Editorial note: this post was originally published at my personal blog, but since it has sparked some good discussion I thought we should publish it on ArcticStartup as well. The post is dated May 31st and thus some of the references to time & date may not be 100% accurate.
I received a Quora e-mail this morning reminding me of the different topics of the service. For some reason I haven't had time to dig into the discussions there. Also, I find something in the service a little odd for my taste and thus haven't really been active in it.
However, e-mail had an interesting question that Evan Williams, the co-founder of Twitter had answered. The question in the e-mail was "What consumer Internet companies had a large number of users but failed to monetize?"
The answer excerpt in the e-mail I saw from Williams was "I can't think of one".
As I dove into the discussion at Quora it turned out to be a great learning experience into how Williams sees monetisation and ways to go about it.
Williams offers three solutions to why he can't think of any.
1. The companies in fact had significant revenues.
2. The companies didn't really have a lot of users.
3. Or they actually got bought, ran out of money due to a dotcom crash or sued out of existence before they tried to monetise.
Monetisation is a key part of a startup's lifecycle. It is extremely important as all the hypotheses and expectations climax at that - if you are unable to generate sales, you're doing something wrong, ie. the market doesn't see value in the offering you are asking money for.
In my opinion, if you get bought, run out of money or sued out of existence - you have still failed to monetise. I see this in a quite black and white way - either you're monetising or you're not.
Instagram is a perfect example of this. They failed to monetise with their userbase, but that didn't matter. They still got bought by Facebook and the story is a happy ending for all involved (though for Facebook, it's just beginning).
Perhaps the bigger question that entrepreneurs should be asking is that what are some of the ways a company can test their hypotheses on monetisation even with a smaller userbase, if they require a large one to do so?
I'm quite passionate about monetisation and building value as it's something I've had to think a lot about with ArcticStartup. Media businesses on average require a lot of users (ie. readers) to monetise it through the most common business models in the industry - display advertising.
We, at ArcticStartup, for example have failed to monetise through display advertising as it brings in just some €5-6k a year. Sponsored blogs for example suit expert organisations on our site better and we're able to monetise those much more. Our partners are able to get their message across in an interesting way, while readers get interesting content. We are strict about the promoted content as it becomes also a core part of the product we are offering to our readers.
Another way to look at failing to monetise is that you can't create a scalable business model that is cash-flow positive. Myspace and Digg for example are great examples of this, in my opinion, who failed to monetise successfully.
While you're able to generate some revenues through display advertising - it's not enough to push you to become cash flow positive meaning the model behind it might not be scalable.
These are crucial things to realise in my opinion when talking about the value creation startups engage themselves in. It's really easy to talk about creating value when there is no one paying for anything. It's the same as "running a startup" when there are no costs involved.
The last paragraph in Evan Williams' post really underestimates the importance of monetisation in my opinion (is this due to the general optimism in Silicon Valley? Hard to say):
Sure, there were Internet companies that went out of business because they were losing too much money, but I think usually they didn't *really* have a lot of users (just a lot of hype) or they had out of control costs.
Isn't having too many costs in comparison to your revenue exactly the problem in monetising successfully?
Image by o_corgan.