Don’t Confuse Growth with Success, and Don’t Delay the Revenue Model
There is a difference between success and growth. It used to be that growth was the result of success, but now, – companies are equating growth with success, and by doing so, they are taking risks in delaying the realization of their business model,- arguably the most important part of success.
The reality of the Growth-Success conundrum is that growth is half the success. The other half is really revenue.
Mark Suster wrote an emotional call to entrepreneurs to not forget about revenues in Why You Need to Ring the Freaking Cash Register. His warning was about not being too lax on revenues, because you’ll be right in .01% of the cases if you delay for too long.
Back to the Business Model
I’ve long argued that the ultimate success for a startup is the Business Model Realization, not growth, or a great product, Forget the Product, Start Focusing on the Model.
You can have a great product with millions of users, and you could be adding thousands of them daily, but if you don’t start tinkering with your business model to reveal the strategy needed for your revenue, then time is passing you by. At the end of the tinkering, revenue is the proof that your business model was valid.
There is a time lag between the 3 phases of a) user growth, b) figuring out the revenue strategy, and c) a successful execution of it. Fred Wilson called this progression Product>Strategy>Model. Practical Translation: Users>Revenue Focus>Execution.
Do not be blind-sighted by your staggering growth numbers, especially if you haven’t figured out the exact way you will be generating revenue. If you have it almost figured out, and it’s a matter of flipping the switch (like Facebook or Twitter did), then that’s great, but you’re in that .01%.
Otherwise, and for the mere mortal startups, you need to start the required iterations to figure out what will work, so better to start doing it while you’re growing, not when your growth slows down. Why? Because if growth slows down (hey, that can happen to anyone), then if your revenue is ramping-up, you will point at that as the key metric of success, and user growth rates will become a moot subject. But if you still haven’t figured out the revenue part, and your growth slows, and you’re running out of cash, then, you’ll remember the 2 key points in Ben Horowitz’s Climate Change post: a) you will do a down round, b) you’re not generating cash, therefore your fate is uncertain.
Network Effect, or Network Effects?
For consumer businesses, having a large number of users is very critical. A startup (and its valuation) grows because it is doing a good job at attracting users. Understood. There is no argument there. Furthermore, if you focus on revenues too early, it will distract you from focusing on getting users. Got it. And the Network Effect is differentiated via its defensibility. Roger that.
But the runway money that the VC’s gave you is not just to grow users. It’s also to experiment and discover the revenue model.
So if you don’t start activating the necessary triggers to move into some revenue generation early enough, you are delaying your success, perhaps indefinitely. The longer you wait to activate revenue after the conditions are there for you to realize it, the more difficult it will be to actually be successful at getting it, later. There are reasons for that.
Maybe the CEO isn’t able to make a product that sells. Or, maybe the CEO is still behaving like a founder, and not able to instill a sales culture into their startup. If the CEO can’t stop being a founder and start becoming a CEO and do these 2 things, it’s better to find out earlier than later. You need to show that you can sell, not just acquire users or develop products.
So, the second “effect” you want to look for in the Network Effect is the effect you can have on revenues. And that will be based on whether there is a transaction or packaged value somewhere that is monetizable. It’s the Effects of the Network, not just the Network itself that Matters.
A Product that Gets Users Isn’t Always the Product that Sells
Making a product that users use and having a product that users buy is not the same thing. Sometimes, they are two different products.
The consumer-facing one is not always the same one that will lead you to revenues. If you are gunning for a network effect model, the consumer product may be just the one where you derive data and user engagement from, and then, you can use that combination to develop another product to sell to a business user. Twitter, Google, Foursquare and Facebook are good examples. They sell advertising units and services to businesses, but their user-facing product is very different.
Sometimes, those “back-end” products aren’t as sexy as the consumer product, and the founder doesn’t get all that excited or isn’t as involved as they were in the consumer product, and that’s a red flag. But that’s what will secure your future, unless an early acquisition happens, but then again that’s the .01%.
Here are some red flag signs that you’re delaying your Revenue generation too long, despite having reached user growth success and product/market fit:
- You continue to think you’ve got plenty of time to figure things out.
- When asked “How is it going”, or “How’s the company doing”, the first thing you hear from the CEO’s mouth is something about the product or user growth, and nothing about revenue activity.
- Your organization’s structure looks essentially the same and you haven’t taken steps to re-organize functions based on the growth.
- You don’t have enough sales reps, there is no sales culture, and your sales expenses are still small compared to your overall burn rate.
- You’re not iterating on the revenue-related product, the same way you did on the end-user product.
- You are basing your assumption on following outliers (Facebook, Instagram, Twitter). It doesn’t work that way, and never has. Better to buy a lottery ticket.
- You’re still adding product features that don’t directly contribute to your revenue acceleration or business model realization.
- You’re not working on your marketing from a branding, positioning, or market communications point of view.
- You’re more excited about your end-user product than you are about your revenue-generating products.
Don’t monetize too early, but don’t monetize too late either. There’s a right time to start doing it, but don’t miss that window.
I agree with your conclusion: “Don’t monetize too early, but don’t monetize too late either. There’s a right time to start doing it, but don’t miss that window.”
Timing is everything. The trick is to find the optimal timing. Enterprise startups tend to monetize much earlier or even from day 1. Consumer startups MUST wait. In some cases they should wait for a very long time if they are outliers. In some extreme cases, all they need to do is find one customer a.k.a. the acquirer (think Instagram and Tumblr).
And don’t forget, for the outliers “How will they make money?” is the wrong question.
That was a good article by Josh.
Definitely, the B2B players monetize earlier.
But in the case of an acquisition route, then the startup just shifts the monetization challenge to the acquirer. Sometimes, the new context enables monetization (YouTube), sometimes it helps the acquirer indirectly (Instagram), and in all other cases not much happens, and we don’t hear too much about it thereafter (FriendFeed comes to mind). I think Tumblr is still too early to tell, although it’s very likely they’ll be in one of the first 2 scenarios.
Certainly nothing speaks to market fit like revenue.
The reason pricing is such an art is not just how much, but how and when you charge. No argument there.
But you use terms like millions of users as if it is something that 99.9% of all startups every get to. They don’t. This is the extreme corner case.
If I take your logic then someone like Wattpad is behind the ball. I don’t think I look at it this way. Sure they need to carefully find the model but with massive momentum and strong support and cash in the bank the idea of a window that might be closing is really not how I would look at it.
In fact, I would argue that if you are a network model, a platform where the data is the value across a broad range of users, and you have funding, understanding your model in no way means that you need to rush to monetize, even with traction.
Re: your last paragraph, the reality is that finding the strategy for the revenue model isn’t always straightforward. That requires iterations and trial & errors, and sometimes it could take a year for the company to find out what works.
My message is to start experimenting with revenue models earlier than you think, because it always takes longer to figure it out. It is not a trivial thing, even if you have a ton of data. Actually, it might be more challenging, because you need to create a new product out of that data, and that doesn’t happen overnight. Even Twitter and Facebook have been iterating with their revenue products.
I’m saying it’s like an insurance you need to start activating earlier than you think. There is no conventional wisdom here, based on my observations. Velocity of growth can slow down at anytime, and while you grow with metrics and not with revenues, there is this false sense of security and invincibility you get, and which I’m just cautioning against.
My message is for the outliers-in-the-making and the ones that are growing fast. The revenue is like a foundation of support. There’s this myth that if you activate revenue, it would slow down your growth, but I’m not sure that’s a well founded assumption, because if your revenue product is needed in the marketplace, it shouldn’t affect your user growth. Google’s increasing ad revenues doesn’t affect the number of user searches we conduct. As a matter of fact, they keep luring us to search because that’s what justifies their paid products.
Thanks for this thoughtful discussion.
We should put ourselves on stage sometime and have this discussion live.
Two pieces back at ya:
1. What do you mean by experimenting with your business model? We are not talking about modeling as we do that before we have a product often.
How would Wattpad, a great example BTW, experiment and roll in an iterating business model. Trifling with customers through transaction is dangerous and wacko honestly.
2. Google. Facebook. Twitter. They are all bad examples and honestly not at all instructive to the early stage company. Use Path. Use Wallpad. Use Whatap. Use examples that are real-time that us as users are on today.
You need to be careful about generalizing terms like monetization, startup, growth. Investors live on generalization. Working entrepreneurs live in details.
1. Companies don’t figure out the right revenue product out of the gate, and I’m not talking about it affecting the user experience of course. That’s untouchable. When you use Google or Twitter, their advertising product doesn’t affect you, and when it does via native in-stream tweets or Ad words, it’s a mild annoyance. 99% of the experience is intact.
There has been trials of various products at Twitter before they settled on Promoted Tweets, and even that has its own optimization options and iterations from their initial product. Foursquare is still experimenting with their revenue product. This is their second (maybe more) iteration at it: http://venturebeat.com/2013/07/16/foursquare-check-in-ads-annoying-maybe-not/
2. Google, Facebook and Twitter are the examples for revenue products because deep inside them, they continue to refine them, and their revenue products don’t disturb the user experience. I don’t know about Path, but Whatsapp is a unique because the founders are a bit unconventional in their views, and they have opted to charge for the app (and I like that, actually because it saves them from finding another more complicated model) http://www.appfreakblog.com/blog/inside-whatsapps-office-in-mountain-view.html
I’m extracting lessons based on observations, some inside knowledge and synthesis, because that’s where the insight is. The lessons are from the data points and conclusions based on stepping back and seeing the whole thing, whereas individual entrepreneurs and some VCs sometimes have a tunnel vision and aligned interests that make them believes things a certain way.
Only the passage of time will determine these outcomes, but if the effects of my warnings cause some re-thinking of strategies or approaches, then that’s great. I’m not interested in being proven right or wrong. I’m more interested in having impacted some thoughts for those concerned, and let them reach their own conclusions and decisions. One thing I know from experience is that entrepreneurs are very stubborn individuals (and for the right reasons). They don’t take external advice very well under a variety of pretexts, a key one is they don’t know how to differentiate good from bad advice. Only experienced entrepreneurs have that additional context and self-awareness.
There are many many companies coming out of big seed rounds looking for A or coming out of small seeds doing a large one–these to me are the most interesting case studies for this topic.
And personally–nothing is less interesting than media models to discuss.
For one, the numbers to make them relevant are beyond everyone basically. And two, models that are based on building something that most don’t notice is simply not that interesting to talk about.
Good stuff. The gym calls!
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