Edu: Monetization - Secret To Success Or Highway To Hell?

Chris: I just don't want early stage founders listening to this and thinking like, Oh yeah, I heard I should get to profitability or I heard you get it to revenue.

Yaniv said, that's okay.

And so I'm, being a good soldier and getting to revenue. what we're trying to say is,

Your first priority is building something that someone gives a fuck about at scale. And it does not mean selling anything to anyone who will give you a big check. And that is the corruptive, corrosive behavior I see in too many companies too often. hey, I'm Chris.

Yaniv: And I'm Yaniv. And in today's episode, we're going to talk about the topic of monetization. Chris, I can't believe we've been doing this for a year and a half, and we actually haven't had a topic on this yet. It's obviously incredibly important. And it's quite a subtle topic. And the reason for that is we talk about small business syndrome going all the way back to episode one.

And, the challenge of. not falling into some of the traps of traditional small businesses when you're building a startup. monetization is one of those areas, right, Chris? Like, most businesses, They need to start generating revenue pretty much on day one.

And they need to become profitable soon after that. They are generally bootstrapped. They are there to provide a cash flow income stream for their owners. But venture backed startups, as we've talked about before, they're not like that. Take outside capital. They lose money for a period in order to achieve...

Growth. they are still businesses. Eventually, your startup needs to turn into a large, mature business that makes money. And not just makes money, makes lots and lots of money. So what's the path from day one, where you're losing money, to this cash volcano for your startup?

When should you start bringing in revenue? How should you bring in that revenue? And, Chris, how do you even know if you're doing well? Well, that's the topic of today's episode.

Chris: Yeah, that's right, Yaniv. And, you know, I'm often fond of saying traditional businesses earn revenue and spend it, startups raise capital and burn it. And why? Why do they burn it? That seems like a wasteful, crazy thing to do in traditional business thinking. And that's because software has an unfair advantage. It has a different kind of economics than traditional businesses where you're buying a widget from someone and selling it to someone else. There are massive economies of scale in software. efficiencies. And so you build something once. And you basically can sell it infinite times, but the building is expensive. The building at once, the growing at once is expensive. And you want to get to scale first, because we've talked about this in previous episodes. First to scale wins, oftentimes these internet companies have network effects and flywheels where you have a deep moat that's hard to beat. And so you want to scale fast, you want to get to those network effects, those economies of scale fast, and you get to this escape velocity. Where the amount you're spending on R& D is initially... Upside down. You're spending a lot on R& D and making zero to little money. then you turn on the revenue spigot and you get this hockey stick curve and you blow past your costs. And then the cost to serve is basically zero. And the revenue, the gap between your, costs and your revenue is just massive.

It's a huge wedge. that's the goal. That's the goal of these Silicon Valley style software powered startups. And that's why the venture capital model works at all. That's why venture capital exists. It exists because of these software economics, And so that's why this small business syndrome we've talked about Yaniv just does not apply to startups.

Yaniv: That's right. And we're going to talk you through the right way to think about all this stuff. But just before we do that, I'd like to remind you to please sign up to the Startup Podcast newsletter.

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Chris: You can sign up at tsp. show and the signup form is right there on the right rail.

Yaniv: That's right, Chris.

Chris: B2B and B2C companies in this equation, right?

B2B meaning you're selling stuff to other businesses, and B2C meaning you're selling it direct to end users. while we might point out specific areas where there might be differences between B2B and B2C companies. The most successful modern B2B companies are actually using what's called product led growth, which means they're actually selling directly to the individual employees inside the businesses. So a random employee, a random manager, a random... department head can pick up the tool and just use it without a sales process, without procurement, without IT. And because of product led growth, the difference around the go to market strategy and the monetization strategy between B2B and B2C is not quite as vast as you might initially imagine it to be. So a lot of what we're going to say actually applies both to B2C and to B2B companies acting with product led growth, point out the differences, but the differences aren't as dramatic as you might initially think, so keep an eye out for that.

Yaniv: Even if you are not doing product led growth, the topics that we discussed today still apply to you.

So let's, talk about what monetization is actually for. This seems like an absolute no brainer, but in a venture backed startup, it's actually a bit more complicated the first thing, and the obvious one, is that monetization brings in revenue, And revenue is an essential ingredient on the path to profitability, and profitability is the ultimate goal of every company, including, like I said, venture backed startups. that's obvious, but there's actually a much less obvious, purpose for monetization that I would argue in the early stages of a startup are actually more important than bringing in revenue.

