On my previous post I mentioned that there are two pathways a startup can take – the revenues-first pathway and the assets-first pathway. I also covered the revenues-first pathway in more details. In this post I’ll cover the assets-first pathway and which path to choose when both pathways are suitable. So Let’s start…
The assets-first pathway initially ignores the need to generate revenues and focuses on accumulating assets that can be monetized once they achieve a large scale. In this case you have two simple goals:
- Maximizing the number of users
- Maximizing the monetization potential of each user by collecting unique data. The more data you have and the more unique the data is, the higher the monetization potential becomes.
The value of your company will eventually be the product of the monetization potential of each user and the number of users you have.
The assets-first pathway is the default choice for companies that must build a huge user base in order to make their product or service useful, and therefore seek for rapid growth. For example, a social network should use this pathway rather than the revenues-first one, since there’s no added value in a social network if there are not enough people using it. The same is true for products like Skype, which require other users to use the product in order to make it useful.
The main advantage of the assets-first pathway is that giving your product for free can significantly improve your conversion rates and increase your growth rate. However, notice that just giving your product for free isn’t enough to bring traffic. You first must achieve product-market fit.
The disadvantage of this pathway is that it requires raising significant amounts of capital in order to generate real value for your company. The reason is that you can’t monetize the user base until it reaches a critical mass, and achieving this critical mass is usually very expensive both in customer acquisition cost and in operational costs.
Which path should you choose when both pathways are suitable?
In many scenarios both pathways are suitable. In such cases I usually prefer the revenues-first pathway. Here’s why…
First, there’s nothing that feels better and gives you more confidence and motivation than generating revenues. In addition, having a growing number of paying customers is usually a good sign for product market fit (although this is not always the case – see: Revenue Traction Doesn’t Mean Product Market Fit).
Second, having significant revenues makes your company more stable and less dependent on investors’ willingness to invest. Of course, you need to be careful not to over-staff your business and keep expenses low, but that’s something you must do in any business.
And third, paying customers are usually more engaged with the product and have a higher tendency to recommend it to their friends (psychologically, one needs to justify to himself and to others why he’s spending his money on something). This is of course an advantage if your customers are satisfied from your product and if you provide perfect customer service. If one of these is not happening, then paying customers become much more frustrated and vocal then non-paying ones.
UPDATE: APRIL 14, 2013
Although my general tendency towards the revenues-first pathway when both pathways are suitable, there is one major scenario where the assets-first pathway makes more sense. This scenario is when there’s a risk that your competitors will take over the market and become the dominant brand if you don’t grow fast enough.
And if you’re still not sure which pathway is better for you, then another factor to consider is whether you prefer bootstrapping your startup or raising capital for it (read how to decide between the two in this post). If you prefer the bootstrapping option then the revenues-first pathway is your only option.