Recently, I talked about how Figma’s acquisition exposed a fundamental issue with how investing in products can sometimes be counterproductive to the health of the community the product serves. Today, I’m exploring how a product’s revenue and business model underpins its potential in market.
This topic came up during an office hours session with a founder. But to be transparent, it was mostly motivated by a recent Economist article detailing Facebook’s (ahem, Meta’s) challenges as they have their first negative YoY in history. I’ve had beef with Facebook for years so it’s easy for me to pile on them here.
Instead, I want to highlight a theme from their struggles that I caution startups to be mindful of — especially early on.
Meta has dozens of problems, but one persistent issue is that they’ve eroded trust with their community. They’ve tried solving this by completely rebranding, commercials featuring social gatherings and even touting the Metaverse as a remedy for the societal issues they’ve helped to create. But they’re losing money due to lower advertising dollars. And therein lies the ultimate problem they have.
They decided to monetize their users by advertising to them.
As a result, their product grew in ways that pushed inherently toxic features to maximize ad revenue. While the toxicity has peaked in the last three to four years, they’ve doubled down on the community they’ve claimed they wanted to build. Unfortunately, their revenue model is completely antithetical to that mission so innovations like Meta’s version of the metaverse will be doomed to fail.
But let’s step away from a goliath and see how this manifests with earlier-stage companies.
As a designer, my perspective has always been user-first. Even as my career has evolved to be more business focused, I often consider how business models are tied to consumer behavior. Somewhere between the business model and the consumer is the founder’s vision. The challenge is that there are many ways to monetize a vision, but not enough founders think about how their monetization strategy will align with the consumer behavior they want to encourage.
And more importantly, many investors don’t think enough about this.
The business model investors advise a founder to leverage will be stronger when it’s aligned with the type of world the founder is hoping to create.
Imagine a founder who wants to disrupt traditional K-12 education to make the classroom environment more fun. They’d start by selling an education product through the school, hoping that students would eventually use it outside the classroom. The student uses the product in a standard classroom setting, but when school ends for the day or summer break, they continue to utilize it.
I’ve seen this pattern more than a dozen times. Most only focus on monetizing through select schools and school districts—a highly efficient, scalable model.
But if the founder wants to truly disrupt the traditional education model and help students, this model won’t work. Their features and roadmap will be dictated by the school’s administration which is fundamentally opposed to disrupting traditional education.
To be truly disruptive — and effective, the product has to work outside the system. This means it needs a revenue model that treats the student—and by extension, the parent(s)—as the customer instead of the school. This will drive features that encourage at-home and shared usage between the child and parent because it reinforces the value of the product to your buyer.
The two models can work in tandem, but the latter often gets dismissed because it may seem more challenging, less lucrative and less efficient as the channel approach. But by aligning the business model to the founder’s vision of disrupting education with the family in mind, more value will emerge over time. Rather than capturing one year of a student, they can monetize their usage for years.
My message to investors is to realize that good founders have compelling visions and a strong sense of mission. The best guidance you can provide is not convincing them of the best revenue model but finding one that maps to their vision. There is always more than one way to monetize a vision. The best ones aren’t determined by statistics, but by alignment with the founder and market.
To hear more of my hot takes, subscribe to my newsletter.