As stock prices for Zynga and Facebook plummet, Silicon Valley is learning a hard reality. Users, the startup currency of choice for the last decade, are not money. They are as useful to Wall Street as “eyeballs” were in 1999. And now as Users are losing their value in the eyes of investors, the downward pressure on valuations has already begun.
Chris Dixon nailed the supply-side reasons for this change in fundraising economics with his blog post: “Ten million users is the new one million users”.
- Thousands of early-stage consumer web/mobile companies were started and funded in the last 24 months
- There are only a few dozen VCs who actively write consumer Series A checks, limiting the number of total deals
- A few breakout early-stage consumer hits (Instagram, Pinterest) have reached tens of millions of users in record time.
His conclusion: with so many companies chasing the users-first-revenue-second consumer startup model, you need to show even more growth than before to expect a strong valuation. If you don’t, it’s likely that you will see less favorable terms than you expected. But in my opinion, this misses the point: you need to focus on Revenue, not Users.
While Silicon Valley investors have spent the last four years investing in companies that demonstrated they could get Users, this groupthink was largely validated by Facebook and the idea that “with so many Users, of course they’ll make money! They just need to figure out how.” (Frankly, I think Facebook is in a great position to do so too, but in the months since their IPO it’s clear that they haven’t had the kind of breakthrough that would validate their valuation in the short term.) With Facebook’s struggles since its IPO, investors are now reevaluating how they value consumer-facing companies.
If you’re a startup founder, how do you react to this changing landscape?
1) Make people pay. Instagram may have been sold for a billion dollars without earning a penny itself, but those startups will prove the exception, not the rule. Now is the time to start thinking about how your startup can make money, and to start working towards it.
2 ) Show the ability to monetize even a small amount of users. This demonstrates two things: that your product has value worth paying for, and that you know how to articulate that value to consumers.
3) Show the revenue growth chart in your pitch deck. VCs are now more money focused than they have ever been in this fundraising cycle. You need to demonstrate that now only is your user base growing, but your revenue base is growing with it.
Of course, making revenue growth a goal doesn’t mean abandoning all-important user growth goals. It just means that you’re beginning that learning process and making it a priority within your company. When you’re trying to figure out how to monetize your product, think about how users are getting value out of it, especially in interactions with other peers. It may not be in the way that you expected. But that’s better than postponing this learning until later. As Ilya said on his blog, people running freemium apps are afraid of money as they overextend their free product offerings to maintain user growth. Now, the game has changed: you need that revenue growth and you need to start building it sooner rather than later.
Fantastic post from Steve Blank on the little moral choices we make every day
Originally posted on Steve Blank:
It’s not the crime that gets you, it’s the coverup.
Richard Nixon and Watergate
Getting asked by reporter about where I went to school made me remember the day I had to choose whether to lie on my resume.
I Badly Want the Job
When I got my first job in Silicon Valley it was through serendipity (my part) and desperation (on the part of my first employer.) I really didn’t have much of a resume – four years in the Air Force, building a scram system for a nuclear reactor, a startup in Ann Arbor Michigan but not much else.
After trying my hand at blogging on every service, I’m always drawn back to WordPress. This will be my official personal blog going forward. Here’s to new beginnings.