And that is really about demonstrating that you are providing value to your users or to your customers in this case because they start paying you and that you're able to capture that value just as critically. Right. So you're saying, okay, people actually give a shit about our service. They're getting value from it, meaning they're willing to open their wallets.

That's a really strong proof point. It's probably the best proof point that you are delivering value. And that also, you've actually cracked the code on how that value that you are delivering can translate into dollars in your company's pocket. So it's also true that You can deliver value, but don't have a suitable method for capturing that value, and that can become really frustrating.

Actually, if you look at the recent shitshow around Reddit, incredibly valuable service for its users that has had a lot of difficulty monetizing. And when they tried to monetize, they faced a bit of a revolt from their users. So, those are the two things. And that second thing, the demonstrating that you're providing value and that you're able to capture that value.

To me, that fits into the broader narrative of de risking your startup. And again, we've talked about this in previous episodes, the aim of having this sort of iterative process of raising venture capital, getting to that next stage and raising the next round until you reach escape velocity, until you do achieve that profitability is to progressively attack the biggest risks that your startups face, remove those risks, thereby increase the probability of success.

 And then you go back and you do it again. you look at revenue in that context as how does it de risk us? Is it the biggest risk that we need to conquer is demonstrating value and capturing that value through monetization, then that is what you should be focusing on.

But if it's not your biggest risk, then consider whether you should be monetizing. And so I pass back to you, Chris, that's the lens I want you all to be thinking in here. we'll talk about investors in a moment, because that's an interesting little wrinkle here, Chris.

But the lens early on. idea of monetization is not primarily around the actual dollars that are coming in. It's about what those dollars represent on your journey as a venture backed startup.

Chris: Yeah, this is the first big discussion we need to unpack, right? When is the right time to monetize? we should be clear here, Yaniv, this is a really controversial topic, If you talk to some investors, they'll say immediately. If you talk to some, Silicon Valley high growth long range thinkers, they'll talk about, it being delayed as long as possible.

If you talk to some product managers, they might have a different opinion about that. controversial. People will often say, well, if they're not paying for it, then they mustn't be getting enough value from it in the first place, so it's not that useful at all.

Or if they don't pay for it, then there's no real value exchange.

You need to make sure there's a value exchange, and you need to take the money off the table and... the reality is none of that is necessarily true, You are building a net new business with a net new product and in some cases that product is disruptive.

It's different. It requires a behavioral change. you need to prove that people even give a shit in the first place about this problem, about this idea and about this approach, this hypothesis that you have. And so changing behavior is hard, Building a new brand is hard, Building a flywheel is hard. And that's really what you're trying to do in the early days of your startup. so, from my point of view, the first thing you need to do is find a real problem. And find a real solution to that problem such that some set of people give a shit. They have to give a shit before they're going to hand over their money. and so that's really the first problem you need to solve is building something that someone gives a shit about. all too often in my advisory work, I'm bumping into founders who are really trying to figure out like, Hey, maybe we can charge for this, and maybe we can charge for that And we were thinking of turning on a subscription revenue, model.

And my question is like, okay, what are people subscribing to And they're like, well, you know, maybe it'll be to a community, and maybe it'll be to a newsletter, and maybe it'll be to this other thing. And I'm like, Hang on a second. have you built a product that anyone gives a shit about? Have you created net new value that someone wants to hand over a dollar for?

No. Then why are you talking about monetization? That doesn't make any sense whatsoever. So you've gotta start with building something that someone gives a shit about. then once you've figured that kernel out, Chances are, hopefully, that they're going to get addicted to that solution.

They're going to really fall in love with it. And they're going to find the limitations of it. Like, geez, I wish I could invite my colleague. Geez, I wish I could invite my spouse. Geez, I wish I could have pro analytics. Geez, I wish I could have more data for storage. Geez, I wish I could have little bit more access to your network.

Those things are prime candidates to a offer, and B, charge for. and that's when you're able to introduce paid tiers, pricing, what have you. And so, all of this has to be in the context of the thing I said at the very beginning. First to scale wins. Or rather, first to network effect. there are times when you may still have found great product market fit.

You may have found incredible features that pro users, want to pay for. But there is value to subsidize some of those things. In other words, give them away for free. to invest in growth and get to network effects, get to scale first. Sometimes. There is an advantage To investing in, giving away those features because your business is better off at scale.

that's the more aggressive strategy. So you need to think about That final piece, which is you may have found product market fit, You may have found pro features people are willing to pay for, but yet you may still move that paywall pretty far out or delay that paywall on your roadmap to get to those network effects fast.

