Scalability or the Nature of Internet Businesses

In his excellent book The Black Swan, Nassim Taleb makes a distinction between two types of occupations or businesses:

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  • The first type are not scalable, meaning that workers or owners’ earnings are constrained by the amount of time they put on. A doctor, for instance, can only visit a certain number of patients in a day; a teacher can only teach one class at a time; there’s a limit to the number of clients a brick-and-mortar shop owner can serve simultaneously.

  • The second type of occupations are scalable, that is, workers or owners’ earnings are mostly independent of the number of hours they work. The time spent writing a book, for example, is the same whether it has 100 or 100,000 readers. A singer only has to record a single once, whether it becomes a hit or never makes it into a radio station.

Most internet-based businesses are or can become scalable. Writing a blog or advertising products as an affiliate are obvious examples. Even an internet business that involves selling, packaging and mailing physical products can be easily outsourced in order to fit into the scalable category –this is the concept of automation that Tim Ferriss describes in The 4-hour Workweek.

Since the profits derived from a scalable business are not limited by the time your work on it, they can be endlessly replicated. This will allow a small percentage of business owners to make extraordinary amounts of money. The flip side is that they will saturate the market, and the remaining majority will make close to nothing -from this perspective, scalable professions and businesses imply a much higher degree of risk than non-scalable ones.

The earnings distribution across internet businesses reflects their scalable nature: More than 95% of internet entrepreneurs will never make a significant amount of money; 4% of them will be able to derive a comfortable profit from their business; while less than 1% will strike it big and become Google-like millionaires.

Given the slim chances of success, I believe that all of us first-time internet-venturers are overoptimistic –we overestimate the potential profits. Notice that I consider overoptimism a very positive quality –if we didn’t at least try, our chances of a worthy payoff would be exactly equal to zero.

However, a dose of realism is always advisable. How can you hedge against the possibility that your internet venture never produces any real returns? There are several things you can do.

  • The first one is not to quit your (non-scalable) job until you’ve proved you can make money online. If worst comes to worst, having a backup source of income can make all the difference.

  • The second and most important one is to start a business related to something you like. In this way, even if it eventually fails –not that this is going to be the case!-, what you have learnt and the enjoyment you have derived from it will have compensated your effort… and will serve you as valuable starting points to be successful next time.

TALKBACK

  • Did you start an online business attracted by the scalability of profits?

  • Do you agree that optimism is a defining quality of online entrepreneurs?

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