Consumer internet is not a very popular place to be right now – the advertising market is difficult (although I sense getting a little easier) and the profitability challenges of Facebook and YouTube, plus the history of Bebo post the AOL acquisition and Myspace post the high point of their Google search deal, have left people wondering how much value there will ever be in the sector.
I’m a big believer that there is value to be had, a faith that comes from the utility these various services provide, but at the same time these are very real concerns and it is clear to me that we need to go about building these companies in a slightly different manner if we are going to create sustainable businesses. In particular a focus on revenues and profitability seems to make sense. As I’ve said before for all but the very hottest consumer internet brands I think profitability is going to be a pre-requisite for a good exit, at least for the next couple of years.
However, if you are aiming big I still believe that the best way to get to revenues and profits is to focus on building great product, achieve your first million users and then start layering the revenue on top of that.
LinkedIn is perhaps the premier case study for this model of a consumer internet company and I’m going to finish this post by pulling some quotes from a recent interview with Reid Hoffman. You can read the full version on CNN.
Firstly – he started LinkedIn in 2002, the post internet bubble downturn:
I have a strong belief that starting businesses during an economic downturn is the exact right time to do it because it gives you runway. It’s harder to raise capital, but if you can do it, it gives you an advantage.
Secondly – they set themselves a big but achievable target that was based around product and audience, not revenue:
We had this initial challenge of, "How do you get a million people?" The first challenge was getting enough people so that functions like searching for people or sharing information had enough people in it to be valuable. The year 2003 was all about tuning and viral growth.
I’m a huge believer in getting a million people, getting them engaged, and then building a business model on top of that. I knew I wasn’t planning on really trying to work on a business model until later.
Thirdly – they did get round to revenue pretty quickly and with paid for products that were pretty obvious and I guess conceived of from pretty early on:
We launched three revenue streams in 2005. The first was job listings. The second one we figured would help us get to profitability fast: We launched subscriptions, which was enhanced communications and search capability. People need to talk to people they don’t already know in order to get the job done. That’s the plural majority of our business today.
We had originally not even thought about doing advertising. But two things persuaded me to launch advertising as well. One of them was that our demographic was so good. The second one was that we began to realize we could build unique business products.
This strategy isn’t for everyone – you need to have the resources to cover the early period (Reid used the money he made from Paypal) and you need to have a business that genuinely has breakout potential – but if those criteria are satisfied then focusing 100% in the early days on getting the product right is the best way to create value. The downturn doesn’t change that.