Wednesday, November 23, 2011

Why Startups Fail...

Another day, another three or four companies jumping lemming-like into the video platform space (OK, OK, I know lemmings don't really leap to their deaths..). Let me use one of the most recent launches as a model for why most start ups fail - they simply get carried away with ideas and enthusiasm and forget their sums.

Dacast has a nice proposition - commoditised bandwidth with monetisation tools. But I spend a lot of my time working for VCs looking at business models, and, as much as the main platforms are expensive, Dacast's model is barking.

Let me explain. Let's say they sell bandwidth at $0.20 on average, and pay $0.10 ( I reckon they would have needed to sign up to a guaranteed commitment level to get this rate - a higher level might get them a lower rate, and I'm also factoring in their freemium model and storage). And, from fifteen years' experience, I know that the average online client will use around 50GB of video (sure, some will use 50TB, but most will use under a few gig). Their launch  seems to have resulted in around 5,000 "broadcasters" according to their home page, and, again, experience of such businesses makes me believe that under 5% will convert into a paying plan. So, at the moment I reckon they're making around $1,250 in gross revenues.

That's fine if you're a developer in a bedroom in Bangalore, but companies like this have offices, and CEOs and developers, and marketing budgets, and VCs. Of course, you can add in margins on pay per view, advertising and the such, but it's not going to be significant.

With all of that, I can't imagine that their monthly overhead is much under $50,000, so they will need around 10,000 clients to break even. This is before you figure out that the minimum bid for a click on Google for the terms 'Host video website' is $5 - and you're giving money to your biggest competitor's parent company!

In a world where Vimeo and YouTube offer free alternatives, and where video is still quite niche and demands a huge amount of hand-holding, this company is, I'm afraid, destined to failure.

As ever with these cases, I really hope they prove me wrong...