Why scale doesn’t come before revenue, or at least for most

Thanks to Dennis Howlett, I picked up news of Fred Wilson’s blog post about Twitter earlier today. His post is about the potential business models for Twitter. I’ll write my own views about Twitter’s potential later, but for now, I’d like to discuss ‘business models’ vs ‘scale’. In his post, Fred states that he agrees with Jason Calacanis’ opinion on this topic.

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.