Stop asking “But how will they make money?” | Hacker News Reader

Stop asking “But how will they make money?”

andrewchenblog.com

39 pointsrevorad40 comments

Oh god.

I just mentored at a startup event this weekend. Half the teams had no idea how they were going to make money. None. They were building products, not businesses. Many of them were subconsciously hoping that the VC fairies would visit them, and then 18 months later somebody would buy them. "Instragram!", they cried. And then I cried.

Facebook is the worst possible business to use as an example here. They are an outlier, a once-a-decade company. Building an actual ad-supported business these days requires you get massive amounts of traffic quickly, and that means that a very large percentage of your brainpower will be devoted to user acquisition, ad network optimization, and trying to decide how you feel about auto-play video ads and popunders. That is, you will always be thinking but how will we make money?

It also kills me that when talking about ways one makes money he mentions Stripe, Boku, and Kickstarter in the same breath with ad networks. Those are not business models. They are just ways that money travels. It's like saying one's business model is accepting checks.

His post, if it's relevant to anybody, is only relevant to a very small number of businesses that will take $10m-100m in venture funding and are doing something so trivial that nobody is willing to pay money for it. It's ridiculous.

>It also kills me that when talking about ways one makes money he mentions Stripe, Boku, and Kickstarter in the same breath with ad networks. Those are not business models. They are just ways that money travels. It's like saying one's business model is accepting checks.

I came here to post this. Kickstarter's intent is to assist with bootstrapping a product. It's not monetization. It's a way to get the capital to produce something. They answer the question "It's going to cost $100,000 to make a batch of our widgets/books/etc. Is there enough of a market to actually sell that number?"

Stripe, Amazon Payments, Google Checkout, etc. are payment processors. Again, they're not monetization. They're there to get money from customers hands into your hands. They're the answer to "We want to sell this, how can we get our customer's money?"

But even if you're using those methods to provide answers to those questions, the fundamental question still remains: "What are you selling, and how do you sell it?"

THAT is where the business model comes in. If you cannot answer that question, I seriously question your entire startup.

Agreed 100%.

The thing that really kills me about this: cluelessness about one's business model can be an adaptive trait in a bubble. When the situation is crazy, sanity is not a virtue.

A post like this makes a good Exhibit A in a case that we're in Bubble 2.0.

This. I'm really having a hard time seeing how these are relevant at all. They're ways to accept/raise money - not generate it.

Great comment: ...are doing something so trivial that nobody is willing to pay money for it.

I have had many conversations with inspiring entrepreneurs that thought building a relatively simple product/service "supported" by advertising would instantly generate millions (or "gazillions").

I'm curious, though, what is your company's business model? Is it an ad-supported business?

Good question.

I can't talk about my current company's business model, although anybody looking at it would say that ads are certainly one plausible candidate. For what it's worth, the last company I helped start is ad supported, as is one I worked on in the 1995-2000 timeframe. Before that, I consulted a lot for publishers. (The old kind, whose business plans started with: first we slice the trees real thin.)

I say that to demonstrate that I'm not entirely knocking ad-supported businesses. They can be a great way to pay for something that is otherwise hard to monetize. But I also know how hard they are to get to scale, and I know there's a difference between them and businesses that fill a need strong enough that people are willing to open their wallets.

So in sum, I'm ok with ad revenue as a business model. But I hate, hate, hate people using it as a fairy tale so that people can pretend they don't need to think about their business model.

And thinking further, "something so trivial" sounds too harsh. I don't mean it that way; I consume plenty of unpaid media that I like. I even like Facebook, and use it daily.

But I think the fact that ad-supported businesses need millions of users says something: the value delivered to each user is pretty small.

Wow. Making money is anything but commoditized. What is commoditized is often the business itself. That's the problem for these guys who don't make any money. Twitter has taken $1B in investment. Google makes three times that in profit in a quarter. It's cheap enough for Google to keep at it with G+ for the next century if they have to.

If you think being connected is worth something, AT&T had 99.9% of the nation connected to the rest of the world with a dialtone for a century. And then they got completely owned within the span of 5 years. Long distance is worth exactly zero today. The copper itself is worth more. Being connected in itself was worth nothing to the company that did it. Someday maybe people will look back at Facebook and say the same thing. Who knows.

BTW, non-search-related ads are a fight for eyeballs. There is a limited amount of eyeball time in the world. The graph of growing internet presence is nothing but a pyramid scheme is this regard. Ad money is not endless. Ask NBC (now, Comcast).

