A recent response to a question on Quora about whether Quora was generating revenue showed a mistaken philosophy in many young companies, that not having revenue is a good thing. For those who are not familiar with it, Quora is a question and answer site where users post questions, people respond and questions are up/down voted based on their quality, so the best answers flow to the top. The company has raised about $61 million in two rounds of financing.
A couple of months ago, A Quora user posted the question: Is Quora Profitable?. Marc Bodnick, who leads Quora’s business and community teams, responded: “No, Quora the company is not profitable. We don’t have any revenues!”.
This response, and particularly the tone Bodnick took, points to a mistake many start-ups make that often dooms them. It is putting off creating a strategy to monetize, with the assumption that if you build a popular business you can easily transition it to a business worth billions. Although this strategy has worked for a few companies, it usually results in a company that runs out of cash (and closes) or has to take additional funds at a valuation that leaves its founders with very little. It can also lead to strategies that result in your company not achieving its full potential. Moreover, the claim that you are not pursuing revenue is often a rationalization, either to the entrepreneur or their investors, for not being able to find a profitable model.
The success of Google and Twitter is often used as an example to show that you do not have to focus on generating revenue to create a business worth billions of dollars. It is true, these are great companies that were initially not focused on generating revenue and have had incredible growth. The problem with this argument is that every week hundreds of new companies are started, many of these companies will be sold or eventually go public (or make great livings for their founders). Yet out of these hundreds and hundreds of companies, we always come back to a handful that were not focused on generating revenue from day 1. Outside of the 5–10 companies that did not care about revenue, every other great company was focused on optimizing revenue from the day it started. From Microsoft to Apple to Uber to Zynga to Chobani to eBay to Proctor & Gamble to Cisco to Disney, these companies focused on solving a need that consumers would pay for. It does not take an analytics guru to see which approach gives you the best chance of success.
One significant issue with growing your business without focusing on generating revenue is that you cannot optimize your monetization. No company gets its pricing or revenue model perfect the first time. Success is built on constantly changing your prices or fee level to find the level where you can get the most customers who will pay the most for your product. You also need to build retention into your pricing formula by the appropriate balance in which your customers keep coming back but you are charging them enough to optimize revenue. This is the root of maximizing your customers’ lifetime value, which I have written about many times. If you are growing your business without incorporating revenue, you have no way to improve your monetization nor the interdependence between monetization and retention (and virality, the third key to lifetime value). Thus, when you eventually introduce monetization, you may destroy the ecosystem your users enjoy.
Let’s look at Quora. If they are thinking that their long-term monetization will come from charging for Quora credits (which allow you to ask questions or ask people to answer questions), if they were monetizing they could test the right balance between free and paid credits and how much to charge for different activities. If they are looking to advertising for revenue, they can see if advertisers get the most value based on responses users give or if there is more value in showing ads tied to questions. Until they begin monetizing, they have no way of fine-tuning their offering.
Almost anyone who has started a business knows one of the keys to success is the ability to pivot from your original idea to a better opportunity. Very rarely is the original idea for your business anything like where a successful business ends up.
If you are not monetizing, it is difficult to get signals from the market on whether or not there is a better business model. As I mentioned earlier, saying you are not pursuing revenue is a good rationalization for the fact that users will not pay for your product or service. Instead, little or no monetization is often a signal that users do not see sufficient value in your product, forcing you to adjust or offering or target marketing to deliver value to your customers (who may be different from whom you originally think are your customers). Monetization is a great indicator to how highly users value your offering.
Runway and freedom
As I have written a few times recently, the best way in the economic environment to grow your business is through cash flow from operations. It allows you to focus on creating a great company and not spend all your time fund-raising (often unsuccessfully). Moreover, investors who know you have little ability to keep operating without additional funds could force you to take terms that leave you with little control or upside even if you eventually create a success.
You have to make money eventually
It sounds obvious, butyou must understand that no matter what your strategy is—or who your investors are—you will eventually need to generate revenue. All venture capital has a half life: The funds must return cash and stock to its investors after a set time. That may be five years from now or five months from now but at some time the funds must send a check to their investors. The smaller the check, the less likely the fund managers can raise capital for to launch a new fund. Angel investors often have different timing but they are also in it to make money (otherwise they would send their money to the Gates Foundation, a la Warren Buffett). Even the investors who put $61 million in Quora (primarily Benchmark Capital) did it to make a profit, so at some point every company will have to create a path to revenue.
The better approach
I am not saying that Quora will fail nor is this post supposed to be a critique of what is one of my favorite tools (I actually blogged about how much I like Quora last year). I hope that they have a brilliant vision on how they will monetize and grow into the next great company.
What I want to convey is that if you are starting or growing your company, the best way to increase your chance of building a great business is to focus on how you will generate revenue (and optimize your users lifetime value) from day one. It will be much easier than trying to figure out where that revenue will come from a year or so into your company or when you only have cash to meet your next payroll.