Why Eyeballs No Longer Matter For Startups

first_imgHow OKR’s Completely Transformed Our Culture What Nobody Teaches You About Getting Your Star… How to Get Started in China and Have Success Need funding for your startup? Don’t load up your PowerPoint with nifty charts showing all the users your online service has grabbed. Venture capitalists are no longer impressed. These days, investors want to hear about the revenue you’re generating, not the traffic.“There have been a lot of companies that had a lot of users and didn’t make as much money as they should have, so investors are reevaluating,” explains Naval Ravikant, founder of the startup advice site Venture Hacks and the investor-entrepreneur matchmaking site AngelList. “This became most apparent in the Facebook app craze, when lot of top-ranked Facebook apps showed 60 million or 100 million users but ended up being worth almost nothing. Even Facebook hasn’t been able to monetize as well as Wall Street was expecting.”Revenue RulesThe new generation of billion-dollar internet companies is built on revenue. Businesses like Airbnb, GitHub and Dropbox all have plenty of users. But much more important, those users generate serious cash flow.The flipside is that even companies without massive traffic can now attract intense investor interest – if they have real revenue. “A company like Uber doesn’t have a ton of users but they’re making gobs and gobs of money with their high-ticket mobile car service,” Ravikant says. “They have huge margins and high-frequency repeat business.”You Now Need 20 Million EyeballsUsers do still figure into the equation when VCs evaluate an Internet startup. But the bar keeps rising. The new thinking, as outlined in a recent blog post by Chris Dixon: 10 million is the new 1 million. And a few years from now the benchmark for consumer Iinternet startups could be 100 million.“Think about it,” Ravikant said. “Instagram reached 80 million users with only six employees. User stats can get blown out very quickly. But VCs are starting to adjust. There are a number of companies that have come along recently that have generated huge user-number spikes – but either those numbers are not sustainable or they’re not reflective of engagement underneath or they’re not monetizable.”Take Socialcam, for example. It has a lot of users but can those folks be monetized? Autodesk, which paid $60 million for the video sharing app, will have to figure out the answer. “Eyeballs will always be a proxy stat to get to valuation,” predicts Ravikant, who founded Epinions and [Vast](http://www.vast.com/. “But if you give it a long enough timeline, people will learn to game proxy stats. But they can’t game profits.”Turns out that many of the highest-usage consumer Internet companies also have the thinnest and least monetizable engagement, which is a big disincentive for investors.Early Revenue Matters MostSo a lot of Internet startup founders now emphasize early revenue when they pitch VCs.“That’s for two reasons,” Ravikant says. “First, you can move the needle more on early revenue than you can on early users. If you have a product that’s not getting picked up by the marketplace, getting to 5 million users can seem like an impossible problem. But if, say, you need $20,000 a month in revenue, you can do that just by picking up four or five big customers. Second, a lot of companies have such a low burn rate that if you can get revenue quickly you can get to break-even and sustain yourself much longer. You can do $10,000 in revenue with just four or five really impassioned customers.”Customers… what a concept!Eyeball image courtesy of Shutterstock. tim devaney and tom steincenter_img Tags:#start#Venture Funding China and America want the AI Prize Title: Who … Related Posts last_img

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