Not to belittle your point (since I agree with you), but didn't AT&T get owned simply because the MaBell monopoly no longer existed and thus couldn't simply acquire the up-and-coming wireless carriers? Perhaps that's not the best example.

That certainly marked the end of something for them. But they continued to be a very powerful company for another 10-15 years. They leveraged their long distance business to buy everything in sight in the 90s (cable, mobile, even NCR). But by the time the internet bubble came, and everyone built out massive amounts of fiber, that ate the lunch of long distance in a matter of a few years (hence my "5 years" claim above -- they had to start selling assets in 2000 and were acquired in 2005).

No, keep asking. Ask until you are blue in the face. Just look at the Facebook IPO- yes, they have a business model, but that doesn't stop people asking whether they will make more money, or even continue to make money in the face of mobile, etc. Look at Netflix and their various issues over the years.

These are all huge challenges. To dismiss it with a hand-wave and say "the answers are all obvious" seems wildly misguided. The only reason I can think you would take that attitude is because you don't want to think about it.

Thank you, while there is certainly a grey area, and I don't expect a company to know the future. They should be actively figuring out how to make their company sustainable. If not, you aren't a business, you are either a charity, hobby or scam.

I'm not sure about that. There's nothing wrong with a business that's going to burn out in three years, provided everyone knows it will, it's making profit now, and there's an exit strategy in place.

A fairly common strategy among certain types of entrepreneur is the news-driven mini-venture. See major news, make product to capitalise on it, expect revenue to dry up as it becomes old news, move on.

Author seems to have equivocated "online business" with "displays ads for a living".

Which seems like the least creative, suboptimal way to go about things. The most profitable of tech businesses invariably have little to do with displaying ads. See examples Google (ad brokering), Amazon (selling shit to people), eBay (selling shit to people), LinkedIn (selling subscriptions to people), Apple (selling shit to people), AirBnb (selling rooms to people), DropBox (selling storage to people).

Holy shit, I'm starting to see a pattern here. It seems the most stable, profitable tech businesses all involve /whisper/ selling things to people.

sigh

And people say there's no bubble...

On the smaller end of things, I literally know no pro-level ad-supported website owners (generally in the 200k - 2m uniques a month range) who prefer ads as a model any more. Since I run a website in that range (ad-supported - for now) I know quite a lot of those guys.

Everyone's trying to move as far away from ads and toward, once again, selling shit to people, as fast as possible.

Can you say more about why? I think I know what you're getting at, but since you've talked with a lot of people I'd love to hear your broader take. (If you can't talk here, please do email me.)

"Outsource your monetization" has to be one of the most nebulous statements I've ever heard. Last time I checked, it was a critical factor in the success of a company and shouldn't be taken lightly (especially when the proffered solutions are "sell ads" and "use Kickstarter", among others).

That's quickly approaching the slippery-slope of outsourcing your entire company -- product development, personnel, and monetization. Then what are you left with?!

"Outsourcing your monetization" sounds awfully close to "outsourcing your profits"

Making money from an IPO offering (a one-time event) is very different from making money from a customer base (an all-the-time event).

IPO means you can have cash in the bank. Customers mean you have a business.

Facebook did pretty well on Wall Street, but I wouldn't expect those following suit to get the same opportunity.

Making money is not commoditized. Startups who plan on changing the world with no metric to measure so other than VC money are.

Twitter already has 100+ million users, a business model and reasonable revenue. But I'm pretty sure many are still asking how will they make money for many other reasons.

I suppose when people ask "how will they make money" they're not expecting a short "I'll just sell ads" as it seems to be what the author is implying. But instead they're expecting a detailed analysis of your whole business model versus market research of how many people would actually be interested in paying for that.

Investors usually ask for detailed multi-page business plans and not a single page business canvas. These are only meant to give you an overall idea to spark interest, not to justify an investment.

"You should aim to hit 100 million active users"

Wouldn't it just be easier to sell something at a profit?

Blasphemer!

I don't think the business model is commoditized. I understand that there are a wide variety of solutions that a site can pick up and switch very quickly if need be, denoting a 'commodity'. It's also true that the costs of these 100MM+ user things have dropped precipitously, making it easier to prolong the decision on the business model. However, it's called the "business" model for a reason. Without one, you don't have a business, you have an app. If a business model doesn't fit a business, it becomes a bad business.

100 million users is a huge opportunity. There are only 11 countries in the world with that kind of population. Maybe that just makes it easier to use ill-fitting business models longer. It seems like the internet is getting a bit tired of ads.

