It may seem surprising that a seemingly successful product could fail, but it happens all the time. Although we arguably found product/market fit, we couldn’t quite crack the business side of things.
Hopefully people will read into this and learn that building a product without figuring out how to make money and just hoping it becomes obvious -- or that someone will acquire you -- is NOT a business model.
I would say that many people would disagree. Launching without a profitability model is what a lot of startups do, and some of them are successful. I'd like to see numbers on how many of those types are successful versus the startups looking for profit to begin with.
I would argue that it is A business model. The debate would be around whether or not it's a good business model. I guess as long as you're honest with yourself and your employees, aiming to be acquired as a profitability plan is perfectly valid.
"Getting acquired and becoming a cost center for another organization is not how I'd define success."
I'd not consider that failure, either; Many things are valuable, yet often defined as "Cost centers". IT Support, for example, is almost always defined as a cost-center, yet it fuels so many parts of the business and can be such an improvement to getting things done it's insane in the modern world not to have it.
Building a technology or product that is only good as an add-on, loss leader, or tech demo isn't shameful. If somebody's willing to pay for it, if you and your investors can get a good return, that's a reasonable measure of success. It's nice when a product is successful on it's own, but not everything is about direct-sales.
Not everyone wants a sustainable business. Some people just want to get acquired. This was even mentioned in a business class I had in the 90's.
Did you make money? Yes. Did your investors get their return? Yes. Sounds like a successful exit to me. Every week I'm seeing an article about Google/Apple/Microsoft buying a small company that had no hope of being profitable on their own. Everyone defines success on their own terms.
Good argument. It's a gambling instead of a business model. According to the traditional business practice, if you don't have a sales projection, you don't have a business. Tech world should not bet on the exceptions. Investment could cause bubbles. Whoever is the last gets caught.
The reality is: not every startup and business is qualified for making profit. They should pursue it diligently to merge to a model to have enough margins, but be prepared to fail. Therefore the founder will not be that sad.
But a business model that depends on having enough users to support the business is a gamble as well. What's the difference between a company hoping for one more user before the end of the month and one more penny to keep them in business versus a company hoping for that buyout offer before the end of the month, that $300m that would pay off their investors and be enough to start the next business? I guess it's the difference between starting a business versus starting a company. But any business is a gamble at first.
"Starting a startup is so hard that it's a close call even for the ones that succeed. However high a startup may be flying now, it probably has a few leaves stuck in the landing gear from those trees it barely cleared at the end of the runway."
You have two questions in argument if I understand you correctly.
1) What's the difference between a business model based on having enough users vs. having buyout offer?
I don't differentiate a business from a company in that way. Business and company in the real world are pretty much the same thing. In the tech world, large number of users may bring a business into profitable stage because they have a huge pool of leads. Even if the conversion rate is low, there is still many chances to earn, especially due to the trust level. This model is similar to the traditional business.
High tech startups rely on the second way a lot because once they catch some investors, they made money no matter if the business is really profitable or not. That's why it's like gambling, you don't need to have a real business, as long as you make somebody believe you can make money, you win.
2) Is every business a gamble?
Not quite. The odds are a lot higher if you follow the typical business rules in the real world to provide true values to your customers. Now, a lot of people believe in that money can make money, so no real product is necessary. That's completely wrong. This belief puts everybody into gambling. At the end of the day, you will find that only the product/service values being realized can make money. So business is not gambling. We consumers are living on it everyday. If there is no product/service value but money trading, we will be running out of the fuel so quickly.
but alot of business value is on the cost side. being the low cost producer. alot of internet business are about finding a low cost substitute for an existing business usually with somekind of scale to it. Google computer index of billions of pages versus hand index. amazon listing milions of products, customer reviews versus retail stores and service reps. it's not hard to find a product/service sell it for cheaper. it's hard to find a product/service product it cheaper that the customer values as much as the original.
