business-model, funding, social-networkingA lot of people in the startup world ask for a revenue model. Yet many startups had none and were extremely successful. What are their business models, or how could we explain this to non-SV investors?
By zero-revenue social startup I mean: Twitter, Instagram, etc…
Most startups fail. Most free sites and apps never recoup their initial investment. And all investors want to see a route to a strong positive yield.
Any idea could be valuable if it turned into a large community of avid users. But very few make it all the way. So it’s usually sensible to look at your own project as a bootstrap, and ask, how are we going to make this fly?
Here are the main ways I’ve seen people succeed, in decreasing order of attractiveness.
Most great startups are going to solve a real problem in a way that users like and value. How do you validate that you’re doing this? By persuading one user to give you money, then another, then another…
If you know that users are going to see the value after some time invested, then a free initial trial, perhaps with a concierge service to help onboard early users, gets you onto that pay track, especially if you collect payment details up front. (Will this cost you sign-ups? Of course. But if you want to charge, it will certainly screen out potential users who will never pay.)
Of course, you may have nothing worth paying for today. There are well-trodden paths here. If you’re nearly there, a beta with a clear message that this is a paid service is one option. Or an MVP that lets you measure how many people try and click through to payment.
If you can define a base level of service that delivers real value, with additional features at a premium, then you have the beginnings of validation. One problem at the early stage is that you don’t know where the value starts, so there’s a real danger of over-delivering (so that there’s no incentive to upgrade).
So I tend to encourage people who like the freemium model to bake in advertising from the outset, because it’s both one of your revenue model options, and because it gives you an “upgrade to ad-free” option.
Perhaps advertising will be your monetization route. Then get familiar with how the numbers work, so your pitch has a sensible relation between uptake and income. To accelerate learning, you could invest some money in buying one of the many sites or apps out there that makes steady income - enough to keep afloat, too little to achieve the positive feedback loop growth that the creator aimed at.
If you really are committed to a 100% free model, you need to focus hard on validating that users see value, that you’re not going head to head with a major player, and that you have plausible explanations of why:
Your idea has inherent virality, so that customer acquisition costs will shrink as you hit critical mass
Your idea has inherent lock-in, so that potential competitors will find it easier to work through you, not round you
Your idea has a strong chance of making it so big that future rounds of prospective investors will be ready to see early investors retain a meaningful share or make an attractive exit
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