It's been a while since I've seen a new way to fail in business, hence the dearth of additions to this series. But now we have a new one - the fantasy business model.
Most failures of startups, through history, can be classified in just a few camps: 1. the product never worked, 2. the market never cared or existed (there was no real problem), or 3. the execution (team/CEO) was awful. Sometimes it's just bad timing. Luck always plays a role.
Tech business models were all the same. Spend money, build product. Sell product to lots of people for more than product costs to build. Buy low, sell high. Sell more, make more. Yadda yadda yadda.
Today the business model matters as much, if not more, than the product/technology and often even the market itself (assuming it's a staid, boring, incumbent ladened one).
Somewhere during the insanity of the dot com bubble, it became okay to have a business plan that never, ever showed how you make any money. Fast forward 25 years and we seem to have come full circle. Heck, the Federal Government of the mighty USA is fine with simply printing more cash every day and spending beyond the means of thirty generations! Why not you?
VCs haven't helped. They have funded these fantasies and never bothered to look (or care) that eventually (unless you are the Fed), a company needs to take in more money than it spits out in order to sustain itself. Call me old school, but it's that simple.
Nirvanix is the most recent (but certainly not the only) victim of fictitious Fed funding fantasy land. For all the joy and love of a cloud storage service, 15 years after, Peter Bell's Storage Networks collapsed because it couldn't find a sustainable profitable business model (that one was more technology related - not being able to securely multi-tenant kit back then killed the idea) - with lots of customers and buzz. At the end of the day, I could never figure out how they were going to make money. I'm not that smart, granted, but the math never made sense. The more customers they added, the more they would lose. Surely smart VCs would have picked up on that, no?
I vividly remember a due diligence call with Peter Levine of Andreesen Horowitz on this very subject - whereby he came to the same conclusion. How and when do they make money? There was never an answer.
They aren't the only ones. I can't for the life of me figure out how Carbonite is going to make money. I see the same exact thing - the more customers they bring on, the more money they will lose. Unless they cheat, in which case they will collapse eventually under their own weight.
Did you ever see the Saturday Night Live skit about the bank who's motto was "we make change"? "4 quarters for a dollar, or ten dimes, or 20 nickels. Perhaps 2 quarters and five dimes!" When asked how they make money, the answer was "Volume!" It's kind of like that.
Less you think it's only little guys, think again. Amazon does not make money. Not just on EC2, etc. - but on ANYTHING.
The bet is clearly that if you can get really big and eliminate competition, and WAIT IT OUT (so your costs decrease over time and the elimination of competition enables you to raise revenue for a less expensive service), then eventually you will make money.
Waiting it out means you need the Fed - or an equivalent. In Amazon's case they can wait a long time, because they are the king (big), and have a huge CASH surplus because you goof balls who buy stock value a money losing company such as them for many billions of clams. If that changes radically, Amazon can easily go the way of the dodo. Not because they are not revolutionary thinkers, just because their business model will crumble as soon as the money supply does.
So my advice to you is this: have a plan where you actually make money. If your plan is to make money in some nebulous fashion in some distant time, you are most likely screwed. If you can convince a VC to fund that ridiculous plan, god bless you - and spend some of it with me. I'll at least help you look good in your own fantasy.