Death of ‘free’ as a business model?

I looked up Techcrunch40 winners from 2007 to see how the winners have progressed in the last year.  (Agreed, this isn’t a statistically significant sample but given that these ventures received a ton of goodwill, funding, and publicity, one could argue that they had a high likelihood of success). Here’s what I found, many were VC-funded and 1 in 4 of the award-winning startups are still in beta, one year after being recognized for their potential.

Maybe I am missing something here, but isn’t one year an eternity in the online business for small and nimble startups with funding and fully-devoted, talented teams? Perhaps, I am being too aggressive but given the intense competition in the industry, shouldn’t startups and their funders be in a mad rush to get to revenue-generating state ASAP?

While I concede that without funding, many startups would languish and some infusion of cash is needed to sustain great ideas. One could just as easily argue that VC-funding is artificially propping up the weaker ’species’, which should be eliminated through the process of natural selection ie. free market forces.

In all fairness, VCs don’t have a magic crystal ball to predict with 100% percent certainty as to which startup will fail and which one will succeed. They place some calculated bets and the ventures that succeed probably more than make up for the ones that don’t (if not, these firms should consider going into a different line of business). 

However, the bigger systemic issue is that funded startups can afford to give away their services for free but in the process they are creating legions of freeloading consumers who have no concept of paying for any of the services they consume. And how many startups can realistically expect to be sustained by ad-revenue alone? 

As a consumer I love ‘free’, but as an unfunded entrepreneur, I loathe ‘free’ because there’s no such thing as free when it comes to servers, engineering talent, office space, etc. and someone has to pay for these basic business necessities. I can’t help but wonder what it’s going to take to break this vicious circle of ‘free’.  How are the funded and unfunded startups planning to wean users off ’free’? Or is that the next startup’s problem?

For the self-funded startups competing with a well-funded venture, the challenge is similar to what mom and pop stores face when a mega-mart comes into town and slashes the prices to drive everyone else out of business. In the process, the mega-mart creates a monopoly or goes bust itself because the low prices are not sustainable. Neither scenario bodes well for the entrepreneurial community or the users. 

I am optimistic that the current economic downturn is forcing flight to quality and hopefully, we will see more startups that aren’t just a feature or utility waiting to be bought out by some mega-corporation, but rather a sustainable revenue-generating business that can stand on its own.

Economic crisis shifts focus to business model

Even the most deep-pocketed VCs aren’t immune to the current economic woes. Earlier this month and again at a recent event hosted by Venturebeat, VCs are advising startups to buckle down, make drastic cuts to survive in this crunch time.

Kara Swisher from All Things Digital called the VCs on their hypocrisy as Venturebeat reported,

… it’s hypocritical for VCs, who previously encouraged growth and spending, to now push for cutbacks. “It’s like drug dealers saying drugs aren’t good for you,” she said.

The question begs to be asked and answered, why does it take an economic crisis to be smart about your business operations? Especially, when your startup isn’t making any money and shows no sign of doing so  in the foreseeable future? The VC advisements sound like a conversation between rich kids and their  indulgent parents who at one time bankrolled their hobby, but are now suddenly telling their precious progenies that it’s time to grow up and fend for yourself.

Max Levchin from Slide hit the nail right on the head,

…Levchin also took up the theme, comparing layoffs to cutting off a finger — they might be needed, but they will make you less effective. “A much better way to survive the downturn is to make more money,” he said.

One can’t help but wonder that if he’s having to spell this out, does it mean that making more money (or any money) is a radical concept for VC-funded startups? Being stringent is a reality for the ‘poor’ ie. self-funded ventures. Naturally, they have to be prudent all the time because it’s their own money on the line. Apparently, that’s not the case for the VC-funded startups?!

Call me crazy, but since when did having a revenue-based business model become a nice-to-have item on a business checklist? Isn’t any legitimate business enterprise supposed to generate value and wealth for its stakeholders?  

Whom are we kidding? If a venture has no realistic plan for making money (ad-revenue? get bought by Google or Microsoft? really, are you serious?) the founders either have a very expensive hobby or they are running a not-for-profit business. It really is that simple.

Much Yammering over nothing?

New York Times published an interesting article this week, which compared and contrasted two microblogging sites - Twitter and Yammer.

Twitter is the big kahuna with over 3million visitors while Yammer, who won TechCrunch50 prize for start-ups in September was dubbed as “Twitter with a business model” and has about 60,000 users. Note: According to Compete.com, the unique user count for this new site has skyrocketed to over 200K within the first month of its public launch (much of it, thanks to Techcrunch and New York Times, no doubt).

