Tumblr’s Perverse Lesson: To Get Rich, Don’t Make Money

December 15, 2019

first_imgWhy Tech Companies Need Simpler Terms of Servic… Top Reasons to Go With Managed WordPress Hosting Related Posts Matt Asay Tags:#acquihire#acquisition#M&A#Tumblr center_img A Web Developer’s New Best Friend is the AI Wai… $1.1 billion. That’s how much your company is worth if it’s long on users and short on paying customers. Just ask Tumblr. Or Instagram. Each yanked down billion-dollar acquisitions despite making virtually no revenue. Is this a big deal?Acquihires And Billion-Dollar PayoutsSome seem to think so. At least, for acquihires, the kissing cousin to the revenue-free-massive acquisition. For example, Pando Daily‘s Sarah Lacy slams the acquihire, arguing thatLazy profit-seekers love these periods in the Valley. Why not? They can make money without having to actually build a company. It’s like a get-out-of-actual-entrepreneurship-free card.Venture capitalist Mark Suster goes one step further, holding that acquihires actually have a corrosive effect on the tech industry:You have been at Google, Salesforce.com, Yahoo! for years. You have worked faithfully. Evenings. Weekends. Year in, year out. You have shipped to hard deadlines. You’ve done the death-march projects. In the trenches. You got the t-shirt. And maybe got called out for valor at a big company gathering. They gave you an extra 2 days of vacation for your hard work.And that [jerk] sitting in the desk next to you who joined only last week now has $1 million because he built some fancy newsreader that got a lot of press but is going to be shut down anyways.What kind of message does that send to the party faithful who slave away loyally to hit targets for BigCo? …It says if you want to make “real” money  – quit.Fair enough. I’ve been involved in three such acquihires, and I see their point. Acquihires send a signal that failure is OK and, indeed, profitable.But the same holds true for the billion-dollar exits on chimerical revenues. They represent entrepreneurs cashing in on popularity contests without actually having done the hard work of monetizing that popularity. That is, they represent entrepreneurs making big-money success on little-revenue failure. The Downside To Making MoneyAnd why shouldn’t they? It turns out that it’s very difficult to remain popular while charging for one’s service. LinkedIn has done it by charging recruiters. Google has done it by aligning relevant ads next to search results. But monetizing people’s inane pictures of their meals? Instagram didn’t even bother.Pinterest is starting to roll out paid services. Foursquare, too, has been straining to make more money lately. Ironically, these noble efforts to actually sustain the companies on real revenue may make them far less valuable.For one thing, monetization efforts can fail. Just look at Groupon’s gyrations as it has sought to turn a massive sales force into a profit-generating machine. It hasn’t been pretty, and it can turn off users who don’t want to be sold.But more pertinently, the second a business starts to make significant revenue, it will start to be valued on real-world metrics like “profit” and “operating margin” and “sales,” not breathless potential based on “users” and “page views” and “social engagement.” It turns out that the multiples on the former are far lower than they are on the latter.The Entrepreneur’s DilemmaWhat to do? Entrepreneurs can’t really set out to build a revenue-free company that VCs will sustain indefinitely. So most are probably right to initially focus on adoption. Assuming they can get traction, it pays to continue to focus on adoption, because it’s harder to turn free-riding users into paying customers (or find businesses to pay for access to those users). So long as the venture money is flowing, why would an entrepreneur ever choose to fixate on the dismal science of making money? For me, I think if you’re not making profitable money then your future – and that of your customers’ – is always up for grabs. Whatever promises the purchasing company makes, they are the buyer, and you are the seller. As Dave Winer points out, this inevitably means they’re in control. Not you.  Maybe that doesn’t matter. But it does mean we may be building disposable companies with little lasting impact. That doesn’t seem like a good thing.Image courtesy of Shutterstock.  8 Best WordPress Hosting Solutions on the Marketlast_img

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