5 ms·

"How will they make money?" is the wrong question

50 points by wallflower 13y ago

shacharz 13y ago
Maybe it is the wrong question, but VC's keep asking it. unless you have mad traction.
- zmitri 13y ago
  This touches on a lot of the no-nonsense reasons why a VC would say no if you have some traction, but not explosive traction. As someone who has gone through the process of bootstrapping, getting traction, and trying to raise money for the first time in a "consumer unfriendly environment," I think he touches quite eloquently and precisely on a lot of important points. Most VCs don't lay it out as nicely as this either.
tmandarano 13y ago
Excellent summary by Ev at the end of the post.
- ronilan 13y ago
  True. But the "monetize THEM" is not the perfect choice of words. You don't monetize the users. Either a third party pays for their attention, or, they pay for their own access. No one owns the users. That's why they are so valuable.
noelwelsh 13y ago
Social networks must be the ultimate winner-takes-all product. They're probably great investments for VCs. They're high return, and they bleed money until the magic inflection point so you can probably get good terms. I think they're crappy products for founders, because the risk is so high and you don't have the same opportunity for diversification that an investor does. Speaking as a founder, I feel it comes down your own risk/reward preference. I'd rather have a good chance of a $50M exit than a miniscule chance of $1B.
- dylangs1030 13y ago
  True, but for the entrepreneurs and founders that want to take over the world (so to speak), they're perfect ambitions. While not all founders tend towards that goal, the ones that are most "high risk, high reward" will naturally gravitate to that. No one founds a successful social network and doesn't end up wealthy. Tumblr, Facebook, Instagram, etc. all leave their founders with significant exits.
TamDenholm 13y ago
I beg to differ, if you dont make a profit, youre not a business. I dont care if you raised tonnes of money from investors, built a talented team, built an amazing product and sold it to facebook/google/yahoo for a huge sum. Thats failure because you couldnt make more revenue than the costs you had.
- dylangs1030 13y ago
  You effectively missed the point of the blog post. The author isn't suggesting that revenue is insignificant compared to a user base; this is an extreme example of undercutting competitors via price slashing, and it's historically not necessarily a good idea. That said - Tumblr has so many users that it's difficult not to be valuable. A social network can be a currency of its own - having ownership of a platform that tens or hundreds of millions of people use daily puts you in a position to make revenue in a number of creative ways. Ev Williams' specific point is such that if you achieve that many users, you will eventually not find it difficult to be profitable. How could you? People wondered about Facebook this way. Then they introduced ads - the number of users only climbed. Conversely, if Facebook maximized its potential for revenue streams before solidifying organic user base increases, they would have plateaued a long, long time ago. That's the point.
  - TamDenholm 13y ago
    I still take issue with the idea of "oh we'll worry about making money later" If facebook is the prime example then just take a look at what a piece of crap its become for users. Facebook couldn't find a decent revenue model so now they're cannibalising their users by making the experience terrible. Which in my opinion, long term is going to be their downfall. Also, getting lots of users and then just slapping ads on your site is also a terrible business model and its what you tend to do if you haven't bothered to think it through clearly before starting.
  - prof_hobart 13y ago
    I'm not sure he's missing the point - more that he's disagreeing with it. There's clearly a few high profile examples of companies with massive user bases who have either found a genuine way to monetise their users, or at least sold/floated their companies in a way that's been massively profitable for the initial investors. But it doesn't automatically follow that it's always going to be easy to monetise them. There's always only ever going to be a handful of social sites that manage to attract huge numbers of users, and even some of those fall flat on their faces when it comes to making real revenue. Even Facebook is struggling to find a way to get actual ongoing profits out of their users, and the longer it takes them to figure out how to do this, the more nervous investors are going to be about big IPAs for future social media companies. Working on the assumption that "because site X has managed to monitise their user base, we will automatically be able to" sounds like the kind of baseless assumption that led to the first dot com crash.
InclinedPlane 13y ago
I contend that monetizing social software is actually very much easier than most people believe. However, the trick, I think, is to look at assistive rather than extractive models. Rather than looking at how to interject ads into social media, or to otherwise hijack a fraction of the collective attention span of your userbase that you can then sell to the highest bidder, instead look at how to leverage social functionality to put tools into people's hands to help them help themselves in the service of commerce. For example, google search ads and pinterest. Other examples: enable finding product and restaurant reviews, ratings, and suggestions by friends; improve wishlists for gift-buying; make group purchasing at discount easier for many products (games, books, movies, concerts, events, etc.); enable time sharing of services; facilitate picking up hobbies, skills, and activities; and so forth. There's tons of money in these ideas, but it's more common for companies to go to the advertising trough because it's seemingly so easy. In my view it's always easier to make money off of a transaction that both sides obviously benefit from.
- amirmc 13y ago
  "... but it's more common for companies to go to the advertising trough because it's seemingly so easy." Easy and lucrative once you're big enough and to get big enough, you probably have external investors (who've trodden the path before and know the likely outcomes). The sad thing is that while we may see lots of disruptive innovation in tech, we see much less innovation in the business models that follow (though please do correct me if I'm wrong!).
- mijustin 13y ago
  Everybody seems to keep forgetting about Geocities. They had millions of passionate users who built over 38 million pages on the site. They introduced ads in 1997 and two years later became the 3rd most visited sited on the web. Yahoo acquired them in 1999 for $3.57 billion. Yahoo was unable to further monetize those users. There wasn't some magic money tap they could turn on to make money from the site (despite it's popularity). Geocities never made a profit. What's Geocities worth today?
  - stevetsuida 13y ago
kintamanimatt 13y ago
It's far from cynical to ask how a business proposes to make money, especially if it's non-obvious! Yes, there are other challenges beside this, marketing, engineering, and others, but the whole purpose of a for-profit company is to make money. Asking how a business plans to do so isn't naysaying, it's a sensible question. Also, a valuation is more or less a made up number that suited the VCs and others. The words, "okay, we'll change the valuation to..." seem to be uttered quite commonly when the previous valuation is inexpedient.