Yaniv: What I'd kind of like to bring in here now, Chris, is the general zeitgeist from investors, from the sort of influencer space for one of a better term, around revenue.

It is confusing because, going back to what I said before, it does two things, right? It does all this de-risking at the right time, and I think, Chris, your, discussion there is really about, when is the right time, but it is also cold hard cash, which is the same currency, literally, as you're getting from investors.

It's the same currency that keeps your business alive. And so, Things get kind of confusing. revenue is important. back in 2021, there was this sense of money doesn't matter, revenue doesn't matter, growth is all that matters. And, you know, there's this sort of concept now of the zero interest rate phenomenon.

As that has sort of crashed out, interest rates have gone up, venture funds are licking their wounds to a certain extent from taking losses and so on. You've got these big high profile Failures, for example, the whole 15 minute delivery industry globally. I feel like the baby sometimes gets thrown out with the bath water, Or rather that there is this overcompensation where now a lot of people are saying revenue is amazing. If you start making money at the beginning, that slows your burn rate down. It means you're default alive. It means that you don't have to rely on investors for the next stage of what you do. And you know what?

They're not wrong. This is not about right and wrong. It's about priorities. If you can do everything that you need to do to maximize your chance of achieving your goal, and you're able to monetize from very early on, if your pre-seed raise is the last raise you ever need to do, that is fucking awesome! We're not here to tell you that you shouldn't be bringing in money. That is aligned with your goals and aligned with your ambition. The problem comes in when the desire to bring in revenue or the desire to monetize actually distracts you from the most important things, from the biggest risks you need to face, from the biggest opportunities that confront you.

And I'm slightly pivoting, I guess, now into our next topic, which is really like what's the best way to monetize. But one of the ways this goes really wrong Chris, you were talking about this. there's the obvious thing, which is that. Putting a paywall in front of something can slow down that growth flywheel, right?

And, to sort of allow you all to peek behind the curtain a little bit, this podcast, which by the way is not a venture backed startup, is a bootstrap little business, which is really at this point just wanting to break even. nonetheless... Chris, you and I have debates about, when do we potentially create a membership based community that is paid and whatnot, so far we've said what we want to do is grow our audience.

We don't want to slow that down, partly because that is our mission, is to reach a lot of you, but partly because the value we will get later by monetizing, if we choose to monetize in that way, will be much larger if we allow that audience to grow organically. To taste the value, to hopefully get a little bit addicted to us, to make us part of your week, every week, to listen to this podcast, then you will be more willing to open your wallet.

There will be more people, right? So I think that's a big part of it. Do not get in your own way. And then there's an even more... Insidious and toxic way of monetizing, which is when it actually pulls you away from the real opportunity. So that's just slowing you down and kind of creating unnecessary friction.

Chris: When we talk about flywheels and network effects, I want to be very clear in this episode, we've talked about them in previous episodes, but a flywheel is the idea that, the more people using your product, the more valuable your product gets. So, for example, if you think about Facebook. The more friends you have on Facebook, the more valuable Facebook is to you. And the more valuable Facebook is to you, the more likely you are to invite your friends. Which gets Facebook more users, which means more of people's friends are on Facebook, and therefore more people want to join Facebook.

And so that flywheel starts to spin around and around and around, and Facebook becomes... really valuable And it becomes really hard to compete with because when you launch a new social network your friends aren't there so there's no point joining but fly wheels don't just apply to social networks so let me just give you in just a quick example from uber show understand that this is not just about social networks

The more riders Uber has, the more likely a driver wants to work for Uber.

Because there's more demand. And the more drivers work for Uber, the more likely when you request a ride that there's going to be a driver next to you. And so the price and ETA for that ride goes down. There's a driver right next to you so they show up in a minute instead of 10 minutes. And so therefore, the more likely you are to use Uber next time and refer your friends, and therefore there'll be more riders, and therefore there'll be more drivers which will reduce the price to ETA and the whole product gets better and better and better.

Yaniv: Actually, I'd like to do a little aside. We can cut this if it's boring, I got curious about what a flywheel actually is. Where does this term come from? And what a flywheel is, is it's a very basic energy storage device. What a flywheel It's a giant heavy wheel, traditionally made out of stone, And basically... You start pushing it, you spin it, it spins faster and faster and faster. And because it's very large and very heavy, it has a lot of momentum, it basically can keep spinning for a very long time if you have it on good bearings. And it is storing, effectively, kinetic energy, right? And the point is, when that thing isn't moving, It's really hard to get it moving, but every time you push it, it it goes a little bit faster, and faster, and faster, right?

