A VC - Latest Comments in http://www.avc.com/a_vc/2008/10/free-vs-paid.html

Re: http://www.avc.com/a_vc/2008/10/free-vs-paid.html

DJ — Tue, 14 Oct 2008 11:05:51 -0000

I totally agree with Jevon. It's a lot easier to attract resellers and partners if they (and their customers) can use the product first. Knocking on doors is a lot harder, especially in a recession when no one wants to risk new things (and may have already fired the people who would do them :).

Re: http://www.avc.com/a_vc/2008/10/free-vs-paid.html

DJ — Tue, 14 Oct 2008 09:16:33 -0000

Obligatory shameless self-promotion for a successful freemium business: http://www.SurveyGizmo.com

I think he's dead wrong about getting credibility via early enterprise sales. Enterprise sales is hellishly difficult and time-consuming in the best case. It's even harder for a startup. But it's a lot easier if the enterprise finds you via Google (they use it too, far more often than trade shows and trade rags) and you can truthfully tell them you have over a XXX free users and YYY paying.

They still have their hoops to jump through, but you'll be jumping from a position of strength rather than desperation.

Re: http://www.avc.com/a_vc/2008/10/free-vs-paid.html

fredwilson — Thu, 09 Oct 2008 17:13:16 -0000

I like to focus on costs because they are more under your control

This sort of sums up my thinking

http://www.avc.com/a_vc/200...

Of course you can't be sustainable without revenue, but if you keep your
costs down, you can be sustainable on a pretty small amount of revenue and
grow from there

Re: http://www.avc.com/a_vc/2008/10/free-vs-paid.html

Gonzalo Arzuaga — Thu, 09 Oct 2008 11:42:40 -0000

I know you can't force them but you can STRONGLY SUGGEST which is pretty much the same thing ;) Anyways, i wonder what a savvy investor advises in these economic times to the companies he invested in: focus on revenue, revenue, revenue, or just cut, cut, cut costs. I know they can do both, but focus is a "one thing only".

Re: http://www.avc.com/a_vc/2008/10/free-vs-paid.html

fredwilson — Thu, 09 Oct 2008 11:28:19 -0000

Yes, we'd like to see them become sustainable businesses but we are not
forcing anyone to do anything. At best we can advise.

Re: http://www.avc.com/a_vc/2008/10/free-vs-paid.html

btoc007 — Thu, 09 Oct 2008 11:10:27 -0000

I tend to agree

Re: http://www.avc.com/a_vc/2008/10/free-vs-paid.html

Gonzalo Arzuaga — Thu, 09 Oct 2008 09:05:59 -0000

Fred,
Taking Andy's mention of your portfolio companies (great companies by the way, or should i say great services?) I was wondering if given the current economic conditions you, as an investor in these 3 (twitter, disqus, zemanta) are "suggesting" them (should i say forcing them?) to get a revenue model right away? As far as i'm concerned these 3 services are awesome, and gaining popularity by the second, but what about the bottom line? Just curious.

Re: http://www.avc.com/a_vc/2008/10/free-vs-paid.html

vanderleun — Wed, 08 Oct 2008 19:03:55 -0000

At some point one might become ashamed at being such a cheap SOB.

Re: http://www.avc.com/a_vc/2008/10/free-vs-paid.html

Kevin — Tue, 07 Oct 2008 12:59:09 -0000

No one has commented on this statement yet (per my quick skim):
"There's a movement afoot by investors to back web services with a real business model..."

It's more than a movement. It's a capital-allocation decision. The current (since June, acutally) economic environment has taken away the luxury of TIME. If you are 2 guys in a garage with some old stock options in the bank, good for you, you can stretch out the payback time. The rest of us have to find money to be able to eat next week.

I think we'll see the "fifth" model of free more often - the free forever model. I'll take that 2-week trial subscription to the venture cap newsletter, then at the end sign up again for another trial using a different (infinite and free) e-mail address.

Re: http://www.avc.com/a_vc/2008/10/free-vs-paid.html

Jevon — Tue, 07 Oct 2008 11:37:35 -0000

Building relationships with the right people, and then getting a distribution deal in front of them is a tough and often drawn out process.

I think the important thing about what Fred is getting at, and the model I have been working on, is to use freemium to help develop the product in the mean time,. so while you are out building these relationships and finding partners, the product is out in the open, people are using it and you are learning from them.

That, to me, is what you have done with StandoutJobs

Re: http://www.avc.com/a_vc/2008/10/free-vs-paid.html

howardlindzon — Tue, 07 Oct 2008 00:46:18 -0000

i am tired and just disagree with every comment made today. anywhere. i only agree with cramer. he is never wrong nor am I

Re: http://www.avc.com/a_vc/2008/10/free-vs-paid.html

Ted Murphy — Mon, 06 Oct 2008 22:17:38 -0000

You're 100% right -- the youth focused web sites are beating the path. They have dedicated, loyal users and they are figuring out how to monetize them. My question -- how many kids would pay for a one-on-one interaction with Barney? Enough to fill Radio City Music Hall, as a I know from experience.

