Comments on: Free 2.0: Don’t blame the VCs http://www.mathewingram.com/work/2008/04/04/free-2-dont-blame-the-vcs/ ... at the intersection of media, technology, business and the web Sat, 22 Nov 2008 03:37:58 +0000 http://wordpress.org/?v=2.6.2 By: Joining Dots http://www.mathewingram.com/work/2008/04/04/free-2-dont-blame-the-vcs/#comment-342581 Joining Dots Sat, 05 Apr 2008 09:23:49 +0000 http://www.mathewingram.com/work/?p=2315#comment-342581 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. 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.

]]> By: dave mcclure http://www.mathewingram.com/work/2008/04/04/free-2-dont-blame-the-vcs/#comment-342580 dave mcclure Sat, 05 Apr 2008 00:26:47 +0000 http://www.mathewingram.com/work/?p=2315#comment-342580 oh please.<br><br>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).<br><br>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. <br><br>see my comment for 3 specific point-by-point examples that rebut your assertions:<br> <a href="http://www.alleyinsider.com/2008/4/_free_is_killing_us_blame_the_vcs#comment-47f6b7a7796c7ad2007c769e">http://www.alleyinsider.com/2008/4/_free_is_kil...</a><br><br>get over yourself, deal with the market, and get to work building a product of value.<br><br>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.<br><br>period, end stop. 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.

]]> By: Josh Rehman http://www.mathewingram.com/work/2008/04/04/free-2-dont-blame-the-vcs/#comment-342579 Josh Rehman Fri, 04 Apr 2008 23:53:16 +0000 http://www.mathewingram.com/work/?p=2315#comment-342579 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.<br><br>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.<br><br>I presonally believe this is unhealthy, for the simple reason that relationships never form, knowledge never deepens, and efficiencies are never realized.<br><br>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.<br><br><a href="http://javajosh.blogspot.com">http://javajosh.blogspot.com</a> 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

]]> By: Jeremy Pepper http://www.mathewingram.com/work/2008/04/04/free-2-dont-blame-the-vcs/#comment-342578 Jeremy Pepper Fri, 04 Apr 2008 22:43:50 +0000 http://www.mathewingram.com/work/?p=2315#comment-342578 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.<br><br>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. <br><br>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. 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.

]]> By: Peter Cranstone http://www.mathewingram.com/work/2008/04/04/free-2-dont-blame-the-vcs/#comment-342577 Peter Cranstone Fri, 04 Apr 2008 21:19:46 +0000 http://www.mathewingram.com/work/?p=2315#comment-342577 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.<br><br>Cheers,<br><br>Peter 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

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