Read at Joe’s

This morning, I read an excellent blog post entitled “A Failure of Ideas, not Execution”, by Hank Williams, which was copied on the nextNY blog. It’s about the failure of most Web 2.0 companies to be acquired because they don’t have any strategy for making money from their ideas. One particular aspect of these failures is a bugaboo of mine, so I thought I’d follow up. Williams writes the following.

The idea that the raft of social media companies with no revenue model was going to somehow “figure revenue out later” after building up large audiences of free users has, I think been debunked.

I couldn’t agree more. Just having users is no measure of potential profitability, especially if you have nothing but advertising as a way to generate revenue. A database of users is not worth very much, in my opinion, even as a data asset. But investors continue to use this as a metric for valuation. Indeed, it seems to have become one of the accepted conventions of startup business. Buy why? I think it’s because, in the absence of real revenue, there aren’t any other ways to measure a web 2.0, social media startup. And, in addition, you have to have made those users go through a tedious registration process. It’s as though investors won’t count a user unless you made them go through some pain to register.

This is nonsensical. It’s like setting up a bricks and mortar retail store where you give things away instead of charging for them, but only letting people in the door if they sign your guest book. Well, what does that prove? That they value what you’re giving away? That you somehow “own” them now?

The theory, as it was explained to me once, is that you can expect to be able to convert some small percentage of free users into paying users. But if that’s the case, why make it difficult for them to sample your wares? Why not get as many in the door as possible? Why not make it as easy as possible? There is a way to do this, yet still give them an identity on your site. It’s called OpenID, an open, single-sign on technology for authenticating users and creating unique records for them on your site. Basically, it lets you use the same user identification (a URL like http://joecascio.net) and password for every site that accepts it. It’s very similar in concept to a general credit card like Visa or MasterCard. Instead of having a separate credit account with each merchant, you have one account with the credit card company and use that same account ID (the credit card number) everywhere you shop.

Someday, I hope Web 2.0 companies and more importantly, their investors, realize that it’s more important to get people in the door and shopping than getting them to sign your guest book. This goes hand-in-hand with Hank’s point that you have to give them something worth paying for.