Monetize . . . or Die?

This article will take approx 3 minutes to read.

What we say to dogs.jpgA few months ago, my pitch to Virginia’s Center for Innovative Technology (CIT) for their GAP funding program was turned down. I actually thought I had a fighting chance, having worked with the good folks there before and produced a plan that set the stage for their first $100k GAP disbursement. But my app-in-progress CHALLENJ was turned down, for, among other things, “We are unsure about your ability to monetize the site.” Gee, I thought — I had scoped out several alternatives . . . one of them should surely yield.

What I said was, “The revenue is, of course, dependent on my ability to acquire millions of users.” And what they heard was “I don’t really care about revenue.” Like the classic cartoon, listening, understanding — and in the case of investors, believing — are often completely different things.

I had built a financial model — I love building models — that suggested revenue somewhere between $10M and $20M was achievable in Year 3. (Maybe I should have given them an interactive model or web toolkit, that would let them dial in their own scenario.)

But truth be told, my focus was primarily on getting users. I was willing to bet on our ability to do so, and that’s fine for founders . . . but for CIT (and others), the risk was too high — certainly to place a $100,000 bet.

(Incidentally, I still recommend applying for GAP funding — it’s a relatively easy application, and structured as a convertible note, avoids issues surrounding valuation, which can be very touchy these days.)

The conclusion I soon reached — months before the economy flip-flopped — was to build and launch before resuming the quest for investment. (Now pretty much a fait accompli for any web start-up.)

Launchbox Digital co-founder (and most recently, Thummit co-founder) Sean Greene suggested an alternative at BarCampDC2 last week: sustainability with small numbers: “VCs need things to be big — you don’t. You might be perfectly happy with 10,000 paying customers. And if so, you don’t need a VC.”

Point well taken. For that matter, maybe you don’t even need angel financing.

In a recent BusinessWeek story, New York Angels chairman David Rose — and several others — remarked they’d like to see self-sufficiency on the initial investment. Jeez Louise, how many businesses can get to self-sufficiency on a couple hundred thousand bucks?

Maybe it’s my upbringing. My first venture-funded company was in the computer-chip business. Talk about a leap-of-faith investment — money comes in, and a year or two later, you hope to have a working product, a receptive customer base, and good market conditions. In that world, there are only two qualifications for investment: 1) the pedigree of the team; and 2) the gut of the VC.

Google was a gut investment; the founders were super-smart, but still in school. Twitter had a mix of both — the founders had proven their smarts and ability to execute with Blogger, which was acquired by Google in 2003; but well before the meme had proven itself with the masses (some say it has yet a ways to go) a few VCs — notably Union Square Ventures‘ Fred Wilson and Spark Capital‘s Bijan Sabet, were also trusting their instincts that Twitter was not destined to be another PointCast. They believed instead they were on the very brink of a phenomenon . . . even without a revenue model.

Recently, a bit of tempest in a teapot brewed around a comment USV’s Wilson made about Twitter, as reported in a Wired blog:

“œIt’s like the stupidest question in the world: How’s Twitter going to make money?,” said Union Square Ventures’ Fred Wilson, another investor. “It’s like ‘How was Google going to make money?’

Wilson subsequently apologized for being snippy, but I knew what he meant. Throughout my startup career, I rarely worried about revenue models — the hardware companies of course made products to be sold, so the only concern there was could we sell thingies for more than it cost us to build them. But even in the software and Internet companies, there was a general belief in the notion that if we produce something people use, we’ll figure out a way to make money.

It may all be moot, because most of you are probably thinking more about sustainable revenue models than ever before.

Call me crazy . . . but I’m still a fan of go big, or go home.

In any case, we believe in our ideas, exuberant (if not irrational) as ever. And we remind ourselves that, as David Hornik, of August Capital has said: “One VC’s next Google is another’s wasted hour.”

Which is why I continue talking to VCs. And in fulfilling my personal mission to improve the VC-entrepreneur dialog, I’ve organized my first OpenCoffee, where we’ll have two local VCs in attendance. Join us, if you can, for some stimulating discussion!

Comments

  1. says

    Great post Ray.

    I understand the need for VC funding for certain types of startups – certainly chip confabs are one of those types of businesses, however I don’t fault folks for requiring more concrete metrics prior to funding. The reality is that it’s really easy these days to build an app (even in a day, or weekend) and it doesn’t require any capital…just time and talent. I think that’s a good thing!

  2. Ray Capece says

    Thanks, Peter — I don’t disagree . . . and certainly once the app is built, something is measurable! But even once the users start piling in, it’ll take some time to figure out how to make money — ads? Freemium? Enterprise sales? That’s the fork in the road when survival means either getting revenue, or getting other to believe you can get it.