There is a ton of discussion around when startups should “turn on” revenue. In this piece I will tell you a) why this debate exists, b) when you should turn on revenue, and c) do you have to invent a new revenue model for your startup?
A. Why Is there a debate over when to turn on revenue?
Revenue is an “elegantly-simple-yet-complex” discussion. The debate about when to “turn it on” assumes there is a tap just waiting to spit out money in the corner of your office — and life in 2015 is that simple!
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Subscriptions, advertising networks, and affiliate fees for commerce are all available for your startup in hours — not days or months like it used to be back in 2004!
The reason this is such a debated topic is because consumer products are easy to build but hard to get to scale. Savvy investors advise founders of consumer products to not worry about making money until they actually hit scale.
Why? Five reasons:
1. If you try to make money early, the management team will be spending 50% of their time on product and 50% on revenue. You’ll also be spending 50% of your head count on product and 50% on revenue. Every percentage point of resources — time and money — you put on revenue could have been spent getting to scale. When you’re at scale you will make money — it’s guaranteed!
2. If you charge for your product you’ll reduce the number of customers giving you feedback, and that feedback is essential in — wait for it — getting to scale!
3. If you place a bunch of ads in your product it will, on some level, reduce the quality of the product.
That is why if you look at Inside.com today we are not charging for, nor running ads, in the product.
4. There is unlimited funding available to startups that are growing — at least right now. If you grow you get the dough!
5. Cynical people in the industry believe that if you turn on revenue early you will LOWER the valuation a buyer will put on the company. Their theory is that if you make $1 per year with 10m users you will have proven the business is low revenue, but if you have 10m users and no revenue the acquirer can create their own model of how much they can monetize your user base at.
You can debate these points, but this is how our industry works today. If you choose to debate it you’re going to have to convince everyone around you why they’re wrong. Oh yeah, the people you are going to have to convince are millionaires, billionaires, narcissists, and flat-out winners — good luck!
B. When to Turn on Revenue
Enterprise: If you are an enterprise software company turn revenue on from the start, because you need to know how much folks are willing to pay for your product.
Hardware: If you are a hardware company you have no choice but to charge for your product from day one. The only question is, what margin do you want to have? In this case, you can take two approaches: 1. The Apple model where you make money off the hardware, or 2. The Microsoft and Android model where you make money off the software/services while commoditizing the hardware.
Marketplaces: If you are a marketplace like Uber (matching cabs and riders), EBAY, Kickstarter, or Dogvacay you should make money immediately at the percentage you ultimately intend to run the company at. Why? Because if you become successful, you will have sellers who will be VERY pissed off if you change the split. Imagine if tomorrow Kickstarter said, “we’re now taking 15%!” Folks would run to Tilt and Indiegogo!
Ad-driven businesses: You should wait until you hit scale as described above, but you should experiment with unique models. Medium (I’m an investor) doesn’t have advertising, but they did a little partnership with BMW that was a very subtle way to — I assume — experiment with native advertising and sponsored collections of content (which John Battelle did a bunch of at Federated Media back in the day).
C. Do you have to Invent a new revenue model?
Are you f@#$king nuts?!?!
Do you really think there is a new revenue model out there that hasn’t been tried already?
At best you might delude yourself into thinking that you are evolving a revenue model, but folks are generally just coming up with new buzzwords to replace old ones so they can trick everyone into thinking that they are breaking new ground. For example:
“Native Advertising” was “Custom Publishing” in the 90s and “Sponsored Programs” in the 50s.
“Affiliate Fees” in the 90s were “Commissions” in the 1900s.
“Crowdfunding” was “Patronage” in Roman times.
Remember, your ideas are all unique snowflakes that have never existed before — but will only exist for a moment in the blizzard of brilliance we live in!