9 business models for billion-dollar startups
There’s a magic to startups that succeed in becoming billion-dollar companies.
They don’t just invent new products; they adopt business models that are scalable, repeatable, and well-suited to growth.
If you look closely at the landscape of unicorns today, you’ll notice patterns—certain business models appear time and again, underpinning these highly valued companies.
The goal isn’t necessarily to reinvent the wheel; it's to leverage the models that have consistently proven to work.
Based on the Y Combinator top 100 funded companies, here are nine business models that have created billion-dollar companies, along with the key metrics that drive their success.
1. SaaS (Software as a Service)
SaaS companies sell cloud-based software via a subscription model, typically charging on a recurring basis—monthly or annually.
What makes SaaS so powerful is its ability to generate predictable revenue, also known as recurring revenue. It’s not a surprise that companies like Salesforce, Microsoft, and Adobe have built empires on this foundation.
But success in SaaS isn’t just about recurring revenue. It’s about the combination of predictable income, high gross margins, and low churn rates. Once you’ve signed up a customer, your primary challenge is keeping them around. And the longer they stay, the more valuable they become.
Key Metrics
- MRR (Monthly Recurring Revenue) / ARR (Annual Recurring Revenue): These are the lifeblood of a SaaS business. Investors love predictable income, and high ARR growth rates are an indicator of a business with potential for long-term profitability.
- Churn Rate: SaaS businesses are subscription-based, so you need to track how many customers leave versus how many stick around. Minimising churn is essential for sustainable growth.
- Net Revenue Retention (NRR): This looks at the revenue you retain after accounting for churn and expansion, and it’s a critical measure of a company's health.
Why SaaS Works
SaaS is built on a foundation of simplicity and convenience. Customers prefer it because they can pay as they go, getting updates and support included.
The recurring revenue model offers companies long-term financial predictability, which, when combined with the ability to upsell existing customers, creates a powerful growth engine.
2. Transactional
Transactional businesses are, at their core, intermediaries. They facilitate payments between parties and take a cut for every transaction.
Companies like PayPal, Stripe, and Square have leveraged this model to their advantage by scaling with transaction volume. It’s simple—more transactions mean more revenue.
Transactional businesses thrive on trust. Once they’ve established credibility with customers, those customers continue to use the service repeatedly, leading to consistent and reliable revenue streams.
Key Metrics
- Gross Transaction Value (GTV): The total amount of money flowing through the platform. It’s a great proxy for the scale of the business.
- Net Revenue: Your share of that transaction value after costs, typically expressed as a percentage of GTV.
- User Retention: Ensuring that users come back again and again to make transactions is critical for the long-term health of the business.
Why Transactional Works
The beauty of the transactional model is its scalability. As the number of transactions increases, revenue scales almost automatically. You’re not bound by the constraints of physical products or a sales team.
Instead, you benefit from a flywheel effect: more users lead to more transactions, which leads to more users. Trust, in many cases, becomes a key differentiator—once customers rely on your platform, they’re unlikely to leave.
3. Marketplaces
Marketplaces, like Uber, Airbnb, and Etsy, connect buyers and sellers, typically taking a fee for facilitating the transaction. They can be consumer-facing or B2B, but they share one thing in common: they solve the "chicken-and-egg" problem of building supply and demand simultaneously.
The power of marketplaces lies in network effects—the more buyers you attract, the more sellers want to be on your platform, and vice versa. Once you achieve a critical mass, growth becomes almost self-perpetuating.
Key Metrics
- Gross Merchandise Value (GMV): The total sales value passing through the platform.
- Take Rate: The percentage of GMV that the marketplace retains.
- Growth Rate & User Retention: These metrics measure how fast your marketplace is growing and whether users continue to transact on it.
Why Marketplaces Work
Marketplaces are difficult to build but immensely rewarding once they hit scale.
The network effects that drive their success are also what make them defensible—new competitors struggle to displace incumbents with established buyer and seller networks.
But the key to scaling a marketplace is balancing supply and demand so that neither side experiences friction. If done right, marketplaces can achieve significant scale with relatively low operational costs, creating massive value.
4. Subscription
Subscription models are ubiquitous these days—think Netflix, Spotify, or Dollar Shave Club. Consumers love the predictability of paying a monthly fee for a service they value, while businesses enjoy the stable and recurring revenue streams.
The challenge in subscription businesses is often in customer retention—how do you keep people subscribed once the novelty wears off?
Key Metrics
- MRR / ARR: Like SaaS, these metrics are critical for understanding your revenue streams.
- Churn Rate: Minimising churn is essential in subscription businesses because acquiring a customer is expensive, but keeping them is far more cost-effective.
- Customer Acquisition Cost (CAC) vs. Lifetime Value (LTV): You need to ensure that the cost to acquire a customer is significantly lower than their lifetime value on your platform.
Why Subscription Works
The subscription model is particularly appealing to consumers because of its affordability and convenience. Companies benefit from recurring revenue and predictable cash flow, which can be reinvested into growth.
