That’s why I will not invest any money in you
I have been in the startup game for a while. My last jobs were with startups and I just joined a 3-person startup a few months ago. Yes, it is a lot of work, but hopefully it will pay off in the future.
I also love to read about startups and about what other companies are doing. That’s why I have been following Hacker News for a while. However, I am starting to notice a trend that is annoying me a lot:
- People are doing some small weekend projects and calling it a “startup”
- Every feedback request for a web application is now “review my startup”
Don’t get me wrong, there are lots of cool projects and applications that I get to try daily, thanks to the “ASK HN” threads, but people need to know the difference between a cool weekend project and a real company.
Do you know what it is?
Real startups (companies) are in business to make money!
Shocking, no? Everything else is just a cool fun project that we may use now and then. If you started an interesting web application that your friends tried and liked, that’s still not a startup. That’s only a web application, nothing else. Can you make money of it? Maybe… Maybe not. Most probably not.
“So why wouldn’t you invest any money in me?”, you might ask? What has the title to do with this post?
The problem is that people are taking these cool weekend projects and trying to make money of them. They are trying to build companies out of what was just a fun web application. What’s worse? They don’t even know how they can make money. I think that 99.9% of the time when I ask these companies how they are going to make money, all they can come with is the “ads” or “Freemium” answer. Here is the truth:
- A company to make money based on advertising has to be able to reach a very large audience. Do you think that your application that your geek friends like is going to be like that? If not, forget the “ads” model.
- Same thing for the Freemium model. Do you have something that your free users really want? Actually, do you have enough users for that to work? On the best bet 1% of your users will “upgrade” to a paid account if it is very cheap. Do you have a couple hundred thousand users? Even if you have 100,000 users and 1,000 pay for your paid account. If you charge $10 per month, you are still making only 10k per month, barely making the salary of one person. No one will invest in a company like that
So, that’s why I would never invest money in “your” company. Unless you have a solid revenue model, a very expensive product that people will buy or you can reach a very large audience, it will not go anywhere.
The worst model at all? An ad-based web application seeling “Premium” accounts that the main advantage is being ad-free.
Yur right that a fun project is not a business – and there are too many people launching companies without a plan to make money.
Not sure if there is a problem with freemium though – that seems to be doing pretty well for lots of startups (with or without investors).
your mostly right, but there are still plenty of examples of companies growing very successful web apps that eventually turn into a business. twitter comes to mind; along with most of the video sites out there
I don’t see a problem with the Freemium model for people willing to go at it alone. There is some merit however regarding a Freemium app being able to convert enough users to pay back investment capital.
You’re both right. Fundamentally businesses should solve problems, and not merely do something cool. The problem needs to be compelling enough that enough people will be willing to pay for the solution.
You are bang on with this post. There is a new trend where people aren’t building companies anymore, they are building fun projects and calling them companies. BIG difference. Keep up the good work.
I agree that most people whose answer is simply “ads” might not get it, but I disagree that you need a large audience to make money on advertising. Highly targeted small audiences with lots of repeat purchases do the trick for an affiliate advertising model. There are more tweets in a minute than PresaleToday gets uniques per month, but it is a viable business…not looking for investors, but start-ups that are not looking for investors are people too.