"The new question to ask[...] Could this product engage and retain 100s of millions of active users? For the first time ever, hitting 100+ million active users is actually realistic."

Where the author goes on to list a small handful of internet hits and misses as examples.

Realistic? Maybe for the top of the top apps and services. The "get a bunch of users and then solve the money problem" model seems the path of the apps that hit it out of the park, oftentimes fortuitously. Choosing it as a model doesn't seem prudent.

The author is missing the elephant at the dining table. He claims if you can attract a couple hundred million users, you don't need a business model to make money. But "we'll attract a couple hundred million users" is a business model, and a very specialized one! It's a model that won't work for the vast majority of companies, hence the need to think of a different one.

Yes its obvious that Facebook can make money. They're making money now! That's why you'd be a fool not to buy Facebook stock if it was trading at $2/share. But the question is, exactly how much more money can they make in the future than they're making now? Enough to justify a $30/share price? To figure that out you have to go into the details that this post dismisses.

_“how will they make money?” isn’t an interesting question. The answers are all obvious._

Reminds me of the famous misquote: "Everything that can be invented, has been invented."

"Let me repeat that: They wrote their own ad server as part of building their news site. And that means they had engineers writing lots of code to support their business model rather than making their product better."

Ummm... their 'product' was eyeballs that they sell to advertisers. Making sure you have the best ad server possible to accommodate that is making the product better. What a dismissive and shortsighted 'observation'.

The point is, if you have the audience, you can find the revenue – it’s getting the big audience that’s the main problem.

Cash in the bank /=/ revenue. Also, have people forgotten you don't need a billion users to make not only a business, but a substantial sum of money. User count are not the only way businesses scale.

This is the kind of tripe we were hearing just before the bubble burst the last time. Turns out, you really did need to be concerned with how you were going to make money. There are no money fairies that are going to put the dough under your pillow.

Businesses need money to survive. You can't really scale your startup to 100 million users without having to pay for your servers. Product engagement and retention does not automatically bring in the cash.

And how many of these "great products" will survive for 2 years? 5? 10?

I don't know if it's this black and white.

If your'e pursuing a whole new paradigm of doing or using things, yeah, money won't be at the center of it.

For the majority of businesses and successful tools, there is thought about money. Maybe it's just me but it seems easier to stop asking this when you have enough money not to ask this question.

It's fine not to ask, but will not asking pay anyones bills in the meantime?

But... many people think they're doing the 'whole new paradigm' thing, when really, it's just a regular business/idea/service/product, and they don't have the insight or experience to know that.

the tldr; version is "there is no bubble...there is no bubble...there is no bubble..."

Saying "there are a lot of possible sources of monetization and a lot of people on the internet" is fundamentally useless. It is a meaningless statement that every wide-eyed naive entrant to any business originally thinks.

A Man: ... Jeez, stop asking how they'll make money! They'll make money the same way you'll make money! By getting their numbers up! Any fool will be able to see that they'll be worth a lot more than, than this valuation anyway. (Points with derision.) And believe you me, they will have no trouble finding someone to pay them what they're worth.

A Man (cont'd): Guys like Sequoia Capital. Who, by the way, have already asked for a summary. Then the company will have a whole lot more runway - enough to figure it out. Enough to make it to an IPO, even. (Thinks longingly.)

A Man (cont'd): Not to mention what your shares will be worth by then. Just look at this. (Points.) Can you imagine what it'll be worth by the time they IPO? That's how you make the money. Who cares about them? Fuck them! Isn't it time you thought about you for a change?

A Man (cont'd): Look at you. 'How will they make money.' Jeez! (mockingly) 'How will they make money.' 'How will they make money.' It's like you're TRYING to pop this bubble! (Becomes silent.)

A Man (cont'd): I don't know what else to tell you. Just sign the papers, will ya?

And I thought making money was the most important thing about a business. Stupid me.

I think what he means is getting funded is commoditized.

But that will not continue indefinitely. And that is because eventually someone will want to know how the company plans to make money. When the company cannot tell them, they stop investing. And it spreads back up the chain. The whole thing collapses.

It's like a pyramid scheme.

Agree with some of the article. However proving that the product can make money is fundamental and validates your business. It proves customers will buy from you.

User base is only part of the problem. The question remains the sane.

So maybe the new question is: "have you made money?"

huh? I'd believe this kind of nonsense only if it were coming from a founder who had exited via this strategy and was buying a round of drinks for the bar.

The thesis lacks any real sustainable evidence to back its claims.

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