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Revenue could be fatal: 3 reasons your startup should consider waiting (uservoice.com)
23 points by rrwhite on Apr 30, 2012 | hide | past | web | favorite | 32 comments

This is the stupidest drivel I have ever read. If you brought this up outside of the inane SV bubble, you would be laughed out of the room.

They even state "for many apps, like Instagram [...]" as a good example when revenue is not needed. I'm flabbergasted.

Here's another way to put it: Your hardest problem is to build something that a lot of people want. It's really hard to do that. It's worth focusing all of your efforts on that than trying to be profitable on day 1.

It is very unlikely that you will be extremely popular and not find a way to make money. It is very likely that you can figure out a way to make money but not be very popular.

Making money is, relatively speaking, easy. Focus on the hardest problems you have first, not the easiest ones.

If Instagram had been charging for their app, it would have been very hard for them to get to the scale where they would be acquired by Facebook, especially for anything near the $1b. I'd say everyone who had a piece in that deal is flabbergasted too, but for different reasons.

Is this a strategy people should always aim for? No. But there are legitimate reasons why revenue should not be the top priority, and this post does a good job at narrowing it down.

[...] it would have been very hard for them to get to the scale [...]

Without revenue you can say it would have been very hard for them to, you know, exist as a company for some period of time.

You can say that, yes. But as a company with almost $8m in funding (prior to the $50m/acquisition thing; http://www.crunchbase.com/company/instagram) and low costs, they can defer revenue for a while.

@ktizo absolutely correct. He hints at that in the post, but that's another one of the criteria for when this strategy isn't appropriate. It's rare to have a strategy that is universal. Even "staying in business" is not always a correct strategy, and if you want to be successful as a business person, it's useful to know all of the tools in your arsenal.

Same thing as being a programmer. MySQL isn't the correct DB for everyone, so it helps to know when it's appropriate and when it's not.

So if you can blag 8 million without any promise of revenue, then don't bother with revenue. Sounds fine, but I assume that this doesn't apply to bootstrapped companies in areas without large quantities of gambling billionaires.

This post is not at all meant to be about what to do with your bootstrapped business. It's only targeting high-growth, mostly b2c, companies in winner takes all markets with strong network effects (ex: Pinterest, Instagram). That's what I mean when I say "startup" though that term is completely overloaded and adopted by everyone nowadays :)

By your definition of the term 'startup', the early Apple wouldn't have qualified.

By his definition, Google was never a startup because they're not in an area with strong network effects. Nor is their money-source B2C---they're sell advertising space to businesses.

Sure...I think that's a big part of Rich's point. If you're bootstrapping or building a lifestyle business, this isn't the way you want to go. Neither is right or wrong (though some specific instances certainly seem a bit gross).

(And regardless, eventually you will need to make money)

I remember this the first time round.

If you manage to be sneaky with an exit strategy, you never need to make money as you bail with a ton of cash before that becomes neccessary.

And when things like Instagram come around, the amount of people making businesses purely with the motive of sneaky exit strategies starts to completely overshadow the amount of businesses created that are genuinely valuable.

Then things can get very messy.

None of these companies are "trying to be sneaky with an exit strategy". They are trying to grow very large, independent businesses. If you build to flip, you are most likely going to fail -- it's just not a winning strategy.

But putting off revenue != built to flip. Having a ton of usage and figuring out how to make money is easy. Getting a ton of usage is hard. They are focusing on the hard problem first, and the easier problem second.

Are you honestly saying that Instagram's team was "trying to grow a very large, independent businesses"?

@zmanji: Absolutely. What evidence do you have to the contrary?

Here's evidence I have: Steve Anderson, one of Instagram's earliest investors and a board member, is also on our board. Just because they're not trying to make money on year 1 doesn't mean they weren't ever planning on making money.

What evidence do you have to support your claim? As far as I can tell Instagram was a cool idea/product that got lots of users. I am unable to see a moneymaking opportunity from any angle from the current iteration of the product.

In addition, if they wanted to build a large independent business why would the sell out so early?

@ktizo: I'm not name dropping, I'm presenting evidence that they were not "built to flip".

What evidence do you have to the contrary?

