What Will We Do When Growth is No Longer the “In Thing” Anymore? (Web Startups)

I was reading Scoble’s post and another post in Hank Williams’ blog, both of which touch (in different ways) on what’s happening in the world of technology startups. Scoble focuses on the shift in talking more about business and less about tech innovation. Hank talks about why we don’t have any IPOs. As is the case with many posts I write, reading those two posts helped me connect the dots with some of the things I’ve been thinking about lately.

I get this sense that we’re nearing the end of the growth-at-any-cost phase of the most recent epoch of the consumer Internet and some real changes are afoot. It’s part of the symbiotic relationship between investors and companies:

Companies and investors are symbiotic organisms. When investors reward growth, companies want to show growth to get attention and funding. When something else (revenue, profits, etc) becomes what gets rewarded, companies will focus on driving the metric that matters most to investors.

I’ve been wondering whether we’re entering the tail end of the “growth at any cost” or “growth for growth’s sake” period of what’s known as the web 2.0 consumer Internet epoch. Some stats show that the Internet stalwarts (Facebook, Google, MySpace, etc) are seeing a deceleration in growth rates (not to be confused with a decline in usage or reach). So, if the reach and growth battle is coming to an end, does it make sense for us to focus on growth as the metric to track obsessively? Should we spend as much time looking at ComScore, Quantcast, Compete, etc to look at uniques and traffic if that’s not going to be what matters going forward?

The more I think about it, the more I think the “pay for growth” era is coming to a close. Whether it takes 12 months or 24, I have no idea. And I think it has very little to do with the macroeconomy and a lot to do with the fact that a lot of the “interesting” land (top app position on Facebook, top web 2.0 application mindshare for the moment, top 500 traffic rankings) has been claimed and it’s getting harder by the day to unseat those who occupy said land. If bumping off the incumbents continues to get harder, the case for land-grab or growth-oriented investments must get tougher.

If we do transition from a growth orientation to something else, a few things are likely to happen:

1. We will have to rethink our expectations for growth and the metrics we track
Things like uniques, pageviews, visitors, etc will still be important but they won’t constitute success in and of themselves. They’ll have to be other things that matter – revenue? profits? paying customers? paying advertisers or sponsors? There are lots of things we’ve stopped talking about that are going to become important again.

2. Companies will likely appear to grow slower because the new metrics we’re tracking grow more slowly.
Paying customers, revenue, profits, or any other performance metric that involves the transfer of money from a customer or advertiser to the company are things that grow slower than the “growth” oriented metrics we’re used to tracking (pageviews, uniques, etc).

3. Some companies that succeeded during the growth land grab won’t make the transition to life after growth.
The sad truth is that some companies will find themselves having made it to the top of the heap for the given market in which they operate and unable to turn that traffic / usage leadership position into a revenue / business leadership advantage. Scale is never a business model in and of itself but it can certainly make a business model work better if there are economies of scale or other advantages of scale and girth. Some companies will find that there aren’t any real advantages to scale in their markets or they’ll fail to convert their leadership position into business leadership.

The land they grabbed might not turn out to be that valuable after all.

4. Companies will worry less about the threat of free “ankle biters” who don’t business plans
Right now there are a lot of companies who are competing against other competitors who are offering free-to-the-user offerings without an ancillary business model. In today’s environment, there appears to be plenty of cash available for companies who are showing (or have shown) growth without revenue and profits. As long as those companies can continue to raise money and continue operations, it muddies the market. If funding for growth-only companies begins to dry up, companies interested in building businesses will face fewer competitors and have the opportunity (and I hope the conviction) to look at alternative business models to “free now, business model later” approach.

5. Silver lining – some of the stickiest problems on the “prosumer” web might finally get addressed with some real effort and muscle.
If we have companies whose bias is more toward getting it right in a sustainable way and less about getting it done as quickly as humanly possible, we might finally see some breakthrough solutions in services where people have shown a willingness to pay and where there is customer demand for better solutions. Companies can take some of the revenue they generate and invest it into building better products – they won’t be wholly reliant on capital markets to fund R&D and operations. A few opportunities jump out at me as being good candidates to tackle:

-Data synchronization between mobile devices and the web – MobileMe is just the first attempt. Barring a duplicate service from Google (and that sure could happen), there is a willing market of folks who want to keep data (calendar, contacts, to-do, important files) in sync and accessible when they’re away from their main PC. People will pay for a solution in this market if it works well

-Groupware for distributed teams – I think we’ve seen that people will consume this stuff (WebEx, GoToMeeting, etc) and we’ve barely scratched the surface here. Most of the products in this space are a bit long in the tooth and if you’ve used them you know there is room to improve them.

-Consumer storage and backup – There are a few solutions out here that work well, but I do think there’s room for new innovation and new services that make it even easier to manage the data backup and management process.

I can think of a few others as well but I won’t list them here. Maybe I’ll save those for a future post.

Feel free to share your thoughts in the comments.

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  • This time I don't quite agree with your views, Charles. Traffic growth vastly rules in the web world and will continue to do so for a while, for the simple reason that most monetization opportunities rely on fast traffic ramp-up. Online ads (be it PPC, PPA, or PPT), recruiting fees, even new B2B opportunities, which quickly move to the SaaS model, all rely vastly on building traffic, as the main revenue driver before even the monetization potential of this traffic.

    Growth is not slowing down across-the-board. Of course, if you're talking about existing web services, those are maturing. Just like any other industry out there, those services follow the typical market cycle we've learnt about in our business studies. Tying curiously into your conclusive point, however, I am convinced that there is a high potential for new technologies, to disrupt the existing value propositions, and to fulfill a whole lot of new ones. I worked recently on the “thinking process” for instance, and what parts of that could be brought online. Today, this is clearly unaddressed. Semantic technologies, among others, could change that, and create a whole new web market from it. A fast-growth one, by traffic standards, and not necessarily profits or revenue. I don't disagree with the need to focus further on monetization, but I think that in many cases getting traffic is the “best-enough” proxy metric, short of being able to turn everything into dollars and cents right from the start. So, if your argument is for the market to focus further on monetization, rather than just traffic, then I can buy some of that. If it is about the web growth slowing down, then I think you need to specify it further, and list which services you're referring to. Because by my count, there are still billions of people without access to the web, and 100's of millions of web users who would use the web order-of-magnitude times more if the value propositions went beyond the simple (by future standards) search/communicate/play benefits in place today. If that doesn't offer huge potential for land grab and hypergrowth, I'm not sure what is!

  • Greg,

    Thanks for the thoughtful comment. My main point is the following – if you have a business that doesn't generate revenue at tens of millions of unique users, I find it hard to believe that doing 2-3x times as many users would suddenly crack the code.

    For businesses that have figured out how to convert traffic into revenue, more traffic is obviously a good thing. For those that haven't, I'm not sure what will happen if growth for growth's sake is no longer sufficient to keep the interest of their investors.

  • Thanks Charles. Good discussion. I obviously agree with that clarification, what I'm disputing are the 2 original assumptions you base your point on:
    1. “growth for growth's sake” carries less weight with investors nowadays or, quoting you, the “pay for growth” era is coming to a close. I'm interested in some backing facts here, because from my conversations it seems that investors are investing less because start-up costs are much lower, not b/c they became more picky, which they are hardly in