The grow-users-before-revenue strategy has several spectacular success stories: Google, YouTube, Facebook, Flickr, MySpace, etc. etc.
That's not to say it's the only valid strategy, but it's certainly a valid strategy. In fact, it probably has the highest payoff, albeit with the highest variance.
-Youtube might have been fucked if it didn't get acquired. It was hemorrhaging cash like Pac Man Jones & Robert Downey Jr. trapped in a strip club.
-Flickr was _priced_ like a talent acquisition.
-Like most acquisitions, the Myspace acquisition has largely failed according to Google, their primary advertiser. Additionally, Myspace's contribution to News Corp's earnings have been piss poor.
I agree that it's a valid strategy (especially for a company like Justin.TV), but IMHO opinion most companies have tunnel vision when it comes to turning in to a real business. It almost makes them risk seeking. Although getting acquired is nice, it sure as hell isn't a strategy - it's a cop out.
I'm trying to come up with companies that tried this strategy and either worked (issued dividends continuously) or was acquired and actually benefited (i.e. was worth their acquisition price based on DCF) their acquiring company. I'm sure there are examples, I just can't think of any off the top of my head.
Google and Yahoo are both obvious successes. Amazon is another. One Google outweighs hundreds or thousands of failures. You can't dismiss them as merely "anomolous" - among the biggest internet companies most of them followed this strategy.
MySpace's acquisition hasn't failed: it's a profitable enterprise for NewsCorp and still growing. It paid back the purchase price in the first year! So that's a success, not a failure.
The jury is still out on YouTube, Facebook, and Flickr as to whether they will be long term businesses, so they are not yet data points one way or another. They are clear success stories for the founders though.
Amazon had a business model from day 1. I don't think they really apply to this conversation. They weren't profitably early on, but that's way different from not having business model.
"Among the biggest internet companies, most of them followed this strategy."
You could be right, but I honestly have no idea. What sources are you using? How are you measuring this?
"It paid back the purchase price in the first year!"
Microsoft - revenue before users, although their internet properties consistently lose money. Not really an internet company.
MySpace - users before revenue, success (MySpace is profitable already)
Facebook - users before revenue, undecided
Blogger - users before revenue, probably a success although google doesn't release numbers so it's hard to say how much money they make on it
Orkut - same as Blogger
RapidShare - users before revenue, success (very profitable freemium model)
Baidu - I'm not sure. I presume they follow the same path as Google did, but with an obvious example of how to succeed already in place.
QQ - users before revenue, success (virtual goods turn out to be a great way to monetize a free chat product in China)
eBay - revenue before users; they didn't make auctions free
Hi5 - users before revenue, undecided
In addition to being the biggest internet companies, these are among the most profitable. Several of the top 20 were acquired by other companies, making it difficult to judge how successful they would be independently. Several are still so new it's hard to tell. There's exactly one which took money over user growth (eBay).
Listen, I understand that this is the kind of thing you might expect to read in a 1998 edition of Wired and does not fit with the 'getting real' mantra, but (at the very least) eyeballs are monetizable trough advertisement. It's a time tested strategy that has worked just fine in other mediums.
Sites like youtube and myspace did not need to worry about the monetizing part as they got acquired quickly, had they not, maybe the story would be different. I still can't think of sites with a huge and active userbase that failed.
Ugh that getting real shit makes me barf. Applying blanket statements like "you shouldn't need to take VC money" only demonstrates the tunnel vision of working on one business for so long. Much of their advice is very good, but there's too many absolutes for my liking..
Anyway, all I'm saying is too many people are applying the blanket statement "worry about monetization later" when not all of them should be.
In my opinion, it can be easier for businesses to reach the tipping point of paying customers (i.e. break even) vs. the tipping point of users (???, profitability?, acquisition?). I think MM touched on this.
Myspace hasn't show itself to be a real business yet and either has Youtube. I still can't think of user based acquisitions that have quantifiably proved themselves to be a wise decision, though I think Youtube will.
>In My opinion, it can be easier for businesses to reach the tipping point of paying customers (i.e. break even) vs. the tipping point of users (???, profitability?, acquisition?). I think MM touched on this.
Completely agree, but the possible payoff in the latter case tends to be quite higher.
>Myspace hasn't show itself to be a real business yet and either has Youtube. I still can't think of user based acquisitions that have quantifiably proved themselves to be a wise decision, though I think Youtube will.
I think that's hard to say. Take hotmail for example, while it might have not generated a $100 mil in revenues yet (or maybe it has?), I would doubt that the purchase was a strategic decision they regret over at Redmond. I think the same could be said for Youtube. If NewsCorp has regrets over the MySpace purchase, they are quite likely much more due to FB´s growth than to MySpace's current revenue.
If all these companies decided to grow users before revenue when they where a startup, it makes little sense to try to squeeze revenues quickly out of them, at the expense of user growth, once they've been acquired by a company with much larger pockets. I think the logical thing to do, in those cases, would be to continue the same growth strategy for a few years while calmly exploring ways to monetize them.
Startups that don´t get acquired are obviously more pressed to find a way to monetize quickly.
" Take hotmail for example, while it might have not generated a $100 mil in revenues yet"
I'd bet it's way more than that due to volume, brand recognition and since it directly circulates hotmail users to microsoft properties. But similar to you, I don't know either. However, I think that's a great example of a user acquisition that has worked so far - thank you - I was having problems thinking of examples.
Not to sounds too 37signally, but what about the freemium model?
I think it's great, but don't see it as a viable option for some products.
I also think micro-payments can be an option one day when someone gets around to making it less painful and more available. I think this will probably involve cellphone companies but I digress.
In any case, I think selling ads can be a very profitable route for others.
From my pov those are anomalies, rather than the norm.
For every Google, Youtube and Facebook, there are thousands of startups with similar strategies that fail.
I think it is safer to go the long route and start small, working your way to the top, charging a price right from the beginning. If your application is useful, users will pay for it.
I exactly agree that they're anomalies...but they're by far the most profitable anomalies. Almost all the top websites grew users before revenue! High variance, high payoff. It is certainly safer to start small and grow revenue first; it's also likely not to produce the next Google (or Yahoo, or Facebook, or YouTube, etc.)
When you're introducing revenue later, you have to provide extra value. This means more features and so you're endangering your core values.
When you're starting to charge for existing features, by limiting the free accounts, you will surely upset your existing users. Google tried to introduce advertising in YouTube videos, and the community was not happy about it ... and imagine a site like YouTube placing a limit on how many videos you can watch. No matter how hooked your users are, you still can lose them, not to mention that popular services like YouTube got cloned and there is competition waiting for those users.
People have been charging money or other goods in exchange for products/services since forever. I don't really understand this trend of releasing products for free. The only viable exit strategy is for your company to be acquired by a big player, but if you want your business model to be sustainable you should question this trend.
I think that is the exact difference between building a "small" business and a startup. Businesses are made to be essentially sustainable from the start (or at least soon after start). Startups are trying to become large in a hurry and are cool with losing a lot of money upfront to generate it later. Obviously however, there are a million examples of companies and businesses that blur the line.
Of the companies in that list the only one that I am sure actually turned a profit is Google. Youtube, Facebook, and MySpace don't have a business model. No idea about Flickr, but iirc they were acquired for a pretty low dollar amount.
That's not to say it's the only valid strategy, but it's certainly a valid strategy. In fact, it probably has the highest payoff, albeit with the highest variance.