You are banking that kinetic energy, and after a while, if you keep spinning this flywheel, it is this huge store of energy and power, that is what you're doing. And the point here is you want to get people pushing that flywheel for you as often as possible. You don't want to put, like, a freaking gateway.

If you've got people lining up saying, I'll give your wheel a push, I'll give your wheel a push. You don't want to, like, charge them. Admission. You don't want to say, oh, well, it's a dollar a ticket to push my fucking flywheel. No, you say, come on in. Here's a free snack. I love you. Push my flywheel. I think it's really important that people understand that.

You can't have it both ways. If your users make your asset more valuable, don't clip the ticket on them. Welcome them in.

 And then let me talk about A time when you can make it even worse. Not only do you slow the network effect, but you get confused about how you're going to monetize, the obvious way to monetize is always whoever uses your thing. You charge them money, right? But if your game is, for example, to sell an audience to advertisers, and you charge the people who are actually creating that content, you're monetizing the wrong side of your marketplace, and that is so tempting.

Again, imagine if YouTube A content platform charged people for uploading. Well, you know what? There is a platform that does that. It's called Vimeo. You may have heard of it, but I bet you don't use it very much. YouTube kicked their butts because uploading is free. So , you want to have a strategy around monetization.

You want to stick to it and you do not want to shoot yourself in the foot.

Chris: I would say, we're talking about if you need to get a flywheel going, you should delay or move the paywall, further downstream in your product. I'll go further than that. I'll say, if your business doesn't have a flywheel, go get one.

Any great software business, internet based software business, will benefit from and almost. require a flywheel to be truly competitive, and create a really deep moat . And oftentimes, I'll bump into founders in my work that are building B2B, building white label, building these things that are

really suboptimal.

And one of the reasons that they're suboptimal, amongst many, many, reasons, is that they're mitigating the possibility of a flywheel. And the flywheel is just so, so important. So, for a flywheel to take hold, you need scale.

For scale to take hold, you may, you may need to delay charging people. And if you don't have a flywheel, I suggest you think long and hard about finding one and building one. It's very, very valuable.

Yaniv: I wanted to insert a little caveat here, which is that I want to be really careful, that we're not giving people prescriptive instructions about when and they should monetize, or even saying that it's always a good idea to delay monetization.

It's not. sometimes you can bring in revenue and it's If you want flywheel, then it's actually a really good idea, right? Because it's like, yeah, you've de risked your business, you're starting to perhaps decrease your burn rate as that revenue actually comes in.

Great. There are other times when you actually... Need to monetize early. And the example I want to give, It's maybe a bit extreme, but less extreme than you might think in the B2B space, Is the Google Maps APIs, which I worked on back when I was at Google. And the Google Maps APIs started off in this kind of funny, gorilla sort of way, ?

Where this guy... Basically reverse engineered the client side JavaScript of Google Maps, figured out how to hack it, and started putting his own data on a map. And Google looked at that and thought, that's really cool. We're going to actually officially support this as an API. Let a thousand flowers bloom.

Lots of fun. This is Google, 15, 20 years ago. Google's not like this anymore. They just made a free API. that was great. And lots of hobbyists started using it and a few businesses started using it. But then the, product managers or whoever it was in those businesses who started building applications for the business on top of Google maps, they started running against a strange problem, which is that their CFO or their risk and compliance people are like, we're not comfortable building business applications on top of a free.

 if we don't have a purchase order, if we don't have a signed contract, if we don't have all of this stuff, it doesn't feel real. We're not used to it. And we had this bizarre situation. It's like, that, Futurama meme of like, shut up and take my money, where people started lining up and saying, My CFO says, I need to pay you for this thing.

And we were like, sorry, it's, it's free. And eventually we, kind of reluctantly, it was this hilarious blog post saying, we really wanted to keep this thing free, but you guys kept asking us, and now we're releasing a paid version. And, this mostly applies in the B2B space, but sometimes charging a price for something is not just a way of capturing value, it's a way of signaling value.

And if that needs to be part of your go to market strategy, to say people don't like to do this type of thing for free, they don't like to use this type of software for free because it makes them suspicious about, what your motives are, or it doesn't feel as trustworthy, then you may want to...

