07.28.10

The Phony Scalability of “Local,” and “Long-Tail.”

VCs throw money at startups because they’re scalable. With the right model, the thinking goes, you can double your revenue while your expenses rise 10%. Then, you can do it again.

This works pretty well for some companies. Facebook, for example, hit 100 million users in mid 2008, with “more than 600″ employees. Now they have 500 million users, and 1400+ employees. 400% growth in users; 130% growth in employees. That’s exactly the kind of math VCs like to see, and it’s why they were willing to fund Facebook generously in the early stages. Facebook will run into scalability barriers after a while. At some point, the limiting factor is not engineers (a scalable resource) but customer service reps and servers.

For many of the current crop of hot companies, the end of scalability is coming much faster.

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