Many of us in consumer startup land have been focused on applications and services that scale into massive networks. The business model for massive scale tends to work, very nicely.
As a result, these networks tend to focus on scale first, monetize second.
But recently I’ve been noticing that you can also build extremely valuable & profitable services without having a massive user base.
Past examples include things like Threadless. Threadless built a great business on a relatively small user base (when I say small I mean in comparison to things like Twitter and Facebook). I know a number of other ecommerce companies that have become very profitable focusing on a core community.
Other areas outside of ecommerce can also work. Marco has built a successful business at Instapaper by providing a very valuable product to an active engaged user base. He keeps costs very low (he’s the sole employee) and a straight forward revenue model. I’ve seen a number of other iOS apps that are now generating $10-$20M/year in revenue and with over 50% cash flow.
I’m still drawn to services and networks that may reach tens or hundreds of millions of users. But that’s not the only thing I’m paying attention to these days.