Monetize it because it actually, is the right signal to send to the market. And so I what we're trying to do here is give you a framework for how to think about monetization, not give clear prescriptions to say, you should always delay it, or, you should do it this way or you should do it that way, but rather think about monetization as not primarily.

Money in your pocket, but as a broader part of your startup growth journey, and you need to figure out how to slide it in, in a way that helps you reach your end goal.

Chris: Yeah, which a really neat segue into the next topic, right, Yaniv? Which is, what's the best way to monetize? And the first, area I wanted to explore on that topic is this idea of enterprise sales what good enterprise sales looks like and what bad enterprise sales looks like that leads you down this vaunted technology backed services company that we mention every episode.

And so a great enterprise sale. Is the kind Yaniv just described, which is they want to buy your product, but they want to pay for enterprise level guarantees. They want service level agreements about support and uptime. They want, a purchase order. They want the confidence that they can speak to someone or complain to someone.

They want evidence that this is a real business and they want to understand what the business model is. That's a good enterprise sale. A bad enterprise sale is when they say, Hey, we'll pay you money to build this thing for us. It's sometimes referred to as NRE. Non recurring engineering. Which all that means is, custom shit for a customer. Right? And that is precisely what you should not be charging for and not accepting into your business. Because you are not... a professional services company.

You're not an agency, right? You want to sell the product as is, or at least with enterprise features, pro analytics or multiplayer or, integration with single sign on, these kind of enterprise features. But you sell it as is with Uptime guarantees, enterprise support, or what have you.

That is a great way to monetize a enterprise product or a product with an enterprise tier. another great way to think about this is, I meet a lot of founders and advised founders who are thinking about monetization in the sense that like, hey, we need to build some features for monetization We need to build monetizable features. And that's the wrong way to think about it. Because often they're off building kind of these side businesses, these side features, these side capabilities, with the express intent of that's the way we're going to monetize with this side feature. And what you really want to do is you want to find a feature that is the next logical feature that solves the next logical problem in your product. It makes your product more usable, more multiplayer, gives more visibility to an enterprise, user. And you put that part of the product behind the paywall or in a higher subscription tier. So it's the next logical feature.

It's the next logical problem to solve. They're already addicted. They're already in love with the thing. And now They want to access more of it. They want to access superpowers. They want to invite their colleagues and collaborators. Those are the features that you would have built anyway. that you just put behind the paywall or the higher subscription tier or what have you. And so that's the next great way to monetize. And then the last thing I want to restate that you touched on, Yaniv, which is you don't want to charge the wrong people, right? So if you have a two sided marketplace, for example, and one side of your marketplace is content creators, and the other side is content consumers, for some inexplicable reason, I meet a lot of founders who thinking about charging their content creators for creating content. But they have a marketplace, the marketplace where they're offering content to consumers. And so why in the world would you slow down the production of content creation by creators? You should be doing everything you can to accelerate that production, to optimize that production, to incentivize that production.

You should be paying those users to create content. And as you said Yaniv, the perfect analog here is YouTube, YouTube doesn't charge you to upload a video. It pays you to upload a video. And so be very, very clever and clear about who you're charging have an ecosystem or a marketplace business.

Yaniv: That's absolutely right. if you're a marketplace business, it's kind of open and shut. If you charge the creators, then you are really screwing up, in my view. but even if you are not, even if what you are doing is providing a service to people, you still want to be a bit careful to charge those people. Now, sometimes it's absolutely the right thing to do, but one of the things to consider, and I go back to the best businesses are ones that tend to monetize on accumulated data. And I don't mean selling data to third parties and all that scare stuff in the newspapers, but when enough people trust you with their data, then you know something about the world on aggregate that nobody else can possibly know.

Durable, competitive advantage that nobody can really touch. And what you should be thinking about first is, can I create an asset where the more people use my product, the more data comes into my product, the more valuable it becomes, the more I can do.

Chris: Right Yaniv? That's a flywheel powered by data.

Yaniv: It is a type of flywheel. Yes, that's right.

Chris: The last thing I'll say about the best way to monetize is to remember two additional things.

These are interrelated. The first is the goal of your first. monetization tactic, right? charge a subscription fee for something or you clip a ticket for something. It Does not have to be the entirety of your monetization strategy, You can actually monetize multiple things in your product. I've had multiple conversations with founders about this idea of like, well, I'm not sure that gets us to profitability, or I'm not sure that gets us enough revenue, or doesn't seem like big numbers. And it's like, dude, this is just the first set of features. This is just the first subscription tier that we're introducing. This is just the first opportunity to monetize. It does not have to be the entire business. It just has to be the first glimmers of a business. so keep in mind that your monetization is potentially a journey. it's series of incremental increases or additional fees, charges and subscription tiers that eventually get you to where you want to be.

