Throughout our LTV course, we have analyzed US-based startups try to achieve product-market fit, decide when and how to scale, and develop a sustainable profit formula. Our debate of the latter issue frequently turned into an extended ping-pong match between classmates who favor building now and monetizing later, and others who prefer delaying scaling until a profitable business model is established. The takeaway—as is almost always the case—was “it depends”: platform-based consumer tech companies are generally allowed to ignore profitability in favor of rapid growth; however e-commerce sites such as Rent the Runway need to hone in on their unit economics and turnover rates before doing so.
Entrepreneurs in mature internet markets have the luxury to delay the profitability discussion, knowing they will eventually have a handful of revenue models to choose from—ad-supported, subscription-based, transaction fees, etc.—as they deem appropriate for their venture. If they’re really proficient, they will even adopt a monetization strategy which improves the product/service’s value proposition to their users, as recommended by Fred Wilson. But let’s step out of Silicon Valley’s borders and its well-established monetization sources and examine the situation in developing economies. There, I would argue that entrepreneurs have to tackle the profit formula early on because monetization will dictate where they can and cannot go, and the types of startups they can sustainably launch. What may come as a secondary decision for founders in developed markets becomes a go/no-go decision for those where the ecosystem is less sophisticated. To clarify my point, I lay out some examples below.
- In the top 5 advertising markets1(US, UK, Germany, Japan, France)—those characterized by a mature internet usage and advertising ecosystem—online advertising spend is 6x that of offline ($25B versus $4B). This is enough to fuel the topline of multiple startups aiming for an ad-supported monetization scheme. Facebook, MochiMedia and foursquare can rest assured to grow today and worry about revenues later as long as they amass a large enough user base which can be targeted by advertisers. On the other hand, entrepreneurs in the Middle East and parts of Eastern Europe would be competing over a $300M (combined) online advertising market, which does not leave much room for ad-supported tech startups. It is no wonder why we haven’t seen many of such businesses flourish in these regions.
- If your business will rely on e-commerce or subscription revenues, you might want to assess the electronic payment market in the particular geography. What is a $150B+ market in North America is short of $7B in the Middle East and Africa. Credit card penetration in the US exceeds 2.5 cards per capita.2 It is 0.04 in Saudi Arabia. While startups in mature markets aim to convert website visitors into leads by asking them for their credit card details, those in developing markets may witness abnormally low conversion rates – not necessarily because the service has not achieved product-market fit, but because the logistics for its monetization are inappropriate for that market. With such low credit card penetration figures, a market which had seemed large at the outset becomes severely constricted, and your growth potential becomes correlated to that of credit card adoption, rather than your business’ intrinsic attractiveness.
It is to be noted that both situations described above are not stagnant. Developing economies will eventually reach internet sophistication equitable to that of mature markets, allowing founders to leverage different monetization streams. If you look at the startups launched by Rocket Internet today, most are in the e-commerce space (the first ones launched in the Middle East were Lazada and Namshi, clones of Amazon and Zappos, respectively). In a chat with Oliver Samwer, I asked him for the rationale behind this, and he validated my hypothesis that the geographies in which they operate are easiest to monetize through transaction fees. The Samwer brothers pick models which can achieve Product-Market-MONETIZATION Fit. Unless you are creative enough to come up with alternative revenue models or are funded by investors with really deep pockets (and sloth-like patience3), you might want to do the same.
1 Google Market Metrics
2 Credit Card Market: Economic Benefits and Industry Trends, http://corporate.visa.com/_media/ita-credit-card-report.pdf
3 Sloths are considered to be the most patient animals. Their average movement speed is 15-30 cm/minute, it takes them about a month to digest their food, and they sleep 15-18 hours/day.
George Audi
Twitter: @audi_george
