If we look back: 2005 to 2007 was the heyday of user-generated-content companies (i.e. Mahalo, Squidoo). As the Google bubble ended starting around 2008 the excitement transferred to some of the leading UGC platforms that had grown into mass market distribution channels in their own right. Facebook mania in 2008 was followed by a similar wave of enthusiasm for the App Store around 2009.
All of these mini-funding bubbles focused on specific distribution vectors: Google, Facebook, the App Store. Central to them was a hypothesis in the potential for fast and easy exponential growth for companies, because this was how people justified supra-market valuations.
If the "social bubble" is deflating now, it's not because Facebook stock is falling so much as because it is increasingly difficult to achieve exponential distribution in these channels and nothing else has come along yet to replace them. And this is what Chris Dixon is saying as I understand him -- if people want to demonstrate that their service is genuinely viral the threshold is much higher since VCs are skeptics.
But advising someone who wants to go down the VC route to focus on revenues is still a bad idea, because you can't justify a supra-market valuation without the prospect of exponential growth. If someone is bootstrapping by all means collect money, but be aware that 10k a month is still only 1.5 million total valuation at ten times revenue, which doesn't give a lot of leeway for raising a ton of money by relying on fundamentals.
So as for the "bubbles" in valuations related to respective distribution platforms, you're spot on (I think a huge part of social gaming's explosive growth and valuation growth was a function of the Facebook platform, not of its own intrinsic value).
I also agree that the "social bubble" is deflating because the gold rush of everyone-being-connected-as-a-free-marketing-channel is largely winding down. Chris Dixon's post can reflect that new reality, but I would still be equally skeptical of a 10m user service with no revenue. (Of course, I'm not a VC.)
Where I disagree is in your last paragraph. Yes, I think a focus on revenues can be a bad idea for some businesses. But I think exploring or attempting revenue is a good idea for every business. If the numbers look bad, don't use them, but you need to try. Even if you are only earning $10,000 per month, that's starting from $0, so there will be a growth rate attached. This is a really good number to show VCs right now. Also, you can make projections of revenue growth with the assumption of your continued user base growth, and basically double-dip into your user growth numbers that way. I still think this will be a better way to fundraise in the next 3 years than ignoring revenue completely.
I agree the startup ecosystem would be better if there were more of a premium for revenues over traction, and hope things develop as you say, but don't think that describes the way things work right now for anything past seed-stage rounds.
I find it funny that people are already assuming that the "bubble" has popped.
Yeah Zynga and Facebook are doing badly. So what? LinkedIn is killing it. There are other success stories. Maybe the bubble in these two company's valuations has popped, but they were overvalued to begin with, not a big loss for me.
they were overvalued to begin with, not a big loss for me
"for me" is important here. While I fully agree that FB, and (especially) Zynga were both overvalued, the near-constant deterioration of their stock price is very visible - both to Wall St and investors. Perception is king, and it's not just "ours" which matters. What the public sees is the tri-fecta failure of 3 super-hyped tech IPOs (Groupon, Zynga, Facebook).
edited to add : It's also very worth noting that the perception of FB being massively overvalued may very well have been highly confined to "insiders", or those close to tech.
When I speak with my non-tech friends, most of whom are highly educated (law, medicine, etc.), the general reaction to FB's decline is one of surprise. For instance, I often hear that "everyone thought the price would go up!".
Yeah Facebook was the last tech stock that was able to sucker in the "muppets". That's why Morgan Stanley & co jacked the price up as much as possible before running away like bandits
LinkedIn is killing it from a share price perspective, but they still have a P/E of about nine hundred and unless they monetize like CRAZY they're going to stay at that P/E or lose value.
In addition, they've proven that the 'business social network' has value, and thus they're starting to see competition where they didn't before.
Sure, the bubble was mostly in private valuations and not public ones (though I know at least two friends of mine that bought Facebook stock at $40+), but it was still a bubble. Social was highly overvalued.
Another point that's not explicitly mentioned in the article: raising money isn't fun and afterward makes the whole venture less fun. If you do a good job generating and growing revenue, hopefully you don't have to worry about raising money until a lot later than you would otherwise. I think most people here probably agree that Github's trajectory should be the goal: crush it on revenue early, and then raise money for scaling later, if you want to.
That's absolutely the goal of every company, I think, but it's not always possible, especially if you're building a consumer-facing product. Companies like Github are more the exception than the rule
My point in this article is that nowadays demonstrating the ability to get some paying users, even a tiny amount, is going to leave you much better off than not trying at all. So while a lot of companies will still not be able to live off of the revenue, they can hopefully raise another round with the proof that they've found something people will pay for.
All great advice. However, it's a tad amusing that someone still has to put in the effort to get these points across, points that the rest of the business world would find obvious. Are these business practices still perpetuated in the Valley?
Generate revenue? Of course!
Show the revenue growth slide? I'm not sure who that makes look worse: the fundraisers not showing it, or the investors not expecting it.
Ha yeah I mean my advice isn't exactly revolutionary, but many people don't realize that they're going to need it in their Series A now, when they wouldnt have before
It still boggles my mind that revenue has not been prioritized with many (most?) of the hottest companies in the last decade. That must be unprecedented at such a scale.
That said, I don't think any investor ever thought their investments would have no revenue. I assume they just figured it would come through advertising, inadvertently making every new product a marketing tool.
Other than Facebook and Zynga stock prices, is there other evidence that a bubble has popped? I haven't seen signs of funding or liquidity drying up. Valuing Facebook at $50 billion rather than $100 billion could be the sign of a massive slowdown in Silicon Valley... or it could just be a market correction to Wall Street hype.
All of these mini-funding bubbles focused on specific distribution vectors: Google, Facebook, the App Store. Central to them was a hypothesis in the potential for fast and easy exponential growth for companies, because this was how people justified supra-market valuations.
If the "social bubble" is deflating now, it's not because Facebook stock is falling so much as because it is increasingly difficult to achieve exponential distribution in these channels and nothing else has come along yet to replace them. And this is what Chris Dixon is saying as I understand him -- if people want to demonstrate that their service is genuinely viral the threshold is much higher since VCs are skeptics.
But advising someone who wants to go down the VC route to focus on revenues is still a bad idea, because you can't justify a supra-market valuation without the prospect of exponential growth. If someone is bootstrapping by all means collect money, but be aware that 10k a month is still only 1.5 million total valuation at ten times revenue, which doesn't give a lot of leeway for raising a ton of money by relying on fundamentals.