Fred Wilson has a great post this morning about Twitter’s business model. His main message is that they are focusing on growing traffic first and will worry about the business model later.
Business models!?!?! The business model comes AFTER you get to scale.
Reid Hoffman makes the same point in this video on Intruders.
I should say here that we are only talking about services where the marginal cost of servicing each customer is negligible – Google, Facebook, Twitter, etc. (Although skeptics will note that Twitter’s text message costs confound this rule…)
For me, as an investor, it is all a matter of risk. At the beginning you have neither traffic nor a business model and to be successful you will need both. The question then is simply one of in which order you address these challenges. With most traditional businesses the answer has been simultaneously, but the web has changed that for a couple of reasons.
- The low cost of building traffic means you can make substantial progress on this dimension with modest funding – Twitter is a great case study in this regard
- Monetisation is much easier once you hit scale – for Jason that is 10-20m users
Don’t get me wrong, having a business model is still a good thing, and all else being equal a startup with a nailed on business model is always going to get a better valuation than one without (Wonga springs to mind as a good example here in the UK), but in that first meeting I’m going to be much more interested in how you will get to 10-20m users than how you will make money.
In fact, as Fred points out, focusing too early on monetisation can be a distraction from the more important goal of getting to critical mass. You won’t make much money until you get there after all.
However, even though the early focus is on building traffic, for me it is still important to have an idea of what the revenue model might be. Even if it is likely that when you get to scale something else emerges having a credible Plan A is important. For Google that was plain banner advertising. I don’t know what it is for Twitter, but Jason sets out three credible options – every tenth message an ad, the last x characters of every message an ad, and a premium option.
This is a specific example of a general statement I often make about startup planning: even though you are on a journey where both the route and the destination will change you should have a clear view of the best guess of both at every given moment. That way you are most likely to get the next few steps right.
The final consideration is the point at which you switch focus from traffic growth to monetisation. In a nutshell, the better your access to capital the later you can leave it and the better off you will be – for most cases anyway. Google and Facebook, heavily backed by Sequoia and Accel respectively are great examples of this.