However, success hinges on low churn rates and continuously providing value that justifies the ongoing cost to the customer.
5. Enterprise
Enterprise startups operate in the B2B space, selling large contracts to big companies. The sales process is complex, often involving pilots, long sales cycles, and multiple decision-makers.
But the payoff is huge—contracts can be worth hundreds of thousands or even millions of dollars annually.
Enterprise businesses often rely on a direct sales team and may also work with channel partners to scale. While these deals can take time to close, they provide high-margin revenue streams once they’re secured.
Key Metrics
- Bookings: The total value of signed contracts.
- Annual Contract Value (ACV): The average annual revenue generated from each customer contract.
- Sales Pipeline: Understanding how deals progress through the pipeline is crucial for forecasting and growth planning.
Why Enterprise Works
Enterprise businesses can be slow to start due to long sales cycles, but they’re highly defensible once established. Switching costs are high, and contracts often include long-term commitments.
As a result, enterprise businesses tend to have stable, high-margin revenue streams. However, these businesses need to navigate complex organisational structures and demonstrate clear ROI to close deals.
6. Usage-Based
Usage-based models are popular with cloud services and infrastructure companies like AWS and Twilio. Customers are charged based on how much of the service they use, making this model flexible and scalable. The more successful your customers are, the more they use your service, leading to more revenue for you.
Key Metrics
- Revenue Retention: Focuses on the percentage of revenue retained from existing customers as they scale their usage.
- Gross Margin: Higher usage leads to higher costs, so maintaining healthy gross margins is critical.
Why Usage-Based Works
Usage-based models align customer success with your revenue. As customers scale, their usage increases, leading to more revenue without needing to upsell or renegotiate contracts.
This dynamic creates a natural growth curve that, when coupled with strong customer retention, can lead to rapid and sustainable revenue expansion.
7. E-commerce
E-commerce has been one of the fastest-growing sectors in recent years, with companies like Amazon, Warby Parker, and Shopify creating massive value.
Unlike marketplaces, e-commerce businesses own the inventory or partner with manufacturers, giving them control over margins and customer experience.
Key Metrics
- Revenue Growth: Total sales over a given period.
- Gross Margin: Profit after the cost of goods sold, a critical metric in product-based businesses.
- CAC / LTV: The efficiency of acquiring new customers versus the value those customers bring over time.
Why E-commerce Works
The biggest challenge in e-commerce is maintaining strong margins while scaling customer acquisition. Companies that invest in brand, customer experience, and operational efficiency can succeed, but competition is fierce.
Scale matters in e-commerce, as does operational excellence—logistics, supply chain, and customer acquisition all need to be finely tuned.
8. Advertising
Advertising-based models power some of the biggest companies in the world, like Google and Facebook. These platforms are free to users but monetise through advertising, leveraging their massive user bases to attract advertisers.
The more users and engagement they generate, the more they can charge advertisers for access.
Key Metrics
- DAU / MAU (Daily / Monthly Active Users): Engagement is the lifeblood of an ad-based business.
- ARPU (Average Revenue Per User): This helps measure the revenue generated per user, indicating the platform’s ability to monetise its audience.
Why Advertising Works
Advertising is about scale. The bigger your user base, the more revenue you can generate from ads.
However, ad-based companies must constantly balance user experience with monetisation, ensuring they don’t alienate users with too many ads. The platforms that win are the ones that engage users and provide advertisers with access to highly valuable audiences.
9. Hardtech / Bio / Moonshots
Moonshot companies, such as SpaceX or biotech startups, face the highest risks but also the highest potential rewards. These startups tackle huge technical challenges that, if solved, can create massive markets.
However, the path to revenue is often long, requiring significant investment and milestones along the way.
Key Metrics
- Milestones: Given the long timelines in hardtech and bio startups, hitting key development milestones is critical for de-risking the business.
- LOIs (Letters of Intent): Early indicators of market interest can help secure further funding and validate the business.
Why Moonshots Work
Moonshots may seem risky, but when they succeed, they create entirely new markets. The technical breakthroughs these companies achieve often serve as their moat, and while the path to profitability can be long, the rewards are enormous.
The challenge for these startups is balancing technical progress with securing enough funding to keep the lights on during the long development cycles.
Conclusion
The path to building a billion-dollar startup isn’t always about inventing something completely new. More often than not, it’s about choosing the right business model and executing it exceptionally well.
Whether it’s SaaS, marketplaces, or transactional models, the formula for success is a mix of recurring revenue, scalability, and defensibility. This is why you don’t often see models like consulting, affiliate or hardware businesses topping the list.
The startups that achieve unicorn status are those that master these dynamics while building a product or service that customers love.
The future belongs to startups that can scale quickly, generate predictable revenue, and create moats around their business.
If you're building a startup, don’t just focus on your product—focus on the business model that will allow you to scale to a billion-dollar valuation.
The right model might just be the key to unlocking your startup’s full potential.
