A common, long-running theme in Silicon Valley is that companies will get started with no sense of a business model. The common ethos is this: “we’ll get lots of eyeballs, and then we’ll monetize the eyeballs later.”
And certainly if you look at a business like a Twitter or an Instagram, neither were ones where a business model from day 1 made much sense. To succeed at scale, they needed to establish themselves as very broadly adopted, broadly used services. Indeed, not so long ago, many were hand-wringing over whether Facebook would ever be able to generate sustainable revenues. Given that $FB is now pulling in well over $1B / quarter, no one’s really harping on that anymore. So I think it’s safe to say that for the foreseeable future, we’ll continue to see tech companies that grow first and monetize later.
At the same time, I’m noticing a trend of companies that are starting to monetize earlier in their life cycles. Companies like Evernote, AirBNB, and Uber are examples, where they were generating revenue really early and growing from there. My sense is that we will see more of these, for a few reasons.
First, the breadth of endpoints is massive. Over the last 5 years, we’ve seen the explosion of smartphones, tablets, Kindles and other e-readers, along with the continuing growth of the PC market. The increase in nodes (or screens if you prefer) and endpoints where a service can be offered and a transaction consummated is staggering.
Along with this rise in endpoints, distribution is now becoming increasingly accessible, if you can pay for it. If your company can prove that it can generate gross margin on a per unit basis, then it’s going to be possible for you to invest a good portion of that margin in acquiring new users via a broad range of promotional and advertising offerings.
A third reasons is that a broader range of business models–freemium and in-app purchases, for example–have matured over the last several years. This gives tech startups a path to offering users a low-friction, try-before-you-buy value proposition on the one hand, while offering a path to monetizing from early in the lifecycle. This is a great thing for startups.
I think all of this bodes well for startups. Getting revenue in the door at any level is a great validation of product-market fit. It’s also a great way to keep the doors open and retain equity. If I were starting a company today, I’d be looking for a path to get revenue in the door from as early on as possible.