OnStartups

I came across this article on Dead 2.0 this morning:  YCombinator Says YProfit?  Besides the clever title, and I’m a fan of clever titles, I think some of the points were dead-on.  This gave me the needed push to write an article that I’ve been mulling about in my brain for some time now.

Web 2.0 Revenues: Not An Oxymoron

My background is primarily technical.  I’ve been developing commercial software products for all of my professional career.

In the software development world, many of us have discovered the value of the “release early, release often” approach.  This is based on the experience that given the choice between trying to write detailed specs and requirements and then building a product around it (often months or years later), the odds of actual success go up if you can get something out there early, determine what your users have to say and then adjust your product accordingly.  The beauty of this approach is that you end up investing in features that people actually use and care about (and hence complain about).  I’m a big fan of this approach, for one simple reason.  It works.

I think too many Web 2.0 businesses decide to “aggregate users now, worry about making money later”.  With all due respect to Paul Graham, who advocates this to startups (and who I have a lot of respect for), I don’t think this is the right idea in most cases.  Like a software product and it’s features, I would argue that a business model and its execution also needs to be “experimented” with and adjusted.  The sooner you can get your business model “out there” the sooner you can figure out what works and what doesn’t (and do something about it).  

For the same reason you shouldn’t keep your product away from the market for too long, as the feedback is crucial, you should not keep your business model to yourself too long either.  Simply relying on the “we’ll make money on advertising” is not enough.  What kind of advertising will work?  Will you invest in finding individual advertisers – or go with one of the larger platforms?  Do you need something more exclusive – or will one of the large platforms like AdSense work for you?  What’s the CPC/CPM or other metric going to be?  How much traffic will you need (based on your users) to make any kind of money?  The point is that even advertising has its nuances (and this is coming from a layperson that knows almost nothing about advertising-based revenue models).

My advice to Web 2.0 startups:  Charge early, charge often

Don’t let the fear of scaring your early users away (because of things like advertising).  If 95% of your users are not willing to stay on your site if you put ads on it, that should tell you something.  

The most common counter-argument I expect to get is:  “But we need to build up a certain critical mass.  It’s easier/smarter to do this by not charging anything, and not putting any ads up.”  We can then figure out the best way to monetize after we hit this critical mass”.  I’ll concede on that point.  If you’re smart enough to be doing this as a strategy and you have at least some knowledge of how all this works, more power to you.  But, I’m guessing that most Web 2.0 startups are deferring discussions of business models and revenue simply because they’re clueless or it’s convenient to do so and they are working under the misguided belief that it’s not necessary.  It is.  Always has been.