Prioritising traffic over monetisation

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.

This seems to be a growing theme at the moment. As Fred points out Dave Winer and Jason Calacanis are of the same opinion. To quote Jason in Why Twitter Will be a billion dollar business:

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.

  • As per my own blog post on this topic, I disagree Nic.

    Twitter does cost money and it’s not negligible. They have yet to prove to be a success in terms of revenue, so to use it as a case study is a little premature in my opinion.

    Facebook was an accident so it too should not be used as a case study. The creator never intended to make money so there was never a risk attributed to the ‘business’. He didn’t have bills to pay, or staff to feed.

    That leave Google. How many of them as an investor, do you anticipate? 😉

    It’s easy for Calacanis and Winer to chant traffic. They’re traffic derives from historical success not from their current businesses. So, again, we’re not looking at the long tail of businesses today in my opinion.

    In case you didn’t read it, here are my thoughts with Segala as a case study of why revenue is needed before scale.

    http://tinyurl.com/2fgtla

  • As per my own blog post on this topic, I disagree Nic.

    Twitter does cost money and it’s not negligible. They have yet to prove to be a success in terms of revenue, so to use it as a case study is a little premature in my opinion.

    Facebook was an accident so it too should not be used as a case study. The creator never intended to make money so there was never a risk attributed to the ‘business’. He didn’t have bills to pay, or staff to feed.

    That leave Google. How many of them as an investor, do you anticipate? 😉

    It’s easy for Calacanis and Winer to chant traffic. They’re traffic derives from historical success not from their current businesses. So, again, we’re not looking at the long tail of businesses today in my opinion.

    In case you didn’t read it, here are my thoughts with Segala as a case study of why revenue is needed before scale.

    http://tinyurl.com/2fgtla

  • nic

    Thanks Paul. Perhaps I should have been clearer – I’m talking about venture style returns in consumer internet businesses where the cost of scaling is negligible.

    In that case I stand by my points. The examples go beyond Facebook and Google as well – Bebo, our own WAYN, Delicious, Skype and Mybloglog are equally good examples.

  • nic

    Thanks Paul. Perhaps I should have been clearer – I’m talking about venture style returns in consumer internet businesses where the cost of scaling is negligible.

    In that case I stand by my points. The examples go beyond Facebook and Google as well – Bebo, our own WAYN, Delicious, Skype and Mybloglog are equally good examples.

  • Then I agree Nic. The problem is, Calacanis , Winer and others, make a blanket statement to often. You’ll find that they refer to ‘consumer internet business’, on occasion, but it’s rare.

    I think the general opinion can be misguided for that reason.

  • Then I agree Nic. The problem is, Calacanis , Winer and others, make a blanket statement to often. You’ll find that they refer to ‘consumer internet business’, on occasion, but it’s rare.

    I think the general opinion can be misguided for that reason.

  • By the way Nic, it would be great if you had an option so we automatically received an email notification each time someone left a comment after us.

  • By the way Nic, it would be great if you had an option so we automatically received an email notification each time someone left a comment after us.

  • Hi Nic,

    Out of interest, do you think startups with a ‘nailed on business model’ such as Wonga or MoveMe are going to get 10-20M users even if they go global? Put another way, won’t the specificity of the model limit the number of users but increase the likelihood/reduce the risk of making a fat profit?

  • Hi Nic,

    Out of interest, do you think startups with a ‘nailed on business model’ such as Wonga or MoveMe are going to get 10-20M users even if they go global? Put another way, won’t the specificity of the model limit the number of users but increase the likelihood/reduce the risk of making a fat profit?

  • nic

    Paul – I will look to implement an email comment feature – it is a very good idea.

    James – you make a great point. There is probably an inverse relationship between the specificity of the business model and its potential reach.

  • nic

    Paul – I will look to implement an email comment feature – it is a very good idea.

    James – you make a great point. There is probably an inverse relationship between the specificity of the business model and its potential reach.

  • Nic

    Twitter’s issue is they are bearing the cost of the mobile transport, which takes them out of the “free ride over the internet” economics that all consumer Webservices rely on as a (taken for granted) basic cost platform.

    As the the 10 billion dollar business based on say 20m users, that’s a valuation of $500 per user – just think of the no. of Ads serves at say $1CPM to justify it! (Thats 500,000 ads served in case you were wondering, or 1,370 per day for an annualised valuation, or 137 per day if you took a 10 year view.

    I don’t think so ……..

  • Nic

    Twitter’s issue is they are bearing the cost of the mobile transport, which takes them out of the “free ride over the internet” economics that all consumer Webservices rely on as a (taken for granted) basic cost platform.

    As the the 10 billion dollar business based on say 20m users, that’s a valuation of $500 per user – just think of the no. of Ads serves at say $1CPM to justify it! (Thats 500,000 ads served in case you were wondering, or 1,370 per day for an annualised valuation, or 137 per day if you took a 10 year view.

    I don’t think so ……..

  • Test comment for subscribe feature

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