To monetize early, or not to monetize early?

By Nicholas Patrick

The lean startup methodology advises startups to validate their business model and find product-market fit before scaling. But recent history is littered with startups that have scaled without a fully-baked business model, including Facebook, Twitter, and Foursquare. In this post, we explore why startups might choose to do this.

First, monetization can be distracting. Early stage startups only have limited amounts of financial and human capital to deploy. Focusing on monetization instead of growth in early stages may doom the startup never to achieve scale. This can be fatal when scale is necessary either for the product or for the monetization strategy to succeed. Would Mark Zuckerberg have been better off placing and tweaking banner ads on early versions of Facebook, or was he better off spending his time and energy continuing to develop the site and spread it to other schools, ensuring scale and ubiquity? History clearly suggests the latter. It can also be distracting for investors and advisors. As Eric Ries says in The Lean Startup, "it is often easier to raise money or acquire other resources when you have zero revenue… than when you have a small amount… zero invites imagination, but small numbers invite questions."[1] Except for small, inconsequential experiments, startups may be better off deferring monetization until they're truly ready to commit to and focus on a particular strategy.

Moreover, settling on a monetization strategy too early may preclude a company from later discovering (stumbling into?) more innovative, more user-friendly, and ultimately more profitable monetization strategies. For instance, Facebook could have placed banner ads on their site in its early stages, but those ads would have been undifferentiated from other sites displaying banner ads, and they could have driven users away. Instead, Facebook collected large amounts of detailed demographic information on their users, and built a powerful, differentiated platform to display highly-targeted ads. Twitter's promoted tweets and promoted trends would not have been possible or even foreseeable in the early stages of the business. And Foursquare could simply have placed mobile banner ads in their app, but they waited until they built their Explore feature and their Local Updates feature, enabling them to introduce a differentiated ads platform with the potential to improve the user experience, not detract from it.

Early monetization is advisable when it is absolutely necessary for the company's survival or demanded by investors. But for the above reasons, and as the above examples show, that isn't always the case.

[1] Eric Ries, The Lean Startup, p. 52



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