Which is very much connected to next point that we want to get into more broadly, which is the idea that monetization does not equal profitability. The goal is not to get to profitability. Again, I also talked to a lot of founders who go, Hey, we need to find a path to profitability. And I'm like, no, you do not. Stop it. You do not need to get to profitability. Maybe you need to get to monetization to do all the things we've been discussing today, to prove the right things, to validate product market fit, to show value to a business buyer. But the goal at the early stages of your startup should absolutely not be profitability.

In fact, I'll go further. The goal for your startup for the foreseeable future should not be profitability. You should be investing in R& D, in growth, in future innovation, Amazon was not profitable for more than a decade, right? the goal of a Silicon Valley style startup is not profitability. It is growth, it is de risking the hypotheses you have, and in many ways, it's about equity growth. It's about higher and higher valuations until you exit. and Yaniv, you said early in the episode, right, if you raise a seed round and never have to raise again, congratulations, you're a hero. I'm actually not so sure. You need to keep raising capital to set higher valuations until you exit. at the highest possible valuation. This is not a game of earning revenue. It's not a lifestyle business. It's not about, multiples on your revenue. It's about people buying pieces of your company.

And I'm talking about the pure Silicon Valley high growth venture backed startup game. The goal is to keep raising at higher valuations, locking those valuations in by selling pieces of your company Until it is so valuable because of the flywheel, the brand, the momentum, the tool, the solution, that, some massive company or the broader public market wants to buy it off you. That is the, pure version of this game. Now, there are off ramps, there are exits, there are ways to get to profitability and kind of sit back and enjoy your cash flow, but I'm saying the pure game. Is to get to higher valuations and then an exit.

Yaniv: Okay, I don't agree with you at all, so this is going to be fun.

Chris: Great. Excellent.

Yaniv: So, the goal of your startup is abso fucking lutely profitability.

And, one of the things that I enjoyed doing was, I listened to an audiobook version of Jeff Bezos's Investor Letters for like the past 25 years, and he's got this like really Clear thing every time. And the great thing is when you mainline 25 years of these things in a row, the consistency is stunning.

From like, Amazon is a pretty small company. I think they IPO'd at a 50 million dollar valuation. Back in those days people IPO'd earlier. through to now. It hasn't changed. And one of the things he says is that we aim to maximize the discounted future free cash flow of every share. Right? These businesses are absolutely there to make money.

You are absolutely there to make a huge, profitable business, and I don't think the game is just to repeatedly raise. Raising is a tool. Raising is not the end right? And a lot of the best companies haven't raised a lot, like some of them have. And, if I were to be candid, Chris, I think you're somewhat colored from your experience, working at Uber, which has indeed raised a lot of money over its period and is a very successful company.

But if you look at, companies like Google, Facebook, Amazon, they all raised relatively small amounts of money and they stopped raising relatively. So, profitability is absolutely a goal. Again, going back to Jeff Bezos, cause he's such a clear thinker on this stuff. It is about looking at profitability over the entire lifespan of your business, which. It's hopefully a hundred years, right? And then bringing it back to the present using some sort of discount factor, right?

Saying, okay, a dollar in 50 years is worth less than a dollar now because I have to wait 50 years for that thing, right? But overall, you are there to build something profitable and you should raise exactly the amount of money you need to be able to maximize that. future discounted cash flow, and then everything else, like the increasing valuations, the ability to go public, the desire of public shareholders to own shares in your company at increasing values is all based, not always directly, but it is all based on the idea that this thing, at some point is going to be a cash volcano, and then it will all be worth it.

Chris: Yeah, saying similar things, which is to say the goal of any startup at the early stages pre seed, seed, series A, series B is not profitability. The goal is future profitability. But your immediate goal is not profitability. You take all of that margin, to the degree that you have it, and you are typically reinvesting it.

in R&D and growth.

That is what a successful Silicon Valley style company does. It doesn't say, wow, we turned a profit this quarter. It's like, Spend that money on R&D on, growth, on, building partnerships, on building your flywheel, right? so when I talk to a startup that has not raised a round, has not built a product, has not gone to market, and they're like, Chris, we need a plan to get to profitability. I'm like, no the fuck you don't. You need a plan to build value, to solve problems, to grow your user base. That's the plan you need, not to get to profitability. and people twist themselves into a pretzel trying to get to profitability at the crazy early stages and it makes no sense, Yaniv.

