Michael Arrington provides good insight into a current dilemma for Twitter. Should Twitter turn revenues on or keep them off? The dilemma being that a revenue-less but growing company will lead to speculative valuation and therefore possibly a high acquisition price. A company with revenue however will be valued on an X-factor related to the revenue being generated.
While it may be a real dilemma for Twitter I feel it is precisely this attitude which makes Silicon Valley sometimes look like a big bubble of nothingness. We’ve heard this story so many times. Entrepreneurs or investors answering questions about revenue for a web company with “we don’t know yet”, or “we are still thinking about it”. Companies being successful because they show incredible growth, instead of sustainable profits. It’s unbelievable that so much money is invested into companies that (seem) to have the arrogance to assume that growth can come first, and thinking about revenue later.
Don’t get me wrong, there is nothing wrong with thinking about, or even discovering revenue streams, while you are building and growing the service. And I obviously do not know if Twitter is not thinking about revenues every day. But I do object to the attitude that anything that grows can be turned into revenue, or that thinking about revenue can be done later. What’s your business model? “Eh, well, we are still thinking about it, but we are probably worth millions if you want to buy us!”
Growing a company is the easy part, especially with all the web 2.0 tools that are available now. There are countless ways of driving traffic to your service. If you are able to provide value, then you can be sure that you can also grow your service. But growth in itself is no reason to assume that sustainable profitability is also within reach. They are entirely separate challenges, only bound by the one common denominator that drives both, user value. Should Twitter do advertisement, subscriptions, API fees, mobile? These are questions the company should be asking itself every day. Growth is not a business model, getting acquired isn’t one either.
Silicon Valley thrives partially because of its opportunistic nature. It’s a great strength but also a big weakness. If a company is created with the sole purpose of getting acquired, then there isn’t really any value creation. Unfortunately it still seems to be the most common ‘business model’ in the online world. All it really does is move investment money around. It doesn’t add any money to the ecology, there is only losses to be made. There is no value creation, merely destruction.
Unfortunately there is always an old-school ‘wanna be cool’ company that is willing to acquire and pay for the mess. Everyone happy, even the acquirer, until he finds out that the economic rules that he has to live by in the real-world also apply in the online world. If you want to be profitable you need sustainable revenues.
If you own a grocery store you may think about opening another store. I’m guessing you will calculate, look at growth and profit, and after countless of days without a lot of sleep take the decision to do it. But not some of our cool web entrepreneur with enough money made in earlier ventures. They just start something for the sake of it. Let it grow for a while, and see where it goes. If it fails, no big deal, just try something else, or even better, sell it to the next sucker that wants to give it a shot. BTW, I’m obviously not talking about you, but about that other guy.
Trying many different ventures, or creating growth without sustainable profit doesn’t make you a great entrepreneur. It’s your ability to grow something into sustainable profitability that makes the difference. Because that is the real hard part. The rest is just play.