In the world of tech startups, and particularly in Silicon Valley, there has long been a very annoying line of thought about whether companies should make money or not. It goes like this:
It does not matter if your tech startup doesn’t make money. It is more important that your product is effective, useful, and popular with users. Once you have built a large audience for your product, you can figure out how to make money later. Revenues today do not matter.
In turn, the public often reacts angrily when tech startups that make no money get huge investment rounds that value them in the billions of dollars. When Snapchat was valued at around $US3 billion, people were apoplectic: Snapchat makes very little money. Three out of four tech startups fail because they don’t make money. There is a long history of tech companies with impressive valuations turning out to be worth nothing because of their lack of revenues: TheGlobe.com. GeoCities. MySpace. LiveJournal. Second Life. Friendster. Tribester. Napster.
Now — thanks to the Sony hackers — we have the truth. The CEO of the hottest tech startup that, for a long time made no money, believes this is nonsense. Revenues do matter. Your business model does matter. Figuring out how to make money off your users is crucial, Snapchat’s Evan Spiegel says, in an email he never meant for the public.
In a message to Snapchat board member Mitch Lasky of Benchmark Capital, Spiegel explained why he was not going to just take a bunch of money as an investment from Tencent just because he could. “This business needs to make money. The argument of grow now, monetise later doesn’t make sense,” he wrote. “I’d rather not burn another $US100mm … before we find out whether or not we have a business.”
“This business needs to make money.” That is the truth about tech startups that think they don’t need to have revenue streams or business models or EBITDA.
Interestingly, Spiegel wanted to boost Snapchat’s monetization for two reasons. One because it helped him justify the company’s valuation in future investment fundraising rounds. And two because he wanted the company to succeed on its own terms, not because people like Tencent and Facebook’s Mark Zuckerberg wanted to back up a truckload of cash onto his front lawn.
Here’s the key section from Spiegel’s email:
… we need to monetise the business in order to create leverage for future financings as needed. In the next two weeks I want to focus on the monetization product rather than a potential financing. It’s almost there and it’s really awesome. If we have a business that is sustainable over the next 2-3 years we will be in a much stronger position.
… Monetizing the business now only makes a stronger case for the permanence of our product. I think most important thing I want to communicate to you is that this is not an emotional decision and is not about “proving it” – this business needs to make money. The argument of grow now, monetise later doesn’t make sense because we have reached abnormal levels of growth and our monetization product is value-added. I’d rather not burn another $US100mm of OPM before we find out whether or not we have a business. If we can build profitable biz w Twitter-scale, 30-person headcount, and major growth ahead we are not going to have a problem attracting additional capital.
You can read the whole thing here.