No revenue is a risky business

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WInner with a lottery check A business without revenue isn’t much of a business.  This little bit of common sense seems to be missing from a growing number of business leaders.

Following the success of a few wildly successful tech companies (think Twitter), several new consumer software companies have emerged that are purely focused on building large online communities and ignoring monetization.

This is a high-risk endeavor. It requires that you burn through significant cash and bet the company on your ability to “figure out down the road” how to monetize the community without disrupting the experience they have already grown to love. It may work for some, but the odds of success are similar to winning the lottery.

Unfortunately, this high-risk strategy has stuck with more than just a handful of lottery winners. I’ve been surprised at how long the “monetize later” mentality has stuck.  It’s now been going on too long to assume that people are simply trying to find gold in mountains that made others rich.  Entrepreneurs are really starting to believe this is a real strategy.

Here are a few reasons why it may not be a good one.

Feedback is essential to building relevant products.

One very powerful piece of feedback is whether or not your clients are willing to pay for your product.  If it’s not worth paying for, it may not have a compelling enough value proposition.  You want to know that early so that you can either adjust, or shut it down.

The size of the community may not be as important as you think it is.

Depending on your revenue model, community size may or may not be a powerful asset. B2B businesses, for example, don’t always drive value from the sheer size of the user community.  If you haven’t figured out your revenue model, how can you be confident that the size of your community is all that it’s cracked up to be?

It’s hard to make advertising models work.

This isn’t the dot-com era anymore. Simply relying on advertising is hard. It requires more than a large community. It requires a high-value community, demographic targeting, and so much more. Actually making money off of advertising these days is not for the faint of heart.  In fact, it’s nearly impossible.

Building for a transaction is a shell game.

Most successful entrepreneurs have a passion for and fundamentally believe in their product. Some who deploy the “build a community, not a business” mentality are simply trying for a big payday and relying on greedy individuals to ride a wave of emotion in order to help them get rich.

Building a great business, not a shell game, is the most reliable way to build value.

A software product drives revenue. This makes it fundamentally different from other forms of software. If you can’t figure out how to monetize your software, it’s not a product, and thus you can’t build a business around it.

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