Re: http://www.avc.com/a_vc/2008/10/free-vs-paid.html

Ted Murphy — Mon, 06 Oct 2008 22:01:51 -0000

As a startup, you need a CEO and/or CMO who can sell into the big guys. And it takes a year. The Enterprise will first try to replicate the product internally. Then they they will try to get IBM and AT&T to replicate the product (at your cost point). If they all fail, you'll have a shot. Simple.

Re: http://www.avc.com/a_vc/2008/10/free-vs-paid.html

Ted Murphy — Mon, 06 Oct 2008 21:54:02 -0000

The other difference between consumer-oriented products and business-oriented products is that the B2B products have to be quite difficult to replicate. The consumer oriented products do not. In my old company, we had 4 award winning (as in web awards from guys like Money, BusinessWeek or Fortune) consumer products, but only one that was interesting to partners (ie big media companies).

They are very different market places, and the B2B market demands a lot more in terms of replacement value. I'm just adding to what I think is a good comment.

Re: http://www.avc.com/a_vc/2008/10/free-vs-paid.html

fredwilson — Mon, 06 Oct 2008 21:47:14 -0000

I am not surprised that you were ahead of me on this one!

Re: http://www.avc.com/a_vc/2008/10/free-vs-paid.html

Charlie Crystle — Mon, 06 Oct 2008 21:45:49 -0000

Freemium isn't appropriate for all sectors (and it's not going to die, no).

We sell CircleDog (at http://www.circledog.com) for $99 for the standard license. No monthly recurring revenues, standard software license model. I'll point to MSFT and their $40 billion of cash or Intuit or etc etc as validators of the model. Then there's Pro at $249, and we'll introduce a higher tier.

Then we also sell web services into the desktop client (we've been hybrid from day 1). So that gets recurring revenue.

Free doesn't work in the small business market as much as it does in the consumer market, because people value what they pay for, and what they don't pay for, they value less than the value they are getting. It's possible we'll do a consumer version with steps up, but I don't know that removing the friction of a purchase will lead us to more revenue down the road.

That said, I'd rather have 100,000 customers who haven't paid than 10,000 who have.

Re: http://www.avc.com/a_vc/2008/10/free-vs-paid.html

Ted Murphy — Mon, 06 Oct 2008 21:40:58 -0000

Hah! That is so wrong. Web services are the brightest spot on the web. "The world has enough software." Oh man, that is hilarious. Technology is a never-ending pain in the butt for 95% of the population. No wonder "cloud software" is the rage -- its the rare user who would not rather have their computing performed off-planet. The opportunities for good, "person-centric" software (thank you Emil Sotirov) are huge right now.

Re: http://www.avc.com/a_vc/2008/10/free-vs-paid.html

Ted Murphy — Mon, 06 Oct 2008 21:28:08 -0000

Google is not freemium, its free. But you gotta realize how spectacularly lucky they were. Who knew that search page views (2% of total page views) would be worth $40 CPM while the other 98% of page views would be worth less than $1 CPM? Not the "do no evil" folk, I guarantee.

Re: http://www.avc.com/a_vc/2008/10/free-vs-paid.html

Benjamin Yoskovitz — Mon, 06 Oct 2008 21:09:53 -0000

I'm not sure Fremium is dead, but I'm certain it's not the model you should automatically use if you're in the B2B web services space.

Since we launched Standout Jobs in January '08 our product has been free. Shortly we'll be releasing a new version and that will change. It's a combination of feedback from customers, knowing our market and learning a lot about what we have to do to meet our goals.

Fred: I understand your concerns with the costs involved selling web services to businesses, but my answer to that is this: Distribution.

B2B startups need distribution -- they need to find the right channels and use those channels to sell their products, so they don't need to build up a huge direct sales force to do it themselves. And in my experience with this, they need industry insiders on their team to help them get that channel / partner strategy roaring along. The challenge for B2B plays is that it's very hard for two or three guys with a good (or great) product and some great ideas to build up those partnerships; most resellers won't give them the time of day. That small startup team may also not have 20+ years industry experience and the right kind of rolodex. But those are solvable problems.

Distribution. It's not the only answer, but I think it's often overlooked by many startups, and can really work to solidify your place in the market, customers and revenue.

Re: http://www.avc.com/a_vc/2008/10/free-vs-paid.html

Ted Murphy — Mon, 06 Oct 2008 21:09:35 -0000

I've used TextPad on a lot of machines (certainly over 20), and I've never paid a dime. Every half an hour for five years, I've simply continued to click on the "Continue Evaluation" button. At some point, you have to insist on a sale.

Re: http://www.avc.com/a_vc/2008/10/free-vs-paid.html

Joseph Flaherty — Mon, 06 Oct 2008 19:19:40 -0000

I think the "Web Meets World" trend creates tremendous opportunity for business model innovation. Youth focused companies have done a lot of inventing in this space, monetizing web services with physical goods, since most of their customers have don't have credit cards. Some successful models are:

- Virtual good gift cards for sites like Gaia, Zwinky, and Stardoll are now the fastest growing product category at Target.

