type of backer.

But it behoves people like VCs to give an entrepreneur a straight answer, not waste their time, and – from first principles – hear their idea first and not care where they come from.

I don’t think the post, or at least the complaint being explained by Mike, lives up to the title.

In summary, the technology entrepreneur to whom Mike refers, has an issue getting in front of a VC. Both he and Mike are putting it down to the entrepreneur’s location. I put it down to his lack of contacts, or lack of contacts who respect him and/or his idea. You could argue that his lack of contacts and introduction opportunities is due to his location. But can you blame VCs for that? I don’t think so.

Location doesn’t matter if you have a personality and are willing to put in the effort to building your network. Hell, Facebook could be used over time to build a network so you could demonstrate who you are and what you’re doing. I’m pretty sure Richard MacManus who runs Read/WriteWeb would agree when I say that you can make a name for yourself no matter where you are.

I’m asked regularly for an introduction to investors. The chances of me making an introduction, irrespective of the company’s location, are slim to no chance. This is mainly to do with the fact that I would only recommend people I know/like and have a great idea. Otherwise I’ll end up risking my own reputation, not to mention wasting the investors’ time. This is particularly important right now as I prepare to officially engage with VCs about Segala (you know who you are and yes, I’ve finally finished the Business Plan).

I’m sure those who come from a farm in the arsehole of nowhere and are refused an introduction, may complain about their location. The fact is, it’s down to them not getting out there and getting noticed.

Segala HQ is in one of Ireland’s most prestigious office complexes – close to Microsoft HQ. However, most people don’t know that. VCs certainly don’t care. If anything they’ll ask if we really need it. It’s about people, not location. Stop blaming VCs for everything and look in the mirror. I don’t think I’m disagreeing with Mike in this post, it’s more of a wake up call for his poor entrepreneur.

Share it

Thanks to Steve Clayton for the link on Twitter. I’ve always said that Facebook isn’t a social network like Bebo or MySpace. Facebook is more of a platform/technology which we use to connect with people we know within our network. We can then build communities using our social network.

SAN FRANCISCO — Microsoft Corp. is in talks with Facebook Inc. about making an investment in the social-networking startup that could value Facebook at $10 billion or more, according to people familiar with the matter.

The talks set up another likely face-off between tech titans: Google Inc. has also expressed strong interest in a possible Facebook investment, said people familiar with the matter.

This is a brilliant opportunity for Facebook to expand it’s application development by taking advantage of Microsoft’s already huge partner network. Microsoft’s partners could also provide additional technology-savvy applications to help improve the overall functionality of Facebook within a short space of time.

So, it makes perfect sense for Microsoft to want to own part of Operating System 2.0, which also has Google on it’s toes! It also makes sense for Facebook to share a piece of the pie with Microsoft, in return for extra ad revenue and accelerated application/core platform development.

Read the original article on the Wall Street Journal Web site.

Could it be true? Does it make sense?

Share it