What About Monetization?

I found it interesting that I decided to write about user acquisition before writing about monetization. I wonder if I’ve internalized the (in)famous Silicon Valley mindset of build it first, monetize second that has both worked and failed in the past.

One of our investors, Mike Maples, has impressed on us that it takes an innovative business model to create a truly revolutionary company. For example, Google not only created a breakthrough product but it also implemented an innovative business model (the keyword bidding system developed by Overture – remember, you don’t have to be the inventor, you just have to assemble the right pieces together!). You can contrast that with companies like MySpace, YouTube, or Digg that have very hot products but applied old business models (display advertising) and came out with very successful companies, but no Googles or ebays.

I think there are also some companies out there that have tapped into very novel ways to monetize, but have not become revolutionary companies because their product simply does not have the mass appeal of a Google or a MySpace or an Amazon – remember, you need both sides of the equation. A few examples are IMVU and Gaia with their venerable ability to monetize virtual goods and economies.

There are also a number of other success stories of companies that found a great monetization match for their product. These include companies like LinkedIn which seems to come up with new ways to monetize every day, most recently surveys / market intelligence, but let’s not forget their enviable subscription business. It also includes another class of enviable “monetizers” – those that mint money by forming a market – ebay is the classic, but more recently Apple’s success with iTunes and the AppStore shows that this model is alive and well if you can pull it off. Finally there are companies that actually make money by selling real goods (no!) – there are the classic examples of Amazon and Zappos, but also some more novel e-commerce plays like Zazzle (customization) and Threadless (crowd-sourcing).

So, when all is said and done, what’s the right time to figure out your business model? I think every company needs to have a business model figured out from inception, but not necessarily the business model. Some path to becoming cash flow positive needs to be apparent, but not necessarily a path to a revolutionary business model. A revolutionary business model does not come in a eureka! moment but instead is the result of careful and deliberate testing and iteration, always aiming at hitting a unique insight that forms the base for a breakthrough.