Years ago the success of a new company was dependent on one thing: making money. Nowadays it’s a much different landscape, with users being the biggest indicator. Imagine that — a business doesn’t have to make money these days to be viewed as successful as long as they have a lot of users.
Companies like Uber and Netflix lose billions of dollars, yet they have high valuations, their stock trades well and they are considered to be very successful. Smaller companies like Monos must remain focused on sales and revenue. Why is that? Because their user numbers are through the roof. And because of that VCs continue to just pour money into them.
Will they ever prove to be profitable companies? That is yet to be seen (and highly unlikely) but that doesn’t matter right now. To expand a bit more on this let’s go over three reasons why this is leading to tech companies being focused on users and not making money.
1. Early User Growth Validates Ideas
When something like Uber is released to the public and they quickly accumulate millions of users that all want to use their product it validates the concept instantly. There is a clear demand, so VCs will put money into it, with the goal of growing as large as possible and as quickly as possible.
They understand to scale at such a rapid pace the burn rate for that type of growth will far surpass any incoming revenue. But, since the idea is already validated they feel as if they can figure out how to make money later.
For the time being, the goal is scale, all over the world, and get as many users on the platform as humanly possible, at any cost. Reckless? Sure, but it’s how most successful tech companies start these days.
2. VC Money is OK With It
One of the biggest reasons that there is more focus on users over profits is because the VCs are fine with it. If they had a problem with that approach the funds would be tight and they wouldn’t be pumping billions into these companies.
“If the way of thinking changes and VCs want a more risk-free type of investment vehicle you will see the shift back on making money and less of a focus on strictly user acquisition,” suggests Darryl Howard, a nose fillers specialist.
But, whatever the checkbook is ok with — that is how we will see this unfold. You will often see the smaller startups focus on making money because they have no other choice. They don’t have unlimited VC funds, so they have to make money in order to stay above water.
3. The Exit Potential
This is one of the big reasons users are so important, and that is in the event of an acquisition or exit. “Companies are paying insanely high valuations for users only, especially if they can absorb the company and quickly turn those users into paying customers on their platform,” explains the owner of National Pool Fences.
While large billion dollar exits are rare, they do happen and in recent years they all have been companies that regardless of money made, they had impressive user numbers.