The Courage to Monetize
Dan Rather spoke on the UT Austin campus last week, and amidst his many stories he opined on his need to monetize his site News and Guts. He has over 1.2M followers on Facebook and is energetically remaining in the public square, but he commented that he’s personally carrying the freight for about 10 employees working on his website. What would you do in his shoes? Even with his excellent health at age 85, has he aged out of relevance to the mass market and therefore high value ad serving? Can he attract paying subscribers in competition with the Washington Post? In the torrent of real and fake news, what’s his competitive edge other than name recognition? Will his digital presence measurably affect sales of his newest book What Unites Us? What happens to his digital property when he passes? I’m not sure what I would decide is the best course of action in his case. He has nothing left to prove, and he can crank out profitable books and tour the speaking circuit easily enough. As is often the case in startups, the desire to create may be outweighing the motivation to monetize, particularly if there are no hungry investors expecting venture returns. Courage!*
That last sentence gets at the heart of the primary monetization tension in a startup. What seems to be the best way to create customers and revenue may result in a business model that is out of vogue with the investment world and shortchanges you on enterprise valuation. A good example is the marketing technology sector. If you bill for your technology services on a percentage of ad spend, you are guaranteed to look like an agency that deserves a revenue multiple of 1–2X. If you deliver exactly the same results at the same net cost to the customer via a SaaS product, you may get a tech multiple 10X higher. However, that is wishful thinking if your customer decision makers have budgets for percentage payments and software buying is handled by a different group and a different procurement process. You don’t normally get to dictate the decision as to how your customers want to buy. As a founder cognizant of finding revenue anywhere you can, you are not likely to turn away today’s dollars for a conceptual future enterprise valuation.
In the long ago I spent a brief period of time assisting Pertec, the San Fernando Valley company that bought MITS and its Altair product line. This was before Peachtree Software was formed as an entity; but our precursor team was already working on software, and we were operating a fledgling software exchange for a variety of Altair vendors. Everyone was looking for ways to make these marvelous machines do more than blink their lights. I have a vivid memory of my first trip to Pertec, when the lead item on the agenda was figuring out the price list. Despite my MBA and prior business experience, I had never focused on the challenge of getting that right in a newborn industry. Compared to today’s complexities, pricing was pretty simple at that time, but it still required some muscle to get it done. We had to estimate hardware costs at various volume levels, distribution channel discounts, competitive pressures from Imsai and a few others, and then decide to go to market with a strong conviction in our pricing strategy. I was given revenue responsibility for the East, which meant everything east of the Sierra Nevada mountains, but I was still more or less commuting between ATL and LAX when not on the road with dealers. (Some of you readers will recall that flying was actually enjoyable in those glory days, so I’m not complaining.) So, off we went building the brand with good success and turning a very interesting cast of characters into dealers. I’ll save those stories for another time, but I am a bit wistful for the days when pricing was a more straightforward practice. You had to deliver a physical object, as did your competitors, and they were all easy to track. There was no thought of enterprise value. Heck, there was no venture capital in Dixie in that era. We were just trying to keep customers addicted and sell them something at a profit one unit at a time.
Now a big part of your decision making on pricing is taking into account far more variables. I’ve been involved in two recent projects in the healthcare world, and that’s where things get really interesting. You need at your side an expensive specialized lawyer with knowledge of the Stark Law and the Anti Kickback Statutes to review how you price every product or service you provide. You must make sure that everybody in the chain of care who wants to get paid is covered, and you have to accomplish that under regulations that are intended to prevent substandard care resulting from double dipping, like owning the the MRI machine to which you as a doctor refer all your patients, or biased referrals based on price discrepancies that unfairly favor one vendor over another. Price is no longer cost + markup = customer price. Now it’s cost + markup + 14 layers of intermediaries who all get a cut = price paid by insurance or the government. When the ultimate consumers of a product are not the ones paying for it, chaos eventually reigns. I’m not making a political statement here, but just beware that if your decision is to go into the healthcare sector, be prepared for what is called in Hollywood “the suspension of disbelief.” In other sectors you may spend your decision making time dithering over more mundane matters like SaaS versus license, subscriptions versus ads versus sponsors, and freemium vs “payupfrontium.” Chances are high that you won’t be alone in your chosen marketplace and that your creativity will be bounded by what your competitors are doing. If today you are selling cars and in five years people are hailing driverless cars and paying by the mile or minute, you will have radically different monetization pathways. How much will you give me for gently used mile ridden by grandma?
Even more prosaic products are susceptible to all manner of monetization complexity. What is your Customer Acquisition Cost? You probably can’t answer that with clarity until you have acquired 10,000 customers. But, it is likely the major differentiator between a win and a loss whether you are selling B2B or B2C. I’m aware of a sophisticated venture investor asking an entrepreneur about his CAC, and he had no answer. He forgot a major highlight of the business model, and the damage was done. No further conversations ensued. It is impossible to make monetization decisions without understanding CAC plus all the palms that must be greased between you and the ultimate payer. It’s also impossible without giving due consideration to buying habits and buying cycles. You are unlikely to change those, so you had better find a way to reconcile those characteristics of your chosen market with what investors will deem to result in enterprise value. The penalty for failure in that respect may mean that you are consigned to the bargain basement of a lifestyle business and will not be part of the exit club. It only takes one successful exit to join that club, establish your career, and provide you continuous playing privileges thereafter. There’s nothing wrong with a high-dollar lifestyle business if that is your calling and it makes your family happy. Not everyone has the big multiple venture gene, except apparently in Silicon Valley where you have to create a unicorn to be in the club that counts.
Back to the topic of an earlier essay, timing has much to do with monetization. Your best decisions will take into consideration the dimension of time. What monetizes today may de-monetize tomorrow and need to be re-monetized the next day. Tech businesses have highly unpredictable lifecycles and heavy competition. If you want your venture to reward you and your team lavishly for your effort and ingenuity, you must catch one of those monetization waves at its peak.
*For you youngsters, Dan Rather had a period of time where he closed each newscast with that one-word admonition.
