VC funding and determination of a revenue model


1

In a recent group chat hosted by Joel Spolsky regarding the Stackoverflow Series A funding round, Spolsky was asked:

"How do you envision making a profit?"

to which Spolsky replied:

"...the whole point of VC is to defer thinking about profit until a large number of people are getting value out of the site, after which it should be easy to find ways to monetize that benefit both sides..."

"the whole point"???

Certainly this situation happens, but it sure doesn't seem true at all, and definitely is not the point of VC funding. Please help restore my faith.

Funding Venture Capital Business Model Revenue

asked May 8 '10 at 11:06
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Howie
148 points
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  • I am pretty sure he was talking about VC, funding and revenue for HIS company - not in general. Apparently from what I have read it was a VC who suggested that - they wanted to be a part of it and stated that with enough "eyeballs" they can figure out how best to monetize later. – Tim J 9 years ago
  • It's interesting that you said that because a VC suggesting it is even more unusual. In fact it makes little sense to ne. VCs are looking for the mega hit and saying "let's not build a revenue model, let's just get a user base and figure it out later" just seems irresponsible. Or something you'd hear in a bubble market where's theres irrational exuberance, and we're certainly not in that. The cynical side of me thinks this all may be purposeful I'm order to generate media buzz, and that there is a revenue model in mind. – Howie 9 years ago
  • @Tim - could you please re-post your comment as an answer? Then people can vote on it and I can accept it, etc. – Howie 9 years ago
  • See below for more – Tim J 9 years ago

2 Answers


2

Most VC's don't have that attitude at all. They do look for the home runs and want viable business models before they invest. Joel's case is an exception but look at what he as built -- 6 million potential customers. That's called traction and traction is hard to get.

VC's tend to look at three aspects of a deal:

  • Team: Joel is and has a proven team. People know him and his track record speaks for itself.
  • Technology: Stack Exchange as a technology has proven to work and scale to 6M users. That's impressive. He has also clearly explained how Stack Exchange is the convergence of Wiki, Forum, Social Media, etc.
  • Target Market: This is a little unclear to me but it looks like their target market deals with helping people solve their problems by building support communities. These communities then attract like minded people who are looking for specific goods and services. So, the model could be sell targeted ads (like Facebook), have people sign up for a monthly fee (like StartUpToDo) or some hybrid.

One thing is for sure. The VC guys do have an idea of how to exit and get their money back. They always worry about that and their are plenty of models to choose from.

answered May 9 '10 at 23:30
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Jarie Bolander
11,421 points

1

(As per your request)

I believe Joel stated that this was a suggestion by an investor - to wait and see about how best to monetize it. And I think it is pretty clear that none of the participants would say that model works in the general case.

I think it is a special case. Jeff and Joel have shown that they can execute and provide value. This is not just a shot in the dark. (I happen to think the way they are implementing the new Q&A sites is somewhat broken and have stated so on some of their web postings but that is not relevant here)

Regardless, the "Wait and see" attitude for revenue is pretty reasonable given that they already have a site that went from 0 to 6 million uniques per month in the period of 18 months. The VCs probably have a BETTER understanding of how to do revenue than Joel and Jeff, but in any case they figure they will get the people, behavior and interest first, then see how best to generate revenue.

I don't happen to particularly like the business model of "get people to visit my site and then we'll pay for it later" but it apparently works sometimes. In this case it probably will as well - there are a lot of bright and connected people behind it.

Even if it fails - it was only 6M, and I suspect it will only take perhaps 2/3 of that to figure out if it will become profitable, but I really have nothing to base that on - it is just a hunch.

RE you comment above:

VCs are looking for the mega hit and
saying "let's not build a revenue
model, let's just get a user base and
figure it out later" just seems
irresponsible.

I think the VCs in this case are taking a harder look at the PEOPLE involved rather than any particular business. It is a symbiotic relationship - Joel, Jeff, et al get the benefit of the funding as well as the breadth of experience the investors provide and the investors get a team that has already proven itself a few times over.

There is also possibly just the cachet of being involved in the Jeff and Joel show and being part of the SO company.

answered May 8 '10 at 14:17
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Tim J
8,346 points

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