9 ms·

Is it just me or is this kind of an obvious (first) thing one should ask themselves when starting a business - "How will you make money?"

by omonra 15y ago

AndrewDucker 15y ago
Depends on the business. I'm willing to bet that neither Google nor Facebook had a concrete idea of how they were going to make money when they started up. And lots of sites seem to work on the principle that "First we get _all_ the users. Then something mysterious happens. Then we're all rolling around in cash."
- kenrikm 15y ago
  True, and they fail to realize that this rarely happens most don't have Facebook/Google type growth and need to generate enough revenue to at least finance operations before they get to the end of the runway.
- mvkel 15y ago
  Google and Facebook are often cited in this regard because they are _exceptions to the rule_. It's bad practice use them as the example.
  - chrisacky 15y ago
    If there are exceptions, then there isn't a rule. Everything we do is best practices and guess work, there isn't a scientific formula to being successful, what works with X, probably won't work with Y. It's just a probabilities game, and by and large, 99% of companies can't approach it the same was that Google and Facebook did. (FWIW I agree with you, just not the way you phrased it).
    - StavrosK 15y ago
      That's just nitpicking, though. Here, "rule" means "what happens 99% of the time".
  - GFischer 15y ago
    However, Fred Wilson (Venture capitalist) does advocate something of the sort: "You can't monetize web services very well until you have an audience of scale. Jason Calacanis suggests that 10mm monthly uniques is where you have scale. I think it can be less in some cases (highly targeted services) and more in some cases (social nets). But every ounce of time, energy, money, and brainpower you spend on thinking about how to monetize will take you away from the goal of getting to scale. Because if you don't get to scale, you don't have a business anyway. " http://www.avc.com/a_vc/2008/01/twitters-busine.html http://www.avc.com/a_vc/2008/01/twitters-busine.html
  - vibrunazo 15y ago
    Just out of curiosity, can anyone give an example of a company had massive scale (10m mau), but then ultimately failed because couldn't convert them into payers? There are probably some, but I can't recall any. So I'd love to study them.
    - mvkel 15y ago
      Maybe not 10m, but Kozmo comes to mind. They raised $250mm They had huge demand but expenditures were too high (doing stupid stuff like delivering packs of $0.50 gum) Also, Groupon? :D
    - cube13 15y ago
      I guess we should define failure here. Is it basically bankruptcy, where the startup couldn't survive(or could barely survive) even after several rounds of funding? Or are we talking about situations where the startup is bought out, but just continues to lose money for the new parent company? Digg comes pretty close to the first definition. They had around that number of monthly uniques, and have pretty much lots most of the visitors(and therefore ad revenue) in the last few years. They hemorrhaged money and weren't able to find a buyer. It hasn't completely failed, especially after the reorg they did a couple of years ago, but it's definitely a shadow of it's former self. As for the second, I guess Youtube around 2009 might count, considering that they were still losing money for Google at that point(Credit Suisse's analysis said that they were losing around $475 million, and RampRate's analysis said $174 million). However, this is pretty much only a business failure, not mindshare, and Google was still willing to drop money into them to get them to profitability.
    - phil 15y ago
      XMarks is a classic example -- in 2010 they announced that they would be shutting down because their user base (2m mau or so?) did not bring in revenue to support operations. In the aftermath of the announcement they sold, presumably at a fire sale price.
  - teyc 15y ago
    +1 And these companies have big hockey stick curves and the right amount of funding It is a high risk trajectory.
jd 15y ago
I don't think it's obvious at all. Because the question of how to make money was implicit in the mind of Satish: (1) build beta version and get some users, (2) improve product based on user feedback, (3) charge money for the product, (4) watch revenues increase It sounds so simple. It's essentially the 37signals way, right? Build a product. Charge for it. It's so simple -- how can you possibly mess that up? And yet, the model above is simple, intuitive and wrong. I think one of the key insights here is that you can have two groups of people who use your product: those who are enthusiastic about your product, give feedback and report bugs, and those people who are actually willing to pay for your product. In an ideal world those two groups overlap and it's easy to make money. What's often the case is that the two groups don't overlap very much, and if you listen to the wrong people you end up making a product that appeals perfectly to those people who have no intention of ever becoming paying customers. It took me years to really learn this lesson, even though it was completely obvious in retrospect. In order to make a better product I should be talking primarily to my best customers (those who have subscribed to the bigger plans for an extended period of time), because the goal is to find more people like them and to keep 'em happy. If I listen primarily to the most vocal users the implicit assumption is that the most vocal users also happen to be the best (potential) customers. And that's a huge assumption that in my case turned out to be false.
- omonra 15y ago
  Thank you, that's a very helpful analysis. It's just that between the raccoons and walks in the garden, I totally missed it in the original post.
wpietri 15y ago
It's just you. And me. And a few others. I mentor occasionally at Lean Startup Machine events. I would say that more than half the teams that get up and pitch don't mention a business model. Last time I asked the question, "And how will you make money?" so many times that it became a joke. To be fair to them, it's a question almost nobody has to ask at work. We think a lot about products. We think a lot about users. We certainly think a lot about features and implementations. But most people work at places where the business model is so well established and stable that it becomes the background. For a lot of people it's like asking, "Will the sun come up tomorrow?" Sure, it might not, but it's just not something you worry about.
batista 15y ago
You are new to this "startup" scene, aren't you?

Is it just me or is this kind of an obvious (first) thing one should ask themselves when starting a business - "How will you make money?"

by omonra 15y ago

Is it just me or is this kind of an obvious (first) thing one should ask themselves when starting a business - "How will you make money?"

AndrewDucker 15y ago

Depends on the business. I'm willing to bet that neither Google nor Facebook had a concrete idea of how they were going to make money when they started up. And lots of sites seem to work on the principle that "First we get _all_ the users. Then something mysterious happens. Then we're all rolling around in cash."

kenrikm 15y ago
True, and they fail to realize that this rarely happens most don't have Facebook/Google type growth and need to generate enough revenue to at least finance operations before they get to the end of the runway.
mvkel 15y ago
Google and Facebook are often cited in this regard because they are _exceptions to the rule_. It's bad practice use them as the example.
- chrisacky 15y ago
  If there are exceptions, then there isn't a rule. Everything we do is best practices and guess work, there isn't a scientific formula to being successful, what works with X, probably won't work with Y. It's just a probabilities game, and by and large, 99% of companies can't approach it the same was that Google and Facebook did. (FWIW I agree with you, just not the way you phrased it).
  - StavrosK 15y ago
    That's just nitpicking, though. Here, "rule" means "what happens 99% of the time".
- GFischer 15y ago
  However, Fred Wilson (Venture capitalist) does advocate something of the sort: "You can't monetize web services very well until you have an audience of scale. Jason Calacanis suggests that 10mm monthly uniques is where you have scale. I think it can be less in some cases (highly targeted services) and more in some cases (social nets). But every ounce of time, energy, money, and brainpower you spend on thinking about how to monetize will take you away from the goal of getting to scale. Because if you don't get to scale, you don't have a business anyway. " http://www.avc.com/a_vc/2008/01/twitters-busine.html http://www.avc.com/a_vc/2008/01/twitters-busine.html
- vibrunazo 15y ago
  Just out of curiosity, can anyone give an example of a company had massive scale (10m mau), but then ultimately failed because couldn't convert them into payers? There are probably some, but I can't recall any. So I'd love to study them.
  - mvkel 15y ago
    Maybe not 10m, but Kozmo comes to mind. They raised $250mm They had huge demand but expenditures were too high (doing stupid stuff like delivering packs of $0.50 gum) Also, Groupon? :D
  - cube13 15y ago
    I guess we should define failure here. Is it basically bankruptcy, where the startup couldn't survive(or could barely survive) even after several rounds of funding? Or are we talking about situations where the startup is bought out, but just continues to lose money for the new parent company? Digg comes pretty close to the first definition. They had around that number of monthly uniques, and have pretty much lots most of the visitors(and therefore ad revenue) in the last few years. They hemorrhaged money and weren't able to find a buyer. It hasn't completely failed, especially after the reorg they did a couple of years ago, but it's definitely a shadow of it's former self. As for the second, I guess Youtube around 2009 might count, considering that they were still losing money for Google at that point(Credit Suisse's analysis said that they were losing around $475 million, and RampRate's analysis said $174 million). However, this is pretty much only a business failure, not mindshare, and Google was still willing to drop money into them to get them to profitability.
  - phil 15y ago
    XMarks is a classic example -- in 2010 they announced that they would be shutting down because their user base (2m mau or so?) did not bring in revenue to support operations. In the aftermath of the announcement they sold, presumably at a fire sale price.
- teyc 15y ago
  +1 And these companies have big hockey stick curves and the right amount of funding It is a high risk trajectory.

jd 15y ago

I don't think it's obvious at all. Because the question of how to make money was implicit in the mind of Satish: (1) build beta version and get some users, (2) improve product based on user feedback, (3) charge money for the product, (4) watch revenues increase It sounds so simple. It's essentially the 37signals way, right? Build a product. Charge for it. It's so simple -- how can you possibly mess that up? And yet, the model above is simple, intuitive and wrong. I think one of the key insights here is that you can have two groups of people who use your product: those who are enthusiastic about your product, give feedback and report bugs, and those people who are actually willing to pay for your product. In an ideal world those two groups overlap and it's easy to make money. What's often the case is that the two groups don't overlap very much, and if you listen to the wrong people you end up making a product that appeals perfectly to those people who have no intention of ever becoming paying customers. It took me years to really learn this lesson, even though it was completely obvious in retrospect. In order to make a better product I should be talking primarily to my best customers (those who have subscribed to the bigger plans for an extended period of time), because the goal is to find more people like them and to keep 'em happy. If I listen primarily to the most vocal users the implicit assumption is that the most vocal users also happen to be the best (potential) customers. And that's a huge assumption that in my case turned out to be false.

omonra 15y ago
Thank you, that's a very helpful analysis. It's just that between the raccoons and walks in the garden, I totally missed it in the original post.

wpietri 15y ago

It's just you. And me. And a few others. I mentor occasionally at Lean Startup Machine events. I would say that more than half the teams that get up and pitch don't mention a business model. Last time I asked the question, "And how will you make money?" so many times that it became a joke. To be fair to them, it's a question almost nobody has to ask at work. We think a lot about products. We think a lot about users. We certainly think a lot about features and implementations. But most people work at places where the business model is so well established and stable that it becomes the background. For a lot of people it's like asking, "Will the sun come up tomorrow?" Sure, it might not, but it's just not something you worry about.

batista 15y ago

You are new to this "startup" scene, aren't you?