For a VC-funded company, when you charge users, you end up with two results: fewer users, and a very clear concept of the lifetime value of a user. If your cost of acquiring those users is higher than the LTV, you have a huge problem.
With a free site, the cost of acquisition is lower, you have a big fat user number to quote (even if many of them aren't actively using it, since they don't have to pay, they don't cancel) and the LTV is a future, "undetermined", number. So it's not as apparent that maybe a business isn't generating real value.
> So it's not as apparent that maybe a business isn't generating real value.
Of course, it's also not as apparent if your business is generating real value. If you were looking to make an investment, wouldn't you look for a business with proven value over a business with hypothetical future value?
Not if you're a VC. The whole point is to see value where it's not obvious, because it hasn't materialized yet.
If there isn't a huge spread between the obvious present value of a business and its /potential/ value, then you can't make an investment where you expect a 4x-5x return. Those kinds of returns only show up when there's a lot of uncertainty around both the current value AND the future value (and most of the value of a new VC business comes from the discounting of its future value, rather than a calculation based on its current performance.)
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For a VC-funded company, when you charge users, you end up with two results: fewer users, and a very clear concept of the lifetime value of a user. If your cost of acquiring those users is higher than the LTV, you have a huge problem.
With a free site, the cost of acquisition is lower, you have a big fat user number to quote (even if many of them aren't actively using it, since they don't have to pay, they don't cancel) and the LTV is a future, "undetermined", number. So it's not as apparent that maybe a business isn't generating real value.
> So it's not as apparent that maybe a business isn't generating real value.
Of course, it's also not as apparent if your business is generating real value. If you were looking to make an investment, wouldn't you look for a business with proven value over a business with hypothetical future value?
Not if you're a VC. The whole point is to see value where it's not obvious, because it hasn't materialized yet.
If there isn't a huge spread between the obvious present value of a business and its /potential/ value, then you can't make an investment where you expect a 4x-5x return. Those kinds of returns only show up when there's a lot of uncertainty around both the current value AND the future value (and most of the value of a new VC business comes from the discounting of its future value, rather than a calculation based on its current performance.)