I don't think it makes sense to even think about starting a company if you don't have some sort of idea of how you're going to make money. This whole idea of build it first and figure out the money stuff later may work for a few companies, but it's more or less a recipe for disaster. Investor capital is temporary, although many treat it as an endless source of income.
It was a great concept 5-10 years ago when ads made a decent amount of money and people didn't spend 80% of their time on Facebook/Google/whatever.
In the present day, we have large dominant sites, so you need a better way to make money than "I'll get the eyeballs and point them to ads eventually". The eyeballs aren't coming in sufficient quantity to make ads profitable anymore.
Either sell them something, affiliate or go mobile.
Are there any success stories of companies that turned on the "profit switch" and started to make money?
I'm just very skeptical about this. It looks like many companies are looking for the big acquisition and there's no plan "B".
Also this article makes the assumption that companies today are actually making some revenue, but, most of them (at least the ones that get press) are not!
It needs to be said that Google and Facebook are perfect, no-brainer advertising platforms. Mass audiences + natural use behaviors that can be monetized via ads + user analytics and segmentation capabilities = beaucoup advertiser bucks.
But it's a mistake to look at a typical startup and assume there's some sort of magical "monetization switch" that can be flipped when sufficient scale is achieved. If your platform isn't a natural fit for advertising, or for other forms of monetization, then monetizing is anything but easy.
Scale isn't sufficient. It's necessary in a lot of cases, but in and of itself, it doesn't guarantee anything.
"It needs to be said that Google and Facebook are perfect, no-brainer advertising platforms."
Hindsight! When Google came to being, search engines were not so obvious. They relied on banner ads (declining CPMs). Overture was experimenting with the PPC model, but it wasn't remotely mainstream.
Facebook as well. Many people claimed that Facebook could never turn a profit with advertising. Users had no purchasing intent, suffered from ad blindness, etc. To some degree, they were right-- clickthru rates on FB are pretty awful-- but with 700M+ active users, it really doesn't matter. It was decidedly non-obvious that Facebook would be a gaming platform.
I'm having a hard time coming up with a case where a platform /product achieved scale (in the age of modern advertising), yet couldn't monetize. Which ones can you think of?
I'm not sure I understand the question. Pretty much every successful internet company began with zero or limited revenues and huge losses (Amazon, Ebay, Google, PayPal, Facebook, Yahoo, etc).
Probably the best example is Amazon. They were unprofitable for the first 6 years or so, using VC money (and money from the IPO) to increase their market share as quickly as possible. Groupon might be another example soon, if they don't get bankrupt, of course.
Eventually, every business wants to make profits. That's kind of the point of Business. The question is when. If you're a startup, you can:
A) Aim at near-term profitability (say, 12 month horizon) by keeping expenses low and focusing on revenue growth
or
B) Aim at long-term profitability (say, 5-10 year horizon) by raising a lot of money, spending it on sales and marketing, R&D, product, etc.
Each has advantages and disadvantages. My take-away from the article: if a competitor could beat you by raising $30M and focusing on growth at the expense of profitability, B) might be the right option. Otherwise, A) should be the default for most businesses.
Clayton Christensen in his great book The Innovators Solution talks about being "patient for growth not for profit" which I think is a great way to look at it.
I recently asked him on twitter this advice would fit into the likes of FaceBook and others and got a reply back that they where looking into that.
It seems to me that the answer as always is it depends.
Of course, they should. It is not whether a company should be profitable or not that is the important question, it is when it should be profitable that is more important.
Depending on a variety of factors, companies have runways of differing lengths. Ideally, you should attain profitability as early as possible. In the real world it is not that simple a construct.
With subscription SASS services, growth means getting closer to profitability. Maybe that is why i like them so much lately. It is nice when things overlap. If I were in the consumer space where you grow before trying to monetize, I'd feel really nervous about whether that something that will drive profitability even exists.
Of course a growth investor is going to insist that "98% of startups should be growth focused". In this regard, profit and venture investment are two different (and, essentially, competing) sources of capital with their own upsides and downsides.
Profitability should not necessarily mean that you are earning more than you are spending, but that you have found a scalable way to make $1 while spending less. Once you have achieve this, you can focus on everything else.
This is a great article and it reinforces for me, the importance of the concept of "ramen profitable". If you're Ramen profitable, you're putting essentially all of the profits you could be making into growing the business. You're not running at a loss, and thus not in the situation where a lack of ability to raise funds would kill your runway. But you're also in the situation where, if some invested were interested in plugging $10M into the company you should already have the mechanisms to manage that money and financial prudence to give the investor a high expectation that you'll put that money into growth.
Its really easy to spend other people's money and have no profits, and also have that show up as high growth. You can turn VC dollars into revenue thru a variety of ways that are unsound for the business in the long term. A trivial example is taking the VC money and then buying your own products on the open market. This would likely be considered fraud, but there's a variety of "partnerships" and inefficient advertising methods whereby you can do the same thing. If you just want to show growth.
But if you're ramen profitable, and have traction, you've shown the business is viable on its own terms. This is akin to finding product market-fit. They might not happen at the same time, but being ramen profitable is a lot easier once you've found product-market fit.
Of course investors, generally VC types, want to see massive growth and are not as concerned about profits. But as a founder you have to look out for he business... and there might not be as much VC interest as you would like, and in my experience with VCs they are known to drag out deals.
In fact, in several of the deals, during due diligence the VC determined the amount of cash we had on hand. They also made it known that they wanted us to start spending more on certain initiatives, and to not worry bout it, we'd close well before there was a cash crunch. Yet in both times, by the time we did close, they had us over a barrel because we were about to run out of cash due to taking their advice.
So, I think ramen profitability is a good balance. You're not wasting gross margin by banking profits, you're turning it all into, hopefully, an investment in future growth. You're less dependent on VCs, but have also shown the discipline to have compelling examples of how you can turn their money into growth, since you've been doing it with your gross margin so far.
