Did you hear about Instagram selling to Facebook for $1 billion?
Remember when News Corp bought MySpace.com for $580 million in 2005?
Remember when Ebay bought Paypal for $1.5 billion in 2002?
Remember when Google bought Hotmail for $400 million in 1998?
… and remember when Groupon unfortunately didn’t sell to Google for $5-6 billion just a little over a year ago?
Something is happening and it’s changing the types of businesses that are being created and how people are turning ideas into money.
Steve Blank, the Stanford professor and startup guru has described this as “Bits in Billions.”
My dad owns a successful financial management firm in the Milwaukee, Wisconsin area and I remember his reaction when he heard about Groupon turning down the offer from Google.
He laughed. See, right around that same time as the infamous Groupon “mis-deal,” M&I Bank, the largest bank in Wisconsin sold to a Canadian bank for approximately $4.1 billion… significantly less than what Groupon thought they were worth… but M&I had been around for decades, had physical assets, nearly 10,000 employees, customers money, ATM’s and physical locations all around the country. On the other hand, Groupon was an internet startup based out of Chicago with far less employees and a distribution method (internet coupons) with far less overhead than M&I’s nationwide banking network… but Groupon had two very important things… Users & Potential.
“Users” is the new hard asset and Market “Potential” drives the valuation of the company higher than it maybe should be worth… so an internet startup with hardly any physical assets or products, but a lot of users and potential for growth is really worth more than an established company with hard assets? Yes. Instragram gained over 35 million users in less than a year with a scrappy team of 8 employees… then liquidity came by being purchased by Facebook, a company that has figured out how to convert 780 million users into revenue.
Now, for any startup, turning bits into billions is as simple as figuring out how to turn users into revenue.
This is the new goal of internet startups. For another example of turning bits into billions look no further than the internet darling Amazon.com.
When Jeff Bezos left his job at a hedge-fund company in NY he saw the opportunity that the internet presented. Since the Supreme Court had ruled that online retailers did not need to pay sales tax for sales in states that they were not physically located, Jeff started Amazon out of the small state of Washington since it had such a small resident population (meaning sales tax would only affect a small percentage of his customers)… and he opened up shop, or rather, he built a website for users to purchase products with no sales tax and has been turning internet bits into billions, ever since.
What does this mean for you and me though? Here are 2 things that we must do!
1. Any physical business must start investing in bits, not in producing more boxes. Bits can expand a business model and open new doors for the growth… simply producing boxes makes you rely on someone who understands bits to come in and help you figure out the internet and how to sell your boxes online to a larger customer segment than you currently reach.
2. If you aren’t doing anything online yet, start! Whether that’s a launching a blog, starting a Shopify site to sell something that you make or just enrolling in a beginners course on how to code websites… the point is, do something!
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