- WebKinz has a 6MM+ UU/M and to get access to their site you have to buy one of their stuffed animals with a special code on its collar. They have a great audience for advertising and a profitable customer acquisition strategy.

- Rockband is making use of 3D Printing technology to allow you to print your avatar from the game, Figure Prints already does this for Warcraft and has a massive waiting list.

- Disney has a sensor technology called "Clickables" that are embedded into consumer products and provide access to content online. e.g. If you buy a charm bracelet for their "Fairly Hollow" MMO you get special virtual goods. What is really neat is that if you swipe your bracelet against a friends in real life, you get to share each others virtual goods online. Brilliant virality.

- Bella Sara is like Pokemon for girls and buying trading cards gets you access to special avatars and virtual goods.

- Zazzle, Cafepress, Shutterfly, scrapblog, et al provide tools to put UGC onto tangible goods.

These models certainly have challenges (manufacturing, distribution, etc.), but they offer companies a host of new ways to think about making money. They also provide some nice barriers to entry for competitors.

I think all successful web-based companies are going to have to give something away for free as a way to "preview the merchandise". The Apple store lets you send emails on an iMac and play with iPods before you buy and most other retail establishments give you a way to try before you buy. I don't think web services will be much different so some "freemium" strategy is going to be required.

Re: http://www.avc.com/a_vc/2008/10/free-vs-paid.html

fredwilson — Mon, 06 Oct 2008 16:53:21 -0000

Geocities was free from day one

Re: http://www.avc.com/a_vc/2008/10/free-vs-paid.html

A2K — Mon, 06 Oct 2008 16:14:43 -0000

And yours is a perfect example of where we are in this age. This isn't a "new" approach by any means. And it's not just here on the web. I remember as kid (excuse me while i date myself a bit) subscribe to Random Houses "10 CD's for a penny" promotion which then obligated you to buy more at regular (if not increased) prices. Mobile phones are a another great example of this model--free phone, 2 yr contract.

Bottom line is: once you set a standard, its very hard to go backwards. While Web 2.0 hasn't necessarily created the free/freemium standard of consumer/user expectation, it has definitely driven it to the forefront in a lot consumers minds. And even if you say "well we'll just change the standard", you need to keep in mind that there will always be someone out there who will give it away free to your customers (and make money from them in a more strategic, less obvious way).

At the end of the day Angels & VC's can choose the path they want. But if the web has taught us anything these past few years it's the reality that the consumer will be the one to decide to who succeeds.

Re: http://www.avc.com/a_vc/2008/10/free-vs-paid.html

Will Johnston — Mon, 06 Oct 2008 15:47:27 -0000

I use Googles range of free services every day and then at the end of the day I tweak my Ads, which I'm paying for, to grow my business. I read the NYTimes each day for free online and occessionally, am drawn to an ad or have a brand impression reaffirm my confidence in a product or business. Freemium has it's place and is a model that I believe is here to stay.

Re: http://www.avc.com/a_vc/2008/10/free-vs-paid.html

A2K — Mon, 06 Oct 2008 15:30:54 -0000

Agreed. Freemium is FAR from dead. Or at least it should be.

I can respect Angels wanting to invest cash into businesses with a more solid model however, in my experiences (especially in the National Advertising and Marketing space), businesses large and small are extremely slow to adopt technologies (new and old).

Additionally, to lead a prospect from "opportunity" to a "win" requires a tremendous amount of time, resources and management from the product/service owner. (No to mention having to spend those on each and every lead--regardless if you win the biz or lose it). Not only does it take a lager sales force (as you pointed out) to win the business, it also requires more layers of "qualified" leadership to help manage the (often) painfully long sales cycle. Oh, and then a little thing called client training and ongoing support.

When you look at most of the web models today that are "free" or "freemium" these extra layers don't apply. And for the most part, users recognize this as simply part of the game. With a paid enterprise solution, the providers don't have that luxury. And if they think they do --and don't end up providing it (such as a few i have come across in the slice hosting dept.)-- their client base will simply move on to the next organization who does.

All in all, these are just tip of the ice-berg considerations. The real fun begins for these providers when they start seeing customers leave or request pricing discounts because Company X has a similar product for $5 bucks less a month. In a free/freemium world the focus turns to feature set and experience, not money. And If done well, this ultimately leads to solid level of Brand loyalty/evangelism--something that is hard to destroy with a few bucks difference here and there. Wordpress is a perfect example of how this can work for you.

As i said above, i can certainly respect the shift in position from some of these Angels. After all, it's their money. That said, i think if these Angels start looking to focus heavily on enterprise solutions providers in hopes of mitigating some risk, they need to be prepared for two things: 1) is to invest a lot more of their cash (since chances are they will be the ones strapped with this "going to market" expense) to help those start-ups find, attract, and manage the talent they will need to sell and support their offerings early on, and 2) is sit on that investment a little (or a lot) longer than what they are accustomed to.

Of course, i doubt that I am pointing out anything that they don't already know.

As always, thanks for a great post.

Cheers,
Alex