Occasionally I come across an entrepreneur who insists that his current strategy is to go for users and not worry about revenue now. It always makes me cringe. Then I try to talk them out of that strategy and find a more balanced strategy of getting users and revenue at the same time. Why do I feel this way?
In the past, the “get users now worry about revenue later” strategy has been successfully employed, so it’s not totally without merit. Yes it’s true; if you have tons of users then at the very least you can monetize the eyeballs via advertising. But certainly if many users find your product/service useful, that’s evidence that they would probably pay to use some version of your service at some point.
In examining how this strategy does work, I’ve come up with these cases:
You hit on a killer app early and you have hockey stick growth in users.
Somehow you’ve hit on a killer app early and you’ve got users up the wazoo. You see exponential growth and you can increase your valuation by waiting a bit longer to really cement your negotiation position when fund raising. In any case, operations can last that long because the speed at which your users are growing is so fast that it is obvious you can survive cash-wise until you reach your goal, before you need to figure out your revenue strategy.
You can last expenses-wise long enough to grow users to a point to be valuable.
You’ve built a service and found it valuable to users, and now you want to wait to build up users before figuring out a firm revenue plan. Expenses to run the site are low enough that don’t eat into your funds. Whatever money you’ve raised now, you can extend that budget for a very long time (try 1-5 years). Or maybe you’re rich or you are married to a rich spouse and don’t need the money coming in from the company to survive.
You’ve got the initial backing of a big fund.
I’ve seen cases where if you get seed money from a big fund, like Sequoia, then it gives you a bit of comfort that there will be someone there to infuse you with cash if you get the huge amount of users but don’t have revenue. Often their terms enable them to get first right to fund you when it comes time for the next funding round. But also realize that they can spend $100k-$500K on a company and not bat an eyelash if they lose it all; they’ve got billions under management and can afford to give you seed cash knowing that they might lose it.
If I see an entrepreneur that fall into these categories, then I usually shut up on this issue. But most people are definitely not, especially when they are in the early stage of their startup.
That’s why I try to talk entrepreneurs out of going just for users. I want them to think about revenue right from the beginning. Even if it’s incomplete or risky, at least they are thinking about it now versus getting into a budget crunch and then realizing they should figure out revenue when they’re almost out of cash. And who knows, they may actually hit on something that brings them revenue to survive or even do better than that. But you’ll never know unless you try as soon as possible.
I’ve also seen entrepreneurs argue they have a funding plan along with their business/product plan. They will build the product and user base, survive until their current cash runs low, and then they will go for their Series A funding and everything will work out great. The problem with this plan is that there is no backup; it pre-supposes everything will go as planned with no hiccups. This is a highly risky supposition to go on.
One problem is that you think you’ve got something great, but those pesky users don’t behave like you want them to. They might actually NOT come in droves to your wonderful product! Or they come slower than you think.
Another problem could be that engineering your incredible product might take longer than you think. Or you launch but find out you need to do more.
The last problem is that convincing people to give you tons of money can be easy or hard. I’ve seen a company close Series A in a month and a half, and I’ve seen companies still out there after a year trying to raise money. You can’t plan for how venture funds and investors are going to react to your plan and progress, even if it seems great. Even if you court someone, the terms negotation and the due diligence process could take months.
Mitigating the risk of all these bad things happening could just simply be…to think about revenue from the beginning. In that way, you can get cash coming in as soon as possible in case you need to survive longer than your plan dictates as you can never predict if you’ll need to or not.