You presented no evidence. You just mentioned that you have a business relationship with someone who put money in, without saying anything else. That, in and of itself, is evidence of nothing.

Also, I never alleged that Instagram specifically was built to flip (although I can see little to suggest that it wasn't, although that is not the same thing), I merely pointed out that phenomena such as Instagram encourages a lot of people to enter the market with that as their motive, often enough to drown out other businesses. And that kind of behaviour was a major factor in the death of the last web boom.

Namedropping is no evidence whatsoever.

Furthermore, the namedropping of someone you share a corporate interest with is generally an admission of probable bias and using it as an argument in favour of your position isn't particularly convincing.

None of them?

That sounds more like faith based economics than anything else, of couse some of them must be doing this.

And offering a service for free at point of use can often be much easier than turning it into revenue later, especially if you have millions in the bank from investment already. There are plenty of stale corporate corpses littering that particular road, but with founders that did quite nicely out of it.

The post is solid, but one of the things I like most in here are the signs of looking at where revenue came from (the comment about only 1% of revenue coming from the entry-level plan).

I'd love to hear more from Richard about how they tested the impacts of moving from the $5 to the free plan.

And yes, it's definitely a solid strategy to delay revenue for users. I'm sure someone will argue this is Web 1.0-bubbly thinking. But, provided you're doing it in the way that Richard suggests, it's not totally insane. Twitter might not have found a great business yet, but at least they've gotten past one of the big hurdles -- getting people to come to the party.

We tested it using Optimizely, what we use for A/B tests, but rather doing a true A/B test we made into a sequential test (by manually setting all traffic to go to one variation versus another). It took a couple days to test and it's tough because since it's sequential traffic spikes will screw everything up and you'll have to start all over. So basically we compared two weeks with "average" traffic: running $5 plans one week and free plans the next week. Obviously if anyone noticed we allowed them to switch their plan to free.

Pesky revenue, always trying to get in the way of creating a business!

Might as well take it a step further and consider waiting on building a product. Why define your business with a real product when you can, like Zombo.com, do anything?

<smartass remark>

But enlighten me good sir: How can I get some pesky revenue? I at least don't have a product to get in the way but would actually like some money.

Thank you kind sir!

</smartass remark>

The question, as I wrote in the post, ultimately isn't about whether you need revenue or not. Of course you do eventually. It's about when you go for revenue.

I think the disconnect, and then perhaps vitriol, comes from the fact that these are small, stand alone companies. Large companies take this strategy all the time with a new group or division "Don't worry about revenue yet. Build a great product, get to market, get solid adoption." Nobody argues when MSFT takes that approach with say the Xbox. It's thought of as wise investments. In this scenario the VC's are acting like the wealthy corporate mothership. It just feels counter intuitive though.

If you don't want to take money or you're not in a market that is strongly viral then obviously you have to be concerned about revenue much earlier. If you are though then focusing on revenue in the short run may be detrimental.

"A Stable (but perhaps unexciting) Business - This is where most people end up."

Really? "Most people" with a new business end up with stable but unexciting businesses?

I suspect most people end in failure, not Stable Business. In a post full of deeply questionable logic, this little gem takes the cake for me. I suspect some anecdotal evidence from otehr commenters will back this up or that there is a bevy of statistics to prove that this is true, even in the rarefied atmosphere of web companies.

I meant that most people end up here rather that in the first scenario of hyper-growth. "Most people (who don't fail) end up here" would have been more clear. Point taken.

Every business and business model is different. This should be considered with a grain of salt. It is not a one size fit all

Nothing ever is which is why I wrote the answer to "when revenue" is: it depends. I wrote this post because I talked to enough people who thought companies not charging was completely irrational. I believe most people, including politicians, are rational actors you've just got to understand their motivations and goals.

Only economics folk think that people are generally rational actors. Try talking to some neurologists or psychologists and see what they think of that point of view, once they have finally stopped laughing.

Of course, but look at the concept of "loss leaders" in retail. Or even in gaming, where the manufacturers lose money on the systems, but make it back on licensing and game purchases. Isn't it helpful to understand when a counterintuitive strategy is a good option?

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