Good point. Now we are back to discuss about the valid business model. Making cost effective products and services is one of the value proposition for a new business. But Google and Amazon's contribution are not only to make the services cheaper, they also make the information available easier for online users to retrieve. This is a big step in our information era. Without them, we are still living in a slow and small world.
However we need to move further. People know that the web is messy. So we need to organize it to improve the efficiency finding relevant information. So quality should be over quantity. And instead of sorting out from the large amount of information from time to time, we need some way to keep the useful information and share it easily. This is the goal that I'm working on.
I thought that Saverin had identified advertising as a potential revenue stream very early on but Zuckerberg didn't want to spoil the site with adverts.
400,000 uniques/month in a consumer play is peanuts. They didn't shut down because they couldn't monetize. They shut down because they didn't get the traction needed for consumer ventures.
I think it goes a bit beyond that. The way I understand the story, they shut down because it wasn't bringing the traction necessary to raise the next round. The company needed a VC-backed growth trajectory, which apparently was not happening.
This is right. It was clear we weren't going to be able to raise another round of financing, and even if we could, it was unclear how that would enable us to change the state of the things, namely that our business didn't represent a startup opportunity. Frankly if someone had offered me a term sheet, I wouldn't have accepted it.
We didn't really have many options. We tried to build a business and failed. We could have tried to raise a bridge financing -- but what are we bridging to in that case? A financing (no), an exit (also not an option, as we found)?
Ultimately spinning things down into a skeleton state and doing our best to operate the service for the coming months (heck, maybe years) was the only path forward.
Re: the OP, I think 400k MAUs is actually pretty decent for a mobile app, but maybe I'm mistaken.
Hi - congrats on the openness about DrawQuest.
Did you consider building cloud based offering for DrawQuest that would allow consumers to save their drawings onlike and or share kids drawings with family members?
Or selling physical products like Paper did?
Imagine that all these 400k consumers were bringing just $1 of income (not profit) each. I suppose that operating the whole thing is significantly less than $400k a month. To sensibly kill a service that brings in a couple hundred thousand dollars of profit a month you must be a large corporation, not a startup.
$1 of income per unique visitor per month is much too high to be a good number to plan with. If your site doesn't have a natural commercial interest you're going to be selling adds at a rate that corresponds to maybe a $0.01-$1 CPM. If the average unique visitor views 50 pages a month that's just $0.0005-$0.05 in income per person.
Consumer startups with such little traction don't get anywhere close to $1 per user per month. I ran a start-up with a million uniques a month and we were making a fraction of a penny per visitor.
You said "visits" which implied you were making a website. This is very different than the gaming space.
We make more than $1 per monthly active user and I know for a fact that our game monetises poorly when compared to the free to play games that monetize very well.
Agree. 400K uniques/month isn't a lot. I'm surprised Poole was seemingly satisfied with this number, considering he knows exactly how much traffic one would need to survive.
Running a video service without even thinking of a distant possibility to make it an ad platform or a paid video-on-demand platform? I can hardly believe that.
Running a centralized messaging service without ever thinking about selling aggregated data (e.g. sentiment analysis) or anonymized ad targeting data (e.g. based on keywords in recent tweets)? I can also hardly believe that.
I'd like to hear about a monetization model for DrawQuest, even as far-fetched as the ones I listed above — besides simply putting hard-to-target ads on the page.
I hadn't heard of DrawQuest before today, but an idea I had while browsing the site is to add a marketplace module, possibly centered around crowd-sourced greeting cards. People can build/buy greeting cards using the creative work. The creative work that I saw on the site seems ideal for the format.
>without even thinking of a distant possibility to make it an ad platform or a paid
The point is that distant possibility wasn't enough in this case. Of course everyone had a distant possibility in mind, 95% of the readers of this article already thought of a distant possibility of where the company could have made money eventually if it had kept growing.
Hopefully people will read into this and learn that building a product without figuring out how to make money and just hoping it becomes obvious -- or that someone will acquire you -- is NOT a business model.