Serial entrepreneur Marc Andreessen, who officially launched a $300 million venture fund with partner Ben Horowitz last week, believes as an investor that if a business can grow to a certain scale, it can figure out a way to build a business around its offerings afterward.
He has said that Web startups should focus on getting to scale first then figure out how to make money later.
Andreessen elaborated on his thinking in a recent interview with PE Week. “The cost structure really matters,” he says. “When people get in trouble with this sort of thing, it’s usually for one of two reasons: Either the market wasn’t going to be that large—in which case deferring revenue to get to the market wasn’t worthwhile—or the costs are just too high.”
He has reason to be confident in his viewpoint. As a
Suppose that Twitter wants to make back what it has invested thus far. “Can they get 50 cents per user per year in terms of ads?” Andreessen asks. “Yeah, probably they could do that.”
Yet not everyone agrees with Andreessen about how to grow a company—or the wisdom of waiting for a startup’s usage to explode before thinking hard about its money-making potential.
In fact, just last week, News Corp. chief Rupert Murdoch said he had no interest in purchasing Twitter because it hadn’t figured out a way to monetize itself. “Be careful of investing here [in Twitter],” Murdoch told Reuters (see story, page 9). Murdoch famously paid $580 million for a hot Internet brand that has since grown tepid: MySpace.
The fall from grace of MySpace isn’t surprising to Faysal Sohail, a managing director at
Picking a winning social media company isn’t “the same as designing a very thoughtful experiment,” Sohail adds. “In the very early stages, it’s very hard to predict that Facebook is going to take off but the other 20 sites won’t, or that Twitter will take off and other mobile apps won’t.”
Sohail hopes CMEA has picked a winner in Pixazza, which overlays Web photos with links that let people buy the products in the images. The Mountain View-based startup raised $5.75 million in March from CMEA,
I talk with my own kids about why they use this app vs. another and they say it’s really difficult to explain why, other than that they use whatever kids just happen to latch onto.
Richard Yen, a director the digital media firm
A handful of startups have pulled off exactly that, including Google, Skype and Facebook, but “very few Internet startups will secure tens of millions of avid users with an opportunity to grow into the hundreds of millions,” says Yen. That makes Saban “cautious about consumer startups where complete ubiquity is the only road to revenues and positive investor returns.”
In fact, the newest investment of Saban Ventures, which was formed a year ago, is the Learning Annex, a direct-response marketing platform that produces online and in-person seminars, lectures and classes that are focused on self-help and education. The amount of the round is undisclosed.
Still, Andreessen is hardly alone in his view. In recent years, plenty of investors have flocked to social media companies with more compelling adoption rates than revenue models.
Jon Callaghan, who co-founded
But even more important is the entrepreneur at the helm, says Callaghan. “It all comes back to [that person],” he says. “The right entrepreneur senses when a market is closing in on them or costs are increasing and, rather than plow ahead into a failure, aggressively and creatively changes paths or pivots to make these factors their advantage.”
Callaghan points to Twitter’s Evan Williams, who first co-founded Odeo in 2004, a company that let PC users find and subscribe to podcasts. When Odeo failed to easily gain traction, Williams simultaneously began testing a new company, Twitter, out of an effort to make Odeo accessible over cell phones.
Soon after, Williams dropped the concept of Odeo, even returning the venture capital he’d raised to his investors.
“Most successful companies have their own story of a pivot or acceleration point,” says Callaghan. “In my view, companies that have scale can have the right team, right product, right timing, but in the end it’s the decisions the team makes along the way.”