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Free 2.0: Don’t blame the VCs
18 comments
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Zach Katkin 3 months ago with 1 point
I'm a huge fan of 37signals (actively using basebamp). I don't know if Free ruins the economy, but I understand the point. Great post...
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Thanks for the comment, Zach.
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I think the "messy area" is free services in clearly unsustainable industries. Services that host a tremendous amount of data - for now, are problematic in my opinion. I don't know if I'd go so far as to say "ruin" but they certainly cast a pall on "why should I pay for that?" services.
One could make the argument that the radical quantities of free news and content on the Internet has caused as much hurt as gain... But then again, who doesn't love free? :) -
That's kind of my point as well, Jeremy -- it's not like VCs invented
the idea of giving things away for free. That one has been around
forever. Let's face it, people like getting things for free, and if
you can afford to give it to them and get them hooked and then charge
them later, then why not do that? I didn't mention it, but I'm pretty
sure that was Facebook's model too, long before they got VC money. -
Providing a free service allows you to "test" what you've created and see if your target audience bites. It's a great way to get feedback and incorporate that feedback into your product development. You deliver something for free to gauge its value to the market. Then fine-tune it from there. As a consumer, it's unlikely I'll pay for something I haven't had a chance to try yet.
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Exactly right, Melany.
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I am the author of the original post. I just want to clarify a few things. The article is not sour grapes from some guy "looking to make an honest living". I am actually developing a product that I firmly believe people will pay for, and so I do believe it is possible to build businesses that generate revenue from users. That said, on some level this is basic economics. VCs did not invent free. But VCs provide support for businesses that would otherwise be unsustainable. This taints the market because it messes up the basic market dynamic of "if it great people will pay for it and if it sucks they won't". In the current market even well done, useful products have a hard time charging. This is the same issue we are facing in the music business. We are training a generation of kids to believe that nothing they get through their computer is worth paying for.
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Thanks for the comment, Hank. I apologize if I gave the impression
that your post was just sour grapes -- but I still think you are
wrong. Regardless of whether VCs support companies that are
unsustainable, this does nothing to "taint" the market for quality
content or services that people can't get elsewhere.
Those businesses still have exactly the same chances they would
otherwise -- except that, as Henry pointed out in his comment, they
can no longer charge higher prices than necessary because there is
plenty of competition (and yes, some of that competition is free).
Your music analogy is also incorrect, I would argue -- no one has
"trained" music consumers that music is free. If anything, many took
to downloading because the industry continued charging far too much
for CDs long after alternatives were available. That's the industry's
fault, not consumers. Music costs less to distribute now than it did
before, and the industry failed to adapt to that reality.
In any case, as someone once said, your competition isn't the product
or service that is better than yours -- it's the one that is good
enough. If someone can get away with providing that for free, then you
have your work cut out for you. If they are just a bunch of losers
being propped up by VCs then they will eventually fail. -
No apologies necessary. I just wanted to clarify. On the main point I think
we can agree to disagree. In any case I only post occasionally on SAI. If
you want to read more of my "controversial" opinions you can check me out at
whydoeseverythingsuck.com. I am sure you will find lots more to disagree
with:) This conversation has been fun, but I do seem to have ruffled some
feathers elsewhere! -
Thanks, Hank -- welcome to the disagree-o-sphere :-)
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great post.
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Thanks, Bijan.
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I just linked to your post on my blog response as well.
http://bijansabet.com/post/30782384 -
One of the problems of funding free models is what happens to the cap table e.g. dilution of the entrepreneurs. By the time you've pumped in $30m plus at high valuations the number of shares goes up tremendously. Now the exit (if there every is one) is predicated on a) the value in the company - earnings and b) the number of shares outstanding. By the time you hit 30 million shares outstanding the exit is in the hundreds of millions and because currently there is no IPO market for companies without real earnings all you are left with is M&A and with a free model, no earnings it's tough to justify anything north of $75m which makes the exit price per share about $2.50 well north of what the last investor paid for his/her shares.
Cheers,
Peter -
I think the basic thing that's being ignored is that you get what you pay for. Some things are free because they really aren't worth more than free.
Some things are given away as free as a loss-leader - think photo sites of the dot-com boom, where the storage was free, and the prints cost money.
There are plenty of examples, of course, but there does seem to be some of the same ideology from the dot-com era to Web 2.0: don't worry too much about a business model beyond free and advertising, and we'll just have an exit strategy. -
Interesting take on the freetardation of software. I think there is common ground between you and Hank, though. VCs are drawn to "free" because they want to hit the lotter; if they hit the lottery, the economics are enormously in favor of the VC. Google, who won the lottery, gets *far* more money from advertisers than it spends to attract and keep users. The market is flooded with short-term plays where VCs spend *far* more money to attract and keep users than it gets from advertisers. Obviously it's not sustainable, but VCs expect low success rates.
The net result is that consumers may end up skitting from one free offer to the next (much like some saavy consumers have done with credit card borrowing). Consumers will learn to mistrust companies and software, and treat them as, at best, temporary tools to be used and discarded.
I presonally believe this is unhealthy, for the simple reason that relationships never form, knowledge never deepens, and efficiencies are never realized.
OTOH, many of these services probably won't make sense in 10 or even 5 years. And, it's probably a good lesson for the public to learn - that you really shouldn't trust corporations anyway. Last but not least, 90% of internet software is unnecessary and frivolous, trying to "carve out a niche" where no need previously existed. The problem is we don't know which 90%, and the market is doing this R&D relatively efficiently.
http://javajosh.blogspot.com -
oh please.
hank: your arguments & logic are just absolutely wrong, and they aren't even accurate if you were describing the market ten years ago (when perhaps a FEW of your observations were true, and not just patently false).
VCs aren't funding the majority of companies out there, small business or otherwise. and those that are VC-funded aren't only offering free services, and aren't only advertising driven. and those that are free and based on advertising aren't killing you.
see my comment for 3 specific point-by-point examples that rebut your assertions:
http://www.alleyinsider.com/2008/4/_free_is_kil...
get over yourself, deal with the market, and get to work building a product of value.
whether or not it's based on advertising, if it's useful & provides value, and if you're not a complete idiot, then it will survive. if it doesn't, or you are, then it won't.
period, end stop. -
I think where Hank may have a point is start-ups that appear almost to be over-funded by VCs. For example, Seesmic has $6m to create some kind of video-blogging service. That gives it a lot more options, e.g. free by default regardless, over similar alternatives that choose to bootstrap. But I also think such examples are the minority, they just get more news coverage. VCs didn't cause 'free' to happen, they are perhaps now funding 'free' in untested areas in the hope of striking gold. That's a problem if you're in the same playground. But that's the way it goes. No different to sports, where some athletes are backed by big sponsors, even before they win anything of note, and others are working nights to pay for their kit and training.
