Crusher co-founder Philip Bensaid is not looking to make money. He'd rather make a good product, and let the money take care of itself. *
Photo: Courtesy Phillip Bensaid * The last thing Philip Bensaid wants to think about is making money. The co-founder of Crusher, a hip, Web 2.0-ish take on invitation sites like Evite, he's determined to keep his self-funded firm revenue- and ad-free, at least for the time being.
"Creating a desirable product is disconnected from trying to monetize," says Bensaid, who created the site with business partner Ericson deJesus. "In consumer products there's a great deal of pressure to distort your vision by squeezing monetization into it. We'd rather focus on evolving our product. It's also just more fun."
Like garage bands that want to hone their chops and grow a fan base before taking on any paying gigs, more Web 2.0 startups like Crusher are electing to put off pursuing revenue streams until they get their act and their audience together. Microsoft's and Disney's recently announced intentions to buy dozens of startups apiece validated many of these entrepreneurs' implicit exit strategies: Work hard for a couple years, then sell out to a big company.
Unlike the early dot-com era, when the mantra was Get Big Quick, these bootstrappers can afford to be patient. Thanks to open source tools, cloud computing, cheap storage and virtual organizations, startups can do a lot more with a lot less, says Keith Benjamin, managing partner for Levensohn Venture Partners.
"Things that would have cost $10 million during the bubble can be done for $500,000 today," Benjamin says. And when startups do spend money, it's typically on product development -- not lavish parties, Herman Miller chairs and Super Bowl ads.
"In the bubble times companies would spend $10 million just to get eyeballs, without any notion of whether they would stick," Benjamin says. "Now the burn rate is being used to evolve the product, to see if they can get it to be adopted virally. That requires a lot more patience."
Lower burn rates make startups less dependent on IPOs to pay back early investors and more inclined to look toward acquisition as an exit strategy.
"Acquisitions have become more acceptable, because you're able to build companies for less money and in less time," says Ariel Poler, an angel investor and CEO of TextMarks, a startup that helps Web sites enable their content for text messaging. "Before, you had to spend so much that anything short of an IPO wasn't worthwhile."
Of course, without metrics to guide investors, revenue-free companies are better able to trade on their hype and potential in order to inflate their value to potential acquirers. But this is more common of open source software firms than Web 2.0 startups, says Benjamin.
"Open source enterprise-software companies absolutely fit the pattern of selling the dream and not the reality," he says. "I've yet to see any evolve to the point where, having won people's hearts and minds, that people are ready to hand over their wallets."
Web companies need to demonstrate a clear path to revenue generation, even if they're not planning to get there any time soon, notes Mike Kwatinetz, a general partner with Azure Capital.
"YouTube and MySpace were good acquisitions, even though they had virtually no monetization when they were acquired," says Kwatinez. "The reason they were good (was) because you could see the monetization that could be there, you could feel the reality of it."
Yet in this stage of the Bubble 2.0 era, startups derive more value from their virality -- how rapidly and broadly they are adopted -- than their profitability.
"Numbers clearly matter," says Hans Peter Brøndmo, CEO of Plum, a site that allows users to share music, videos, web pages and other forms of content. "But the numbers that matter most are not the ones with dollar figures attached, they're the ones that measure page views and site engagement. If I go to a VC and say, 'We have 2 million active users a month,' they'll probably get pretty excited. If I said, 'We did $2 million in revenue,' they probably won't. If we can do both, and show we're on a path to make hundreds of millions of dollars in the future, obviously any investor will look at that and say that's a compelling story."