Yaniv: I mostly agree. I think you, take a fairly extreme position. especially I'd say outside Silicon Valley, but I guess that's why we do this podcast. I think it can be hard to convince investors of that sort of thing. what I absolutely agree with is like, you should not be paying a dividend for a long time.

Like that is absolutely... Nuts and I actually wanted to make a slightly different point But I think it all dovetails in quite nicely, So I was talking about monetization versus profitability and it can actually be tempting to think oh, okay I'm making money our revenue is going up every month, Every quarter, right, our revenue is growing.

Therefore, we're on the road to profitability. And that's not necessarily the case at all, plenty of startups monetize, even monetize quite heavily. And yet, they're still burning cash, And so, the point I actually wanted to make, Chris, is that monetization and revenue can sometimes give you a false sense of security, Where you're like, okay, you know, we're burning cash, but like, our revenue's gone up every month, so we're doing well, we're on a path to profitability, we're showing value exchange, etc. but this is not the case. This is especially true in, anything where there's, like, real world services, like, anybody can sell a dollar.

For 90 cents, you haven't proven anything very interesting there, right? And, these jokes again back in 2021 and I'll, pick on the 15 minute food delivery services? It was called the VC subsidy, right? You could get these incredibly valuable services for really bloody cheap.

Because like, that's okay, you know, we're growing a lot, our revenue is growing. It's like, yeah, but your losses are growing too, right? We also, talked about WeWork, right? WeWork last month declared an insolvency warning.

Chris: But, just to be clear, Yaniv, you're talking about operationally intensive, capital intensive businesses with hard costs. like food delivery and WeWork. WeWork was never a Silicon Valley style tech company. WeWork was a pipe dream by a crazy person and these investors. I'm talking about pure SaaS companies, pure B2B companies, B2C companies, where they're delivering software. Basically the cost to serve is zero. the thing is, when you have a CFO who doesn't understand Silicon Valley style thinking, when you have an investor who doesn't understand Silicon Valley thinking, and you have an entrepreneur who doesn't think Silicon Valley thinking, they're thinking like, well, monetization means profitability, we need to charge enough money so that when we get a few hundred customers we're break even, and then we can stick to profitability. It's like, no, no, no, because not only are you doing... everything wrong that we've just discussed, which is you're putting up a big velvet rope front of your flywheel. You're putting a wall in front of your flywheel because you're trying to price it at a point that is so expensive that no one wants to get anywhere near your flywheel.

And because you're trying to close this profitability gap, which is crazy, Right? Proving you can monetize something which de risks the question of will someone give you money for this is fine. Proving that you can get to break even or make a meaningful dent in your runway or worse trying to get to profitability is most often, a complete corruption of the Silicon Valley high scale

Yaniv: You are, you are too firm on this, Chris.

Chris: I'm talking about the early stages, Yaniv. At the early stages, if you are trying to get to break even or near break even, chances are you're twisting yourself into a pretzel and corrupting your strategy.

Yaniv: So I guess it depends on what we mean by early stages. Like, I agree with that. Like if you're coming out of the gate and you're like, this is just a race to break even, that's sort of like more your, bootstrap business. It's like, okay, you your energy, your priorities are in the wrong place.

Chris: Yes, and that's many of the founders meet at these stages. Are absolutely fixated on a race to break even. the cost of even figuring out what the product is. They're just trying to figure out something they can charge for. Because someone somewhere said, We won't invest in you until have revenue.

Well, I guess revenue's the goal. And invest in you until you're default alive. Which is a dumb fucking phrase that started permeating environment. It's like... This is not the game. The game is to invest in R& D and to, achieve escape velocity. you First have to build something that matters before you even start thinking about revenue, much less

Yaniv:. So maybe this little storm in a teacup, Chris, is we're, disagreeing on what it means to be early stage, Like it's, not a clear black and white line. look at it this way.

Being break even with a real product that is growing, that is a magnificent place to be. Not being on the road, having to raise, you know, like, the strongest negotiating position in life, always, with anything, is to genuinely be in a position where you're willing to walk away. If you're break even, you can walk away from a fundraise.

That gives you a lot of power in a fundraise. So there is power in break even. This is not about... Breakeven is bad. This is not about monetization is bad. This is not about revenue is bad. This is about priorities and sequencing and timing, right? And so you know, by the way, want to slap a great big warning sign over this entire episode, right?

