Show me the money
by Samantika Gokhale
“We don't even know what it is yet. We don't know what it can be. We don't know what it will be. We know that it is cool. That is a priceless asset I'm not giving up.”
Whilst conventional wisdom discourages early monetization, I think it’s a dangerous premise on which to scale a start-up. Tech entrepreneurs often make the assumption that a large user base and a high level of user engagement will automatically lead to substantial advertising revenues in the future but I believe that far too little time is spent testing this logic. Professor Sunil Gupta is always reminding his Digital Marketing Strategy class at HBS that very few tech companies other than Facebook and Google have managed to become profitable through advertising. A great example here is Yelp which remains unprofitable despite its significant user base and network effects. Had Yelp focused more on early monetization, they may have chosen to focus on a different market segment for user reviews where more value could be extracted from the businesses being reviewed, as TripAdvisor was able to do with hotels.
Chegg is an instructive example of a company which had great early user adoption but failed to focus on unit economics, and is now faced with the prospect of a late-stage pivot. Late-stage pivots are very difficult to execute - it is tricky to change your product or user experience when you have an established user base and brand, it is hard to teach your users new behaviours, particularly if you ask them to start paying for a product that was previously free, and may have lost the confidence of your investors.
Entrepreneurs should figure out how to make money from their businesses before scaling, or at the very least, have tested their strategy for doing so at an early stage. They must truly understand the value they are creating, and how they can capture it. And they must be wary of building their businesses to be overly reliant on advertising revenues.
- Mark Zuckerberg’s character in The Social Network
Early monetization isn’t terribly cool. Mark Zuckerberg was clearly not focused on how Facebook was going to generate revenue during the platform’s early years, focusing instead on building a large, loyal user base. Other ‘unicorn’ businesses, such as Google and Twitter, were also not concerned with proving their profit formulae before scaling. It would appear that the recipe for success is not to get sidetracked by early monetization, but instead be singularly focused on pursuing the product vision, capturing users, and creating strong network effects. Early pursuit of revenues risks making your product less ‘cool’ and makes it harder to pivot. You may also get distracted, leaving room for fast-follower competitors to scale faster and steal the market. Visiting our class this week, venture capitalist Fred Wilson also de-emphasised the importance of seeking revenue when scaling tech ventures unless monetization in some way enhances the user experience.
Whilst conventional wisdom discourages early monetization, I think it’s a dangerous premise on which to scale a start-up. Tech entrepreneurs often make the assumption that a large user base and a high level of user engagement will automatically lead to substantial advertising revenues in the future but I believe that far too little time is spent testing this logic. Professor Sunil Gupta is always reminding his Digital Marketing Strategy class at HBS that very few tech companies other than Facebook and Google have managed to become profitable through advertising. A great example here is Yelp which remains unprofitable despite its significant user base and network effects. Had Yelp focused more on early monetization, they may have chosen to focus on a different market segment for user reviews where more value could be extracted from the businesses being reviewed, as TripAdvisor was able to do with hotels.
Chegg is an instructive example of a company which had great early user adoption but failed to focus on unit economics, and is now faced with the prospect of a late-stage pivot. Late-stage pivots are very difficult to execute - it is tricky to change your product or user experience when you have an established user base and brand, it is hard to teach your users new behaviours, particularly if you ask them to start paying for a product that was previously free, and may have lost the confidence of your investors.
Entrepreneurs should figure out how to make money from their businesses before scaling, or at the very least, have tested their strategy for doing so at an early stage. They must truly understand the value they are creating, and how they can capture it. And they must be wary of building their businesses to be overly reliant on advertising revenues.
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