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:
- Create a free app
- Raise seed money on the promise of greatness
- Achieve hockey stick user growth before you run out of money
- Raise more money at a crazy high valuation
- 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.
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.