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Paul Graham is Hurting the Children

Background reading here, though he makes supporting points elsewhere (including on his own site, which has great essays).

Graham is a successful entrepreneur who sold his software business (which - wait for it - sold software to retailers building online stores!) for a pretty penny about two years before the air went out of the bubble who is getting a lot of airtime because of his interesting micro-fund, “Y-Combinator” and his statements about business models not being necessary early in the startup game. He encourages young entrepreneurs to instead focus on creating value. The premise being that value will find an audience, and the business model, extracting dollars from this audience, will follow the value in some way. He has cited advertising as a revenue generator that feeds on traffic/audience, without even requiring them to part with dollars at all!

I need to insert at this point that I have not spoken with Mr. Graham on this topic, and I am certianly guilty of oversimplifying, and potentially guilty of misrepresenting. But even if this is misrepresenting what he is saying, I think I am fairly describing what many people hear, which is this:

Don’t worry about how you’re going to make money. Just create a great product.

I think that software is a marketing business. Find a need, find a customer (defined as someone who cuts checks) and provide a solution. That definition of customer is telling. It’s not a user, not a reader, not someone who signed up once because they read a review.

This description also gets to the haze in the term great product. To me, a “great product” is one embraced by the customer (see above), so the definition gets back to the marketing (by which I do not mean promotion). There is no such thing in my mind as the great product without the marketing aspect, because the greatness is defined by the success in the market. (there is also the 5P factor, which I will try to address in the near future).
That’s not to put down great projects that do not pretend to be businesses. Take Tourb.us and voo2do - both local projects that don’t seem to have moneymaking in mind, and as such are joys to their creators. Creators who have day jobs, because they recognize the difference between hobby and business.

Hobbies are born out of passion, and sometimes turn into businesses. But businesses start with a revenue opportunity.

It is fair that the revenue model of a business on day one may not be the revenue model that one finishes with - a lot can happen in the journey from here to there. But until a path to revenue is clear, one does not have a business, and one should definitely not quit the day job.

This entry was posted on Friday, October 6th, 2006 at 3:14 pm and is filed under Technology Business. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed. Reddit This

2 Responses to “Paul Graham is Hurting the Children”

52 Bicycles » Blog Archive » Revenue Redux Says:
January 7th, 2007 at 9:48 pm
[…] Paul Graham is Hurting the Children […]
Justin Says:
June 8th, 2007 at 5:23 pm
I agree and disagree with you. First, Paul Graham isn’t just getting air-time because of YCombinator. He’s getting air-time cause he wrote a great book based on an excellent series of essays that are widely read and liked by the geek/entrepreneur crowd. YCombinator has helped him get more press etc. but I think he’s real contribution of late has been his book and essays.

I would agree that you must have marketing in mind and built into your business plan and you should also think about how you are going to generate revenue.

BUT: You can generate revenue with readers/viewers. If you couldn’t than Google, MySpace, etc. would not be successful businesses. Not to mention the thousands and thousands of smaller content based businesses.

I’ve taken the other approach to building a business and run a company that “sells” a product and had some moderate success with it. For sure it’s one way to go about building a business. But it’s also in most cases a much slower growth than free content.

Think about how much time you’d spend deciding if a service was worth using if it cost you say $30/month. Now imagine another service that required you only to enter your email address to get started. Or better yet, all you have to do is type in http://… Which service / website are you more likely to give a whirl? Which one are you going to tell your friend to check out. Which one are you going to write about on your blog? Chances are the free service is going to spread much much faster than the paid service. Any barrier to a user trying your service out is going to dramatically decrease your rate of growth, and having to enter a credit card is a huge, huge barrier. Sure you can do free trials etc. but in the end the user knows they are gonna have to pay so they will be less likely to commit to it initially. And they will be way way less likely to tell a friend about it or write about it on their blog because then they are telling people that it’s worth their hard earned money, that’s a much bigger value judgment.

With the number of people that are online today you can grow a company very quickly if you get a viral product/service going. It’s extremely hard to do with a paid service. It’s hard to do with a free service too but not nearly as hard as with a paid. Why not go big and try for viral growth? Instead of slogging away at linear growth (or near linear) with a paid product. The other benefit is you’ll know very quickly if your idea is gonna fly. If it doesn’t go viral it aint gonna work and you can move on.

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Paul Graham is Hurting the Children

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