LaunchBox Blog

A great debate has been raging on the blogosphere over the last week or two on Twitter’s business model, or more appropriately, lack thereof.

Allen Stern kicked off the debate with his post, provocatively titled “Is Twitter F’d?” The piece questioned whether Twitter, despite its strong usage, has “hurt” itself by not developing a sustainable business model. Allen contrasted Twitter with Pownce, which is planning an ad model and a premium product from the get go.

Jason Calcanis, and Fred Wilson weighed in with a simple response: The team should put all of their energy into driving user adoption and getting to scale, and not worry about monetization right now. Get to 10 million users. Once they get there, monetizing will be easy. Fred also points out that Google, YouTube, Facebook all launched and grew without a business model.

Many of the responses were along the vein of 'Dude, It’s 1999 all over again."

There obviously is no one “right” answer. I agree that if you can get to 10 million users, you’ll be able to monetize. I think the biggest challenge for Twitter to get to that mark will be extending its reach beyond the early adopter crowd into a more mass audience.

I think the debate has a few important takeaways for startups:

• The “no business model” approach is a high risk (and potentially high reward) strategy. The biggest risk is that by definition, without revenues, such a business requires capital. Funding is plentiful now, and the current flavor du jour is to fund meaningful customer adoption. That can change over night.
• Focus matters. The primary argument for Twitter’s current strategy is a bandwidth one. The team can only do so many things well. As Fred Wilson argues, every ounce of energy spent on monetization risks taking the eye off the ball on user growth. Whether or not you agree that Twitter is focused on the right things, the focus/bandwidth point is spot on.
• Investor alignment matters. Given limited bandwidth, entrepreneurs should make sure their investors are on the same page in terms of where the business is focused (which Twitter has done; Fred Wilson is an investor in Twitter). Note also, that some commentators have suggested Twitter’s model is one that’s built for an early exit rather than a sustainable long-term business. Again, another point that you want to make sure there is alignment with investors.
• Milestones matter. We have all seen plenty of business plans with hockey stick projections that yield a 10 million user base. The reason that we can have this conversation about Twitter is because it has a viable shot at 10 million. This really is a question of probability: what are the probabilities a business can grow along different trajectories. And those probabilities will be driven by underlying operating metrics like viral propagation rates, take-up rates on the Twitter API, etc. My advice to any entrepreneur is to make sure you understand what those key drivers are, and establish hard milestones and checkpoints to identify what trajectory the business is on at different points in time. Hockey stick projections aside, does the hard evidence suggest that you're really on a trajectory to get there?
  

Labels: business model, monetization, twitter