Friday, 21 December 2007

What should come first, critical mass or a business model?

Reid Hoffman, chairman and president of products at LinkedIn, recently said at a conference that web service companies should concentrate on building a critical mass of users before they worry about how to make money (I assume he’s referring to services where the concept of a ‘critical mass of users’ is important – such as those with a strong element of social networking and user generated content for example).

There are lots of successful companies that did not monetize their users until a long way down the line. Just look at the biggies: Google, YouTube, Facebook, Skype, LinkedIn, MySpace … and what is their primary business model? Advertising and premium services. Yet so many VCs keep telling me that the business model has to be nailed from the start, and by the way "advertising is not a business model." From what I can see, advertising is making lots of people very, very rich indeed. Advertising on the internet and mobile is exploding. Advertising certainly is a business model and a very lucrative one at that.

If you have the critical mass of users. Which is starting to sound like bubble1.0 again: then it was about getting as many visitors as possible to your portal, now it’s about getting as many members as possible in your social network. It’s an improvement this time round, though, because users will be more engaged and you know intimate details about them such as the colour of their underpants. And a big company that already knows that this sort of thing works might buy you.

But since you’re not one of the first web2.0 companies that could attract lots of new members at a low cost because it was all so new and cool and there wasn’t much competition, there’s a tough challenge ahead: you need to expend lots of resources in the early stages to build critical mass with precious little return. To have the best chance, you need to develop partnerships that can enhance the service and bring more reach, have the resources to develop your offering faster than someone else can copy it, and make sure you’re in the right place at the right time. It’s a crowded market, and few will survive long enough to reach the tipping point.

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