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Think Big. Move Fast.

This afternoon I spoke to the Stanford class on Creating Engaging Facebook Apps.

As I said at Web 2.0 expo, building big businesses online is hard work. While it isn’t hard to start an app company, especially as a single developer ($250k in revenue) or even to support a small team ($2.5m in revenue), it gets quite hard to scale revenues to $25m/yr.

Assuming a 5% daily active rate and 3 pageviews per visit, an app developer with a $0.50 RPM would need to get to 926m installs to get to $25m run rate. Compare that to the app with the most installs on Facebook – Slide’s Superwall which has around 20-21m installs. Clearly, broad reach app developers need to develop (i) multiple (ii) high engagement apps [ie higher active rates and pageviews/visit than these assumptions] (iii) across multiple social networks to be able to get close to this revenue target. (RPMs will likely be higher for companies with a direct sales force as well, so the target isn’t quite as high, but you get the point).

Under the same activity and pageview assumptions, an app developer with a $10 RPM would need 46m installs to get to $25m in revenue. Apps with endemic advertising opportunities can easily realize this level of RPM but will still need to be in multiple social networks to get to those levels of installs. It doesn’t make sense to limit your world to being a Facebook app. Social network platforms are avenues for distribution, and app developers should be taking advantage of all of them.

One of Lightspeed‘s portfolio companies, Rockyou, is taking the former approach. Another, Flixster, is taking the latter. Both seem to be working so far.

I also did a similar analysis for digital goods business models in the presentation. Here is a link: Stanford Facebook Class presentation

  • http://cs.stanford.edu/~thathoo rahul thathoo

    this was really insightful, thanks for coming to the class

  • Notmy Real Name

    Wow, no one has yet to figure a way to monetize the social graph. My company will be coming out of stealth in the next couple month, and i will guarantee that we will change how people look at social graph apps. stay tuned

  • Steve

    Thanks for posting the presentation. Interesting stuff.

  • john m

    This was a really good post. However, you fail to bring to light a scenario on the monetary side. That is, yes a small team i.e. generating $2.5M in revenue gives a very nice exit for the team at 10X multiple or $25M.
    At the end of the day this type of liquidity event does NOT work in the VC model, right? Hence, why the VC model will be different in the next five years.

  • http://500hats.typepad.com/ Dave McClure

    thanks for speaking to the class jeremy… really appreciated your talk & presentation :)

    (btw, have you tried using SlideShare.net for hosting your presentations? i’ve become a huge fan lately…)

  • http://silverdock.com/ Raj Gajwani

    Nicely put, Jeremy. It’s refreshing to see a VC speak clearly about the difference between good businesses and good investments.

    @ john m: if a business reaches a $2.5m steady-state revenue level, it’s not going to get a 10x multiple. To get a 10x multiple, you need to be able to generate a net-present-value profit of $25m — not gonna happen on $2.5m revenues.

  • Aaron

    hmm do you mean RockYou’s super wall?

  • Pingback: Flixster-IAC: Deal or No Deal? - GigaOM()

  • http://www.sudokupeople.com sudoku

    It’s hard to make big money by building facebook app than by build a popular website.