Because the last thing I want is any of you writing to me or to Chris saying, you know, my startup failed because I took your advice on monetization. It was wrong. We're not giving you advice. We're giving you guidelines, a framework, a way of thinking about monetization. There is a lot of nuance, a lot of subtlety here.

And my point is, for every startup, the right time to start to turn your attention to revenue, to breakeven, and then to massive profitability, that time will be different. And that is worth understanding, right? So... What does it even mean to be early stage? That's different per startup. I will just point out, again, that many of the biggest startups today hit break even pretty early.

It's not something to be avoided. It's not something to even be ignored. But if it becomes your focus, your priority, at the expense of growth, at the expense of building something that people actually want, Chris, that's where I agree with

Chris: Yeah, maybe let's say it this way. Your first goal is product market fit. Your second goal, which may be a long time away, would be revenue. Your  goal, which may be yet further away, is breakeven. And your fourth goal is profitability. And those things need to be decoupled and deconflated from each other.

And the time horizons between them may be quite large. And what I'm saying is that often founders hear from, you know, All-In podcast and from investors who don't know what game they're playing. Well, you need to have revenue of blah, blah, blah. And they skip product market fit. They even skip the revenue thing. And in their little spreadsheet from their very clever CFO who's ex-Mackenzie or ex-BigCo is like, well, Mr. CEO, founder, I can get you to profitability by blah, blah, blah. And it's like, you've skipped three steps. And you're trying to accelerate the profitability and you are going to create, corruption. strategic corruption for this founder and for this startup because they're not focused on building a great product and getting to scale. And so I guess that's probably the more measured or pragmatic or whatever version of what I'm saying. I just don't want early stage founders listening to this and thinking like, Oh yeah, I heard I should get to profitability or I heard you get it to revenue.

Yaniv said, that's okay.

And so I'm, being a good soldier and getting to revenue. what we're trying to say is, it's about priorities, but what does that mean? It means your first priority is building something that someone gives a fuck about at scale. And it does not mean selling anything to anyone who will give you a big check. And that is the corruptive, corrosive behavior I see in too many companies too often. And that's what really I want to leave people with is, be very clear eyed about this.

This one was probably our spiciest episode, I think. This is one for the history books.

Yaniv: I've worked up a, sweat. It's the first time. I'm like, whew. You can see I'm a bit red. I'm a bit red from all this. That was fun.

Chris: No, I love it because this, this is one of the kind of root causes of the most corruption and corrosive behavior I see in the ecosystem, Yaniv. And it, is these people who've Listen to the wrong podcast or listen to the wrong blog post and they've just kind of repeating, these academic phrases or this, the stuff that's in the vernacular at the moment. Some of these things, some of the time are appropriate and correct. We haven't suddenly switched from playing soccer to playing handball. The game has not changed. The rules have tightened. But the game hasn't switched from soccer to handball. It's still soccer. And the goal is to get the ball in the net, and the net is scale. It's flywheels. It's disruption. It is unfair advantages powered by software. And if you are selling NRE, if you're selling big checks to enterprise customers, and then sending in the requirements to your IT team, which , for the love of God, stop calling it the IT team, then you are playing the wrong game, and optimizing for the wrong thing, which is this whole thing around revenue and profitability.

Yaniv: I absolutely agree with that. So, it has a happy ending, Chris.

Chris: Mommy and daddy aren't fighting anymore.

Yaniv: We, we, we are, we are, Mommy and Daddy aren't fighting. We are reunited once again. Oh, but by the way, before we forget, we've got a new cold open that was suggested to us by a few folks on the internet. So, um, welcome to the Startup Podcast.

We're like All In without shit humans. So that, that's our new thing, Chris. Don't listen to All In. Listen to us. We have souls. We give great advice. We're better people to hang out with.

Chris: I'm going to get an email from Jason Calacanis about that if we use that. all right, guys. Well, another fun episode as always. Thank you all for listening. And as we said at the top of the episode, please visit tsp. show. Find the mailing list, sign up form and sign up. And, that is part of the broader startup podcast pact, which is find us on LinkedIn and all the social networks.

Like us, favorite us and review us. It helps the algorithms helps us grow, and ultimately helps us help more founders. So thank you very much for doing that.

Yaniv: Absolutely. Hey Jason, if you're listening, we love you. You just need to hang out with better human beings. Come join us instead.

Chris: All right, I'll see you in the next one. Bye bye.