50 points by wallflower 13y ago

shacharz 13y ago

Maybe it is the wrong question, but VC's keep asking it. unless you have mad traction.

zmitri 13y ago
This touches on a lot of the no-nonsense reasons why a VC would say no if you have some traction, but not explosive traction. As someone who has gone through the process of bootstrapping, getting traction, and trying to raise money for the first time in a "consumer unfriendly environment," I think he touches quite eloquently and precisely on a lot of important points. Most VCs don't lay it out as nicely as this either.

tmandarano 13y ago

Excellent summary by Ev at the end of the post.

ronilan 13y ago
True. But the "monetize THEM" is not the perfect choice of words. You don't monetize the users. Either a third party pays for their attention, or, they pay for their own access. No one owns the users. That's why they are so valuable.

noelwelsh 13y ago

Social networks must be the ultimate winner-takes-all product. They're probably great investments for VCs. They're high return, and they bleed money until the magic inflection point so you can probably get good terms. I think they're crappy products for founders, because the risk is so high and you don't have the same opportunity for diversification that an investor does. Speaking as a founder, I feel it comes down your own risk/reward preference. I'd rather have a good chance of a $50M exit than a miniscule chance of $1B.

dylangs1030 13y ago
True, but for the entrepreneurs and founders that want to take over the world (so to speak), they're perfect ambitions. While not all founders tend towards that goal, the ones that are most "high risk, high reward" will naturally gravitate to that. No one founds a successful social network and doesn't end up wealthy. Tumblr, Facebook, Instagram, etc. all leave their founders with significant exits.

