"How will they make money?" is the wrong question
medium.com
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Also, a valuation is more or less a made up number that suited the VCs and others. The words, "okay, we'll change the valuation to..." seem to be uttered quite commonly when the previous valuation is inexpedient.
Speaking as a founder, I feel it comes down your own risk/reward preference. I'd rather have a good chance of a $50M exit than a miniscule chance of $1B.
No one founds a successful social network and doesn't end up wealthy. Tumblr, Facebook, Instagram, etc. all leave their founders with significant exits.
The author isn't suggesting that revenue is insignificant compared to a user base; this is an extreme example of undercutting competitors via price slashing, and it's historically not necessarily a good idea.
That said - Tumblr has so many users that it's difficult not to be valuable. A social network can be a currency of its own - having ownership of a platform that tens or hundreds of millions of people use daily puts you in a position to make revenue in a number of creative ways.
Ev Williams' specific point is such that if you achieve that many users, you will eventually not find it difficult to be profitable. How could you? People wondered about Facebook this way. Then they introduced ads - the number of users only climbed.
Conversely, if Facebook maximized its potential for revenue streams before solidifying organic user base increases, they would have plateaued a long, long time ago. That's the point.
Also, getting lots of users and then just slapping ads on your site is also a terrible business model and its what you tend to do if you haven't bothered to think it through clearly before starting.
There's clearly a few high profile examples of companies with massive user bases who have either found a genuine way to monetise their users, or at least sold/floated their companies in a way that's been massively profitable for the initial investors.
But it doesn't automatically follow that it's always going to be easy to monetise them. There's always only ever going to be a handful of social sites that manage to attract huge numbers of users, and even some of those fall flat on their faces when it comes to making real revenue.
Even Facebook is struggling to find a way to get actual ongoing profits out of their users, and the longer it takes them to figure out how to do this, the more nervous investors are going to be about big IPAs for future social media companies.
Working on the assumption that "because site X has managed to monitise their user base, we will automatically be able to" sounds like the kind of baseless assumption that led to the first dot com crash.
As someone who has gone through the process of bootstrapping, getting traction, and trying to raise money for the first time in a "consumer unfriendly environment," I think he touches quite eloquently and precisely on a lot of important points. Most VCs don't lay it out as nicely as this either.
However, the trick, I think, is to look at assistive rather than extractive models. Rather than looking at how to interject ads into social media, or to otherwise hijack a fraction of the collective attention span of your userbase that you can then sell to the highest bidder, instead look at how to leverage social functionality to put tools into people's hands to help them help themselves in the service of commerce. For example, google search ads and pinterest.
Other examples: enable finding product and restaurant reviews, ratings, and suggestions by friends; improve wishlists for gift-buying; make group purchasing at discount easier for many products (games, books, movies, concerts, events, etc.); enable time sharing of services; facilitate picking up hobbies, skills, and activities; and so forth. There's tons of money in these ideas, but it's more common for companies to go to the advertising trough because it's seemingly so easy.
In my view it's always easier to make money off of a transaction that both sides obviously benefit from.
Easy and lucrative once you're big enough and to get big enough, you probably have external investors (who've trodden the path before and know the likely outcomes).
The sad thing is that while we may see lots of disruptive innovation in tech, we see much less innovation in the business models that follow (though please do correct me if I'm wrong!).
They had millions of passionate users who built over 38 million pages on the site. They introduced ads in 1997 and two years later became the 3rd most visited sited on the web.
Yahoo acquired them in 1999 for $3.57 billion.
Yahoo was unable to further monetize those users. There wasn't some magic money tap they could turn on to make money from the site (despite it's popularity). Geocities never made a profit.
What's Geocities worth today?
Quite a lot of dotbombs, too, relied on… advertising. Back when it was banners. Punch the monkey!
Advertising can be a good business, but it still needs to follow the same formula: Revenue - Expenses = Profit
In my mind, Google is the only real B2C internet company that's proven itself.
I was one of those passionate users on Geocities, to the point where I was given shares in the Yahoo acquisition for my work in the community. GeoCities died on the vine because they didn't continue to innovate on the site building and community they had. They certainly could have been so much more - foreshadowing blogs, social networks, everything myspace became, etc and could have found a way to build the kind of sticky (and huge) audience that monetises better - if they'd continued to develop.
The sequence seems to always looks the same:
1. Big social network needs to change privacy settings and TOS in order to make money: users start to leave.
2. Big social network is under increased pressured to make money and introduces paid accounts (or more advertising): most of the users leave.
3. Big social network is no longer cool (because everyone's left and it's full of ads) and can no longer innovate (because there is no more money).
4. Big social network dies
We've seen this play out before: Digg, MySpace, Geocities.
I'm willing to bet this will play out with the current crop of consumer networks: Facebook, Twitter, Reddit.
Picture generals and arms dealers seducing politicians into voting for a war, keeping themselves just outside of the consequence field-of-fire.
"It turns out, there's a lot of money in the world. The money is bored. Money wants to be spent! Money is intended to be gambled. These are big numbers, but these are big companies." - Jason Calacanis, http://youtu.be/SY62KuoxWJ0 [Video]
You don't monetize the users. Either a third party pays for their attention, or, they pay for their own access. No one owns the users. That's why they are so valuable.