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.


4 responses to “Death of ‘free’ as a business model?

  1. I totally agree. VCs go against free market mentality

  2. Great post! It will be interesting to see what changes companies (including start ups) make in the next year in order to thrive.

  3. Thanks, Ginger!

    I’ll continue posting here on the changes I see in business models and such.

  4. Thanks for the feedback, Tyler!

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