The following is from Ask The VC, where Brad Feld and Jason Mendelson of Foundry Group answer questions related to venture capital investment and startups:
Q: In the era of "free" software, would a mobile software startup be committing short-sighted suicide by attempting to price their product at all? These days, it seems that "eyeballs" are considerably more valued than short-term monetization. Facebook being a prime example: they avg a mere $3.00 in gross revs per active user annually, but yet they hold a $15B valuation. Within the VC community, how much weight does the "build it now - figure out a way to monetize later" type model still hold? Are you seeing any trends of push-back against this model?
A: (Brad) There was a time not so long ago (1999) when it didn't matter how much revenue you had, or how much money you made (or more likely - lost) - all that mattered was how many eyeballs you had (and how fast that number was growing.) If I remember correctly, that cycle didn't end too well.
While there are plenty of different things going on this time around, ultimately all businesses have to generate a profit (and positive cash flow) to be valuable. But that's the not the question you asked.
These days, it seems that "eyeballs" are considerably more valued than short-term monetization. The key word in this statement is "short-term". In the short-term, it's important that you get enough critical mass behind your mobile app and this generally means users. However, with the emergence of the iPhone App Store and the crazy disruption it and the iPhone are having on the mobile phone and software market, I'd assert that all bets are off right now on what the best "short-term" strategy is.
For example, I'm aware of several very popular iPhone apps that are free; I'm also aware of several that generated significant revenue in the first week for their publishers.
Ultimately, if Apple is successful, it will help establish a new market price points for mobile apps that will range from "free" to "something". I don't think anyone knows what that range is yet, but it's not going to be "free" to "free". And - as a result, you shouldn't view pricing your app as "short-sighted suicide", unless of course you price your app too high (where - in many cases - the max price you can charge is nothing.)
I'd be a lot more worried about having an app that no one cares about.
Continue reading below