The article mentions that Yammer has already started generating a ‘modest revenue’ and described briefly how the site works,

…Anyone with a company e-mail address can use Yammer free. When that company officially joins — which gives the administrator more control over security and how employees use the service — it pays $1 a month for each user. In Yammer’s first six weeks, 10,000 companies with 60,000 users signed up, though only 200 companies with 4,000 users are paying so far.

I think it’s a brilliant way to leverage social media for the enterprise and makes one wonder why the folks at Twitter didn’t think of this. It’s also commendable that Yammer has managed to monetize in such a short period of time, but that being said, Yammer has a long way to go before it can be considered a serious contender in the enterprise space.  While  monetization is a critical challenge in the consumer space; both monetization AND adoption are the key issues in the enterprise space.

David Sacks, the Yammer CEO/Founder says,

On Twitter, people write about the important and the mundane, like, “At school and debating whether I should have more coffee.” With a workplace focus, Yammer will not deal in such trivialities, Mr. Sacks said. “People don’t want to hear from their friends five times a day about what they’re doing. But they do want to hear from their co-workers five times a day about what they’re working on,” he said.

The comments in the follow up article by New York Times are very telling and not everyone agreed on the need for a new utility to find out what their co-workers are doing and others didn’t even want to know. 

According to the user numbers shared by Yammer, there are about an average of 20 users/company, which means that either only smaller companies are signing up or the adoption in the larger companies is very low or both.  At the companies who have signed up, it sounds like the early adopters have jumped on the bandwagon and have embraced Yammer wholeheartedly, while the majority still remain reluctant to join.

Some of the greatest barriers to adoption and engagement by the enterprise crowd are: inertia and information overload. Inertia leads to little or no sharing of information due to limited time, lack of incentive, or conflict/self-interest (job security, appearance of being a slacker, didn’t want to be bothered, etc.). The latter is the result of electronic clutter in the workspace, so the employees are probably more likely to tune out any additional sources of distraction, especially when they already have IM, Email, Intranet etc.

Despite concerns about Twitter’s inability to monetize, 3million+ (albeit freeloading) user base is nothing to scoff at. While Yammer’s ability to monetize so quickly is commendable, at the current $1/mth subscription model ($4K/mth), it will need many more paid users to ensure a sustainable business model, sans VC funding.

Is downturn a good time to start a new venture?

Techcrunch recently posted VC funding figures for the third quarter that show VC funding for Internet startups is down 16percent since same time last year, while overall funding for startups is down by 7percent.

With all signs pointing to the world going to hell in a handbasket, starting your own business during the worst economic crisis could be considered a sign of sheer lunacy or…maybe not.

Paul Graham has an excellent essay on starting startups in the downturn, he says that the economy by itself shouldn’t dictate whether or not you should start your own gig.

If we’ve learned one thing from funding so many startups, it’s that they succeed or fail based on the qualities of the founders. The economy has some effect, certainly, but as a predictor of success it’s rounding error compared to the founders.Which means that what matters is who you are, not when you do it.

 

If you’re the right sort of person, you’ll win even in a bad economy. And if you’re not, a good economy won’t save you. Someone who thinks “I better not start a startup now, because the economy is so bad” is making the same mistake as the people who thought during the Bubble “all I have to do is start a startup, and I’ll be rich.”

While the going is good, even the most mediocre ventures will get funded but only the good ones can survive the downturn. If you have what it takes to build a business during the downturn, you’ll be in great shape to ride the wave during the good times as well.

Here are three reasons why current economic downturn is a great time to start your own venture:

1) Easier to find qualified people: Many companies are laying off talented people and their loss might just be your gain. It is easier to find qualified people during a downturn and when the stock market is down, rather than in a booming economy where you can’t even begin to compete with high-flying stock options.

2) Less competition is a good thing: The economic crunch has forced flight to quality for VC Funding. Now that the VCs are not throwing money with anything that has half a business plan, you may find that you have less competition. You also have more time on your side especially, if you’re planning to bootstrap your venture and scale slowly.

3) Diversify your risk: With the prospect of mass layoffs looming large, it’s a good time to re-evaluate your options and diversify your risk. The layoffs combined with hiring freezes has increased the scarcity of interesting jobs. If you’re looking for job satisfaction vs. just a paycheck, what could be more fulfilling than your own venture?

Now, it is your turn to tell us what you think.Vote below to let us know if right now is good time to start a new venture and as always, leave your comments in the comments section.