Wikimedia, CCGreylock Principal Josh Elman recently said that startups don't need to know how they'll make money as long as they're making an awesome product with more than 100 million users.
This is an oft-heard motto in the tech and startup world. Not just among founders, but their fans and users too. Suggest that a hot new app like Instagram or Snapchat should fund itself with advertising and you'll see online protests, and people talking about "selling out."
To be fair to Elman, that's not quite his position — he's ultimately interested in the monetization of 100 million users, not simply gathering them onto a platform.
But you hear stuff like this a lot in the tech world: "We're not focused on revenues. We only care about the user experience and scaling up."
This is a ridiculous position to take.
It's a sign of immaturity if working on something "cool" is regarded as more important than working on something that creates money. (After all, you can only work on something cool if someone else has already generated enough money that they feel comfortable giving it to you.)
Look at some recent examples of startups that were were too cool to make money:
- Instagram, acquired by Facebook for $1 billion despite having zero revenues.
- Tumblr, acquired by Yahoo for $1.1 billion despite having less than $13 million in revenues.
- OMGPop, acquired by Zynga for $210 million, and Zynga never reported meaningful revenue from the buy.
- Snapchat is valued at ~$1 billion, if reports of its recent $100 million fundraising-round are true. It has no revenues.
- Waze, acquired by Google for $1.1 billion, despite having no revenues.
If none of these companies make money, then those acquisition fees are simply value being destroyed, not made. (That's not what will happen in the long run, of course — the assets and user-bases in those companies will become heavily targeted by advertisers over time.)
The best example is Tumblr founder David Karp, who just sold his startup for $1.1 billion. Back in 2010, he said, " We're pretty opposed to advertising. It really turns our stomachs."
This was a sign of his inexperience as a business person. He was only 23 when he said it. We all make mistakes.
In May this year, he sang the opposite tune. On the day of Yahoo's acquisition of his company, Karp's new boss, CEO Marissa Mayer, said she made the move in part because of the advertising opportunity. A day later, Karp also said it was about the advertising. Tumblr had been working on ramping up its ad offerings for months prior, in fact, and was showing an ad sales pitch deck around town.
Karp isn't an outlier. Consider Facebook CEO Mark Zuckerberg. When he filed his S-1 papers with the SEC to go public, he wrote this note to shareholders, telling them that business is secondary. He said:
Facebook was not originally created to be a company. It was built to accomplish a social mission — to make the world more open and connected. … Simply put: we don’t build services to make money; we make money to build better services.
Yesterday, like Karp, Zuckerberg was dancing 180 degrees in the other direction, while being peppered by questions from angry investors about FB's stock performance. The Wall Street Journal described it this way:
... Mr. Zuckerberg tried to assure investors that he cares about making money. He said he spends most of his days reviewing products at every stage, including advertising products, and is actively engaged in coming up with money-making ideas. "I'm very well-versed on our advertising business," he said.
It turns out that money is very important. Who knew?
In fact, several "cool" tech companies have joined Tumblr and Facebook with a new, intense focus on raising revenues, mostly through advertising.
- Twitter has rolled out a whole raft of new advertising opportunities for brands, and is hoping to match Facebook step by step.
- Facebook just introduced hashtags to compete with Twitter, which has been stealing all the "real time" ad dollars that are targeted against social media users as they're tweeting.
- Several analysts have upgraded Facebook to "buy" after realizing that Facebook has yet to introduce a single ad format into Instagram, even though doing so will obviously bolt on meaningful revenue.
- And Apple, the coolest of them all, just introduced iTunes Radio, an ad-supported streaming music product, in part to rescue its little-talked about iAd business.
So the next time you hear a startup founder talking about achieving "scale," or delighting users, or making a really cool product — and who then dodges the question about how they're going to make money with some blather about being backed by "patient capital" — note that this is a founder who is a rung or two below where he or she needs to be.
Here's the proof. We recently published a ranking of the 29 most influential executives in mobile advertising. They're almost all at startups or new companies. We ranked them (mostly) by revenue. Twenty eight of them work at companies that have more revenue than Tumblr. Yet you've probably never heard of most of them.
The 29th, revenue-free company? Snapchat — and the executive we honored there is a new hire.
It's his job to find advertisers.
Welcome to the new maturity in tech.
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