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How to build a Billion Dollar App

How to build a Billion Dollar App

George Berkowski

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If you want to build the next must-have app then it pays to learn from the best. In his new book How to Build a Billion Dollar App, serial tech entrepreneur George Berkowski reveals the secrets behind the handful of tech and app companies that have reached billion-dollar success. Here's his advice for getting started:

Let’s start with the bad news: there is no easy way of build a billion-dollar app. In fact, out of the thousands of apps out there, only twelve have hit a billion-dollar or greater valuation.But the good news is that there is definitely common ground that unites the journeys of the apps that have made it billion-dollar big. I explore these secrets in detail in my new book How to Build a Billion Dollar App, but for now, let’s look at eight key things we can learn from the billion-dollar app club (and the other 31 tech companies that have reached a valuation of a billion dollars or more):

IT TAKES SEVEN YEARS. It’s not easy to build a billion-dollar company and it doesn’t happen overnight. On average it takes seven years to reach a billion-dollar valuation (and either an IPO, or merger, or acquisition), so you had better be in for the long haul. The minimum was just under the two-year mark (Instagram and YouTube) and the upper end was eleven years (Pandora). As the inside stories show, this path is never smooth. Perseverance – and a belief in the long-term vision of your company – is key if you’re going to make it all the way.

THERE ARE FIVE BUSINESS MODELS THAT WORK. It turns out that five business models underpin so many billions in value. The first is gaming, where users pay for a virtual service or good. The second is e-commerce / marketplace, where users pay for a real world good or service. The third is advertising (or consumer audience building in the case where the company has not yet switched on the advertising). The fourth is Software as a Service (SaaS), whereby users pay for cloud-based software (typically via a subscription model). And the last is enterprise, whereby companies pay for larger-scale software (again, via a subscription-type model). So there isn’t a huge amount of reinventing the wheel here. If you want to make it big, it’s pretty clear what business models to stick to.

EXPERIENCE MATTERS. Despite all the media hype, most billion-dollar companies are not founded by youngsters in their twenties, but by people of an average age of 34 (that makes my 36-year-old face smile). Fortune also favours those who have known or worked together for many years – in fact 90 per cent of founding teams fall into this category. What does this mean for the average person? It means get out there and start your first company – that’s the best way not only to get the experience you need, but also to make the contacts and find the cofounders for your next business. Hardly anyone is incredibly successful first time – it’s about persistence.

MOST CEOs STAY FOR THE LONG HAUL.76 per cent of founding CEOs stayed with their company all the way through to either an acquisition or IPO, with 69 per cent actually keeping their CEO role. This is a strong reflection on the calibre and experience of the founders who are building these billion-dollar companies – a formidable amount of staying power, vision and perseverance is required

EDUCATION GIVES YOU AN UNFAIR ADVANTAGE. Even though eight billion-dollar companies were founded by college dropouts, the vast majority went to top universities. Stanford leads the charge with 33 per cent of the cofounders. Eight founders went to Harvard, five went to the University of California at Berkeley and MIT had four. The majority of founding CEOs had technical degrees from university. While this may seem a little daunting, you can now get an MIT, Stanford or Harvard education essentially for free via great online course programmes such as OpenCourseWare (from MIT), edX (from MIT, Harvard and Stanford, among others) and from iTunes U.

LOCATION. It’s clear that not only does the network and connections gained from going to a top educational institution help, but the network combined with the thriving geography of San Francisco makes for a killer combination: 27 of the billion-dollar companies are based in the Bay Area. New York is a distant second with three. I suspect that, over the coming years, international hubs such as London, Berlin and Paris will play an increasing part as well.

ENTERPRISE IS HOT. This is something very exciting – and ripe for opportunity. The characteristics of billion-dollar enterprise startups lean towards raising a lot less capital (typically, they require only 40 per cent of the investment that a consumer-focused startup does), thereby increasing returns not only for investors but for founders and employees. On the downside, it does take a little longer, on average, to see an exit event. So, for those of you with deep corporate experience, take that knowledge and those connections – the sector is ripe for innovation.

IT’S ABOUT GOING PUBLIC. Of the 10 companies that have been acquired, the average valuation was $1.3 billion. For app companies this amount was $1.67 billion (not including Whatsapp’s outrageous acquisition amount as it skews the average). This represents the lower end of valuations, which makes sense, since acquirers want to get them at a lower price. So the majority of companies are exiting via an IPO. This is a great sign, because it means that entrepreneurs are focused on building companies that last – rather than just building and flipping them for a quick sale.

Additional Information

Author George Berkowski
Publisher Piatkus Books
Publication date 10 Sep 2014
Format Tradepaper
ISBN/EAN 9780349401379

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