TamDenholm 13y ago

I beg to differ, if you dont make a profit, youre not a business. I dont care if you raised tonnes of money from investors, built a talented team, built an amazing product and sold it to facebook/google/yahoo for a huge sum. Thats failure because you couldnt make more revenue than the costs you had.

dylangs1030 13y ago
You effectively missed the point of the blog post. The author isn't suggesting that revenue is insignificant compared to a user base; this is an extreme example of undercutting competitors via price slashing, and it's historically not necessarily a good idea. That said - Tumblr has so many users that it's difficult not to be valuable. A social network can be a currency of its own - having ownership of a platform that tens or hundreds of millions of people use daily puts you in a position to make revenue in a number of creative ways. Ev Williams' specific point is such that if you achieve that many users, you will eventually not find it difficult to be profitable. How could you? People wondered about Facebook this way. Then they introduced ads - the number of users only climbed. Conversely, if Facebook maximized its potential for revenue streams before solidifying organic user base increases, they would have plateaued a long, long time ago. That's the point.
- TamDenholm 13y ago
  I still take issue with the idea of "oh we'll worry about making money later" If facebook is the prime example then just take a look at what a piece of crap its become for users. Facebook couldn't find a decent revenue model so now they're cannibalising their users by making the experience terrible. Which in my opinion, long term is going to be their downfall. Also, getting lots of users and then just slapping ads on your site is also a terrible business model and its what you tend to do if you haven't bothered to think it through clearly before starting.
- prof_hobart 13y ago
  I'm not sure he's missing the point - more that he's disagreeing with it. There's clearly a few high profile examples of companies with massive user bases who have either found a genuine way to monetise their users, or at least sold/floated their companies in a way that's been massively profitable for the initial investors. But it doesn't automatically follow that it's always going to be easy to monetise them. There's always only ever going to be a handful of social sites that manage to attract huge numbers of users, and even some of those fall flat on their faces when it comes to making real revenue. Even Facebook is struggling to find a way to get actual ongoing profits out of their users, and the longer it takes them to figure out how to do this, the more nervous investors are going to be about big IPAs for future social media companies. Working on the assumption that "because site X has managed to monitise their user base, we will automatically be able to" sounds like the kind of baseless assumption that led to the first dot com crash.

InclinedPlane 13y ago

I contend that monetizing social software is actually very much easier than most people believe. However, the trick, I think, is to look at assistive rather than extractive models. Rather than looking at how to interject ads into social media, or to otherwise hijack a fraction of the collective attention span of your userbase that you can then sell to the highest bidder, instead look at how to leverage social functionality to put tools into people's hands to help them help themselves in the service of commerce. For example, google search ads and pinterest. Other examples: enable finding product and restaurant reviews, ratings, and suggestions by friends; improve wishlists for gift-buying; make group purchasing at discount easier for many products (games, books, movies, concerts, events, etc.); enable time sharing of services; facilitate picking up hobbies, skills, and activities; and so forth. There's tons of money in these ideas, but it's more common for companies to go to the advertising trough because it's seemingly so easy. In my view it's always easier to make money off of a transaction that both sides obviously benefit from.

amirmc 13y ago
"... but it's more common for companies to go to the advertising trough because it's seemingly so easy." Easy and lucrative once you're big enough and to get big enough, you probably have external investors (who've trodden the path before and know the likely outcomes). The sad thing is that while we may see lots of disruptive innovation in tech, we see much less innovation in the business models that follow (though please do correct me if I'm wrong!).
mijustin 13y ago
Everybody seems to keep forgetting about Geocities. They had millions of passionate users who built over 38 million pages on the site. They introduced ads in 1997 and two years later became the 3rd most visited sited on the web. Yahoo acquired them in 1999 for $3.57 billion. Yahoo was unable to further monetize those users. There wasn't some magic money tap they could turn on to make money from the site (despite it's popularity). Geocities never made a profit. What's Geocities worth today?
- stevetsuida 13y ago

kintamanimatt 13y ago

It's far from cynical to ask how a business proposes to make money, especially if it's non-obvious! Yes, there are other challenges beside this, marketing, engineering, and others, but the whole purpose of a for-profit company is to make money. Asking how a business plans to do so isn't naysaying, it's a sensible question. Also, a valuation is more or less a made up number that suited the VCs and others. The words, "okay, we'll change the valuation to..." seem to be uttered quite commonly when the previous valuation is inexpedient.