Why Startups Don’t Make Money Anymore(wyattpeak.com)
wyattpeak.com
Why Startups Don’t Make Money Anymore
http://wyattpeak.com/2009/01/15/why-startups-dont-make-money-anymore/
17 comments
Another post saying that web companies should charge their users instead of just relying on ads.
I'd agree with you on the point the site is trying to make, but what I find interesting is the rationalization for this behaviour.
The meat of the article, IMO, is this paragraph: "This system breaks down, however, when products stop costing anything to produce. The cost of provisioning service to a single user of a site is effectively zero, close enough that it can seem worthwhile to give it away in order to expand your userbase. Unfortunately, in doing so, you lose the revenue stream which has supported businesses since the dawn of commerce."
The meat of the article, IMO, is this paragraph: "This system breaks down, however, when products stop costing anything to produce. The cost of provisioning service to a single user of a site is effectively zero, close enough that it can seem worthwhile to give it away in order to expand your userbase. Unfortunately, in doing so, you lose the revenue stream which has supported businesses since the dawn of commerce."
This is really obvious advice, but people need to hear it. There are loads of developers working on the next great social consumer facing product that will revolutionize the way people interact yada yada yada - the only downside being that they have no idea how they will monetize.
This is a gross generalisation. Plenty of startups are making money.
Name, say.. 10. That are actually MAKING money, VC rounds and such don't count.
Most of the startups that are making money are the ones you've never heard of. This is a pointless exercise...however, here are some that I believe are making money that you may have heard of (happy to be corrected as I don't know for sure that they're all making money):
1. GitHub 2. eBuddy 3. Dogster 4. StyleDiary 5. ThisNext 6. Kaboodle 7. Stateless Systems 8. RedBubble 9. Wufoo 10. NationMaster
1. GitHub 2. eBuddy 3. Dogster 4. StyleDiary 5. ThisNext 6. Kaboodle 7. Stateless Systems 8. RedBubble 9. Wufoo 10. NationMaster
11. Mibbit (From advertising so far)
Although I have no idea if it's even classed as a 'startup'.
I wonder if some of the reason for the recent backlash against advertising supported models is that some techie types install adblock, and perhaps assume everyone does? In my measurements only 6% had adblock installed, and that's for a very techie early adopter crowd.
The truth is, there are millions of websites out there, making millions from advertising. It's so much more scalable than charging users.
If facebook+digg etc cut back spending, they'd be making millions in profit from advertising. I expect they have bigger plans though.
Although I have no idea if it's even classed as a 'startup'.
I wonder if some of the reason for the recent backlash against advertising supported models is that some techie types install adblock, and perhaps assume everyone does? In my measurements only 6% had adblock installed, and that's for a very techie early adopter crowd.
The truth is, there are millions of websites out there, making millions from advertising. It's so much more scalable than charging users.
If facebook+digg etc cut back spending, they'd be making millions in profit from advertising. I expect they have bigger plans though.
Zynga FTW.
A ton of SaaS apps are, I think. Like Lighthouse, the 37signals apps, Freshbooks... SlideRocket probably will in the near(ish) future, if they're not already, etc. Then there's the micro ISVs like Balsamiq.
Plenty of startups are making money.
(Quick caveat: I haven't actually read the article yet... so it might be talking about a totally different kind of startup.)
Plenty of startups are making money.
(Quick caveat: I haven't actually read the article yet... so it might be talking about a totally different kind of startup.)
All of the businesses you mention solve real problems that other business people are willing to pay to have solved.
The way I see it social sites need to climb a very steep peak before they have any chance of making money from ads - how many facebooks (which is still a long way from profitable) can the web ecosystem support? - If you do reach the top of that peak which only has room for 2-3 big players you have a chance of banking millions.
B2B services on the other hand are much safer. Business people understand that products and services cost money - and they are used to paying for the services they use.
My advice to developers looking for a product is to forget about the 1 in a million chance that they will develop the next great social app and cash out rich. By focusing on customers that are willing to pay, your venture has a much greater chance of becoming profitable and sustaining itself.
The way I see it social sites need to climb a very steep peak before they have any chance of making money from ads - how many facebooks (which is still a long way from profitable) can the web ecosystem support? - If you do reach the top of that peak which only has room for 2-3 big players you have a chance of banking millions.
B2B services on the other hand are much safer. Business people understand that products and services cost money - and they are used to paying for the services they use.
My advice to developers looking for a product is to forget about the 1 in a million chance that they will develop the next great social app and cash out rich. By focusing on customers that are willing to pay, your venture has a much greater chance of becoming profitable and sustaining itself.
I think that, fundamentally, a lot of startup founders don't charge money because they lack the confidence to ask people for it. Which is crazy, because the people who would be your customers spend tens of thousands of dollars a year on things they care about less than your software.
I know I was TERRIFIED of charging money 2.5 years ago. What if it breaks?! What if there is a bug?! What if no one cares about what I'm doing?! But charging money is the BEST MEDICINE for this fear because people will pay you money. And after that happens a few thousand times, you start to lose the sense of "zomg, I am totally unworthy of being compensated for improving people's lives, perhaps I could put out a tip jar in a suitably discrete location and hope some money falls into it."
I know I was TERRIFIED of charging money 2.5 years ago. What if it breaks?! What if there is a bug?! What if no one cares about what I'm doing?! But charging money is the BEST MEDICINE for this fear because people will pay you money. And after that happens a few thousand times, you start to lose the sense of "zomg, I am totally unworthy of being compensated for improving people's lives, perhaps I could put out a tip jar in a suitably discrete location and hope some money falls into it."
Dude, not all startups are in the software business. I know a few startups in the hardware business which are growing spectacularly. Contrary to popular belief, not every startup wants to be the "next Facebook" ;-)
This is absurd on it's face. The marginal cost of software has been 0 for almost three decades ( arguably, it has 0 marginal cost by definition). That didn't stop Microsoft from becoming one of the largest, most successful companies in the world. The issue with social media is the lack of barriers to entry, plus the limited value offered by most social networking sites. If I want to interact with my friends, usually I will just call them. Facebook is a fun distraction, but it is not providing me with a service I value enough to shell out cash for, and if they did charge, everyone would just pick up and move on (cf Friendster, not that they charged but that users left en masse).
The author seems to be confusing social media with the entire web industry. Zappos, Threadless, Etsy, Basecamp... there are plenty of newer sites making money by charging for goods or services.
As far as innovative revenue models go for social sites, I've always held LiveJournal in high esteem. I don't know the status of the site today, but five or so years ago you could buy a premium account then pay for add-ons: more photos, privacy features, and the like. Last time I checked out WordPress they did something similar (pay $5 to get custom css, etc).
As far as innovative revenue models go for social sites, I've always held LiveJournal in high esteem. I don't know the status of the site today, but five or so years ago you could buy a premium account then pay for add-ons: more photos, privacy features, and the like. Last time I checked out WordPress they did something similar (pay $5 to get custom css, etc).
It doesn't matter what your plan to monetize is if you don't have the users/traffic.
Every anti-advertising blog post and article skirts around this inconvenient truth.
Every anti-advertising blog post and article skirts around this inconvenient truth.