MoneyBall for Startups: Invest BEFORE Product/Market Fit, Double-Down AFTER. My apologies... this is a long piece (~2500 words). Not for the faint of heart. If you want the short story, read the abstract below & 3 core assertions, then cut to the conclusions at the bottom. Abstract: VC funds are getting smaller (good), & angel investors are growing (also good), but both need to get smarter & innovate. Startup costs have come down dramatically in the last 5-10 years, and online distribution via Search, Social, Mobile platforms (aka Google, Facebook, Apple) have become mainstream consumer marketing channels. What does this mean? Let's start with 2 intial observations about the current market for investors, and for startups. Assertion #1: Most consumer internet investors (angels, seed funds, big VCs) have no clue what the fuck they're doing. Recently some very smart folks have been talking about the relative [upside/downside] of being a [small/big] investor in tech, and specifically the changes & challenges going on in venture capital in the last decade.
Fuck. The secret to making money online. When Should a Startup Start Charging? I’ve recently changed my long held belief that all startups should charge immediately upon the release of a new product. I now believe that non-enterprise targeted startups should only charge once you have achieved product/market fit. As explained in this earlier post, I define product/market fit as at least 40% of your active users saying they would be “very disappointed” if they could no longer use your product. The evolution in my thinking to charge only after product/market fit is based on finally working with some “normal startups.” The first five startups I helped take to market all amazingly achieved product/market on the initial release. It is safest to assume you won’t have product/market fit right out of the gate. If however, you are like most startups, you will spend an undefined period of time engaging users and evolving your product to better meet their needs. It’s Different for Enterprise Targeted Startups Growing Your Startup with a Business Model.
Freemium. How to create a profitable Freemium startup (spreadsheet model i. Click to download Freemium spreadsheetBackground on this discussion Last year, the stupendous Daniel James co-hosted a talk with me on Lifetime Value metrics for subscription and virtual goods-based items. You can see the video/outline for the talk, Daniel’s commentary, and a mindmap of the talk (scroll to the bottom of the post). As part of the talk, we worked on a spreadsheet model for freemium businesses that we didn’t get enough time to work on – so I’m going to cover it in this post! If you haven’t gotten the spreadsheet yet, here’s another link to it. Here are the questions this post (and the spreadsheet) is meant to answer: What are the key factors that drive freemium profitability?
If these questions interest you, keep reading :-) Article summary (for people with attention deficit!) Lifetime value > Cost per acquisition + Cost of service (paying & free) There are lots of different factors that influence profitability, including: Now for all the gory details… LTV = 1/(1-R) * rev. Freemium Founders: Start Charging for Things Today! – Tony Wrigh. I tend to disagree with 37Signals on a mess of things. Like a lot of successful internet pundits, they deal in absolutes and hyperbole. There’s no middle ground and there’s no “…well, it depends”. That’s just not as linkbaity. It’s probably not as fun, either.
But there’s one place where I wholeheartedly agree with ‘em– if you’re in the Freemium game, start charging for your software. Right now. Price signals value. We’ve been at this for almost two years and I have very few big regrets. Some additional fabulous reading on the topic of when to charge can be read on Sean Ellis’ blog here. I agree that price is part of the process of figuring out if you have product/market fit. This is an interesting thought, but I’m not convinced. But where I think Sean is absolutely right (to be fair, I think Sean is brilliant– you should subscribe to his blog!)