Last night at a Techrunch event in London someone who was at a talk I gave in Manchester earlier this year asked a VC panel if they still shared the view I expressed at the time that for many consumer internet startups the right strategy in the initial stages is to prioritise growing traffic over building revenues.

The point being that now we are in a credit crunch a more conservative strategy might be appropriate.

Unfortunately I wasn’t in the room to defend myself having irritatingly arrived too late (my fault), but if I had been there I would have stood by that comment – with the two caveats that you still need a strategy for monetisation even if you prioritise traffic in the early days and that I was talking about VC scale businesses.

I think those arguments apply equally in good times and bad.  My logic then, as now is:

  • For mass market (primarily) free to use sites unless you have got a lot of traffic then garnering meaningful ad revenues will be impossible.  Minimum critical mass to get advertisers to really engage comes in at around 1m uniques in the UK and maybe 5m in the US.
  • Generally speaking, for a business with VC scale funding and ambitions the revenue available with traffic under these levels is secondary in terms of value creation to reaching minimum critical mass in your user base.
  • Therefore growing traffic is more important early on than growing revenues

This strategy worked for Google and Facebook across cycles and is working for Twitter now.

Note though, that these are all very successful businesses and if there is any doubt that VC funding is available then finding revenue to ensure survival makes a lot more sense.  That can be either for pre VC companies or businesses that have had a Series A.  And VCs are getting a lot more conservative at the moment.

The other caveat is that the display advertising market is getting soft and there are new and legitimate doubts about whether straight forward banners on social media sites will ever generate much revenue.  Simply having hundreds of millions of page views (or the potential for them) is therefore less attractive.  That monetisation strategy is getting trickier.

The other point I want to make is possibly more important: focusing on what VCs want is not necessarily a good idea. 

Venture capital is only appropriate for a small percentage of businesses – i.e. those which have potential to exit at significant valuations (for us around $200m+) and which need at least $5-10m to get them there.  For businesses that fall outside of those parameters then raising venture capital can be value destructive – and often is.

So for me the right thing for any business is to focus on what is best for it’s existing shareholders and then only if there is a natural fit with what a VC wants to do you go ahead and raise some money.  That is very different to bending the strategy out of shape just to get a VC on board.