Making Money (at a consumer-focused startup)

Making Money (at a consumer-focused startup)

Last summer I had a conversation with someone who works at one of the big tech internet giants. I mentioned that we were worried at my startup about the profit margins for one of our new products. He paused and then said something to the effect of “why do you care about making money?”.

The Case for User Growth

I almost laughed out loud when I heard that, but I knew exactly what he was talking about. For most consumer-focused startups in Silicon Valley, user growth is the primary focus and they actively try to avoid revenue. The moment you start making money is the moment you start getting judged on how much money you make. So, don’t make any money. Just focus on increasing the number of people that use your app on a regular basis.

In some ways this works well for consumer apps because it takes a lot of effort to make something that has mass appeal. If you focus on revenue too early, you may inadvertently cater to one niche of early adopters at the expense of a much larger group of people who would use your app under different circumstances.

The conventional thinking for consumer apps is that you can figure out how to monetize once you gain a critical mass of users. In other words, the path to success looks something like this:

  1. Create a free app
  2. Raise seed money on the promise of greatness
  3. Achieve hockey stick user growth before you run out of money
  4. Raise more money at a crazy high valuation
  5. Figure out how to monetize

This is the playbook for many consumer app startups in the valley and it has a proven track record. Just look at Snapchat, Facebook, Twitter, etc.

The Case Revenue Growth

Actually…wait a minute. Yes, Facebook went for user growth and has turned into a high revenue generating business, but what about the other examples? Twitter went public in 2013, but has never turned a profit and continues to lose about a quarter of a billion dollars a year. Snap went public last year and lost almost a half of a billion dollars in Q3 2017. And these are the success stories! A large majority of consumer apps don’t get close to this level of “success” and die off once their burn outpaces their ability to dupe…I mean…convince investors to continue to dump money down the drain…I mean…take a speculative position on a risky asset.

Obviously this is all a bit insane. But what is the alternative?

Well, how about focusing on actually making money instead? The great thing about this approach is that even if you don’t hit your aggressive revenue targets, you will extend your runway as a side effect. The longer you stay alive, the greater chance you will figure out your own path to success.

Yes, there is a fear that you won’t generate hockey stick revenue growth but…who cares? If you achieve profitability, then you an create your own destiny.

Conclusion

I have taken both approaches at various times in my career and perhaps this is the old fart in me, but I have come to strongly prefer revenue growth over user growth. I am patient and confident in my team’s ability to deliver. I don’t need immediate satisfaction. I know that if we just keep staying alive and we keep getting more and more swings at the plate, one of those swings will inevitably be a home run.

Product vs Commodity

Product vs Commodity

I love building software products, but sometimes it makes sense to treat a certain resource more like a commodity.

The definition of a commodity is a raw material like copper or primary agricultural product that can be bought and sold. There are of course many other services and businesses built on top of any commodity. For example, a manufacturer may buy a commodity (iron ore) and then sells steel beams. A builder would then buy the steel beams and sell a building. A real estate mogul may buy the building and then rent out space in the building. And so on.

ArcelorMittal (a steel company) really only cares about one thing when it buys iron ore: price. A new startup, on the other hand may evaluate many different factors when it comes to office space including intangible things like “vibe” and “network effect”. Part of the reason why co-working space renter WeWork is doing so well despite extremely high price per square foot is that they have developed a full product that appeals to young startups.

So, the big question is if you had a commodity like iron ore, should you sell it largely as is (i.e. you are selling a commodity) or should you try to transform it into something else (i.e. you are selling a product)? I think that software developers are naturally inclined to make everything a product, but the key decision point is whether the extra value you get from a transformation is worth the cost.

For example, let’s say you bought a commodity for $5. You could either sell it for $7 with $1 in costs for marketing, operations, etc. OR you could spend an extra $5 to transform it into something else that you can sell for $20. It may seem like the obvious choice is to spend the extra money and create a product you can sell at a higher price point for more profit. However, this isn’t always the right solution. The subtle thing that is often ignored here is that transformations carry risk. Markets can change and if you put yourself in a situation with a lot more overhead you may not be able to move quickly enough to avoid going in the red when your costs jump from $5 to $50.

The point here is that if you can truly make a profit off a commodity without much of a transformation, you may want to consider doing it. I love building products as much as any developer, but sometimes it may make sense to not build something complex and just expose the raw information or downstream tool without much on top of it. The contact information on GetHuman (for example, the Comcast Phone Number page) is built around a commodity. Namely, phone numbers and cheat codes for companies. We have at various times tried to turn this into a product, but nothing has been as valuable as just exposing the raw info in a very clear way. No login, no extra clicks, no downloads, no popups. Just the info the user needs in one shot.

Back to Work

Back to Work

Most people need to work in some form or fashion. Love it or hate it, work is a staple of life.

On one extreme, life is work. Everything else comes secondary. 100 hour+ weeks, little sleep, broken relationships and poor health are common.

On the other extreme, work is a necessary evil but one to be avoided whenever possible. Life is more about fun and recreational activity.

As much as I try for balance, my tendency is toward the former. However, one thing I recognize is extremely valuable is time away from work. Every time I spend a week or more away from work, I come back even more fired up and energized. I constantly forget about this and feel guilty about taking time off when it is coming up on the schedule. After it is over, though, I can’t appreciate it enough.

So, it’s a new year and its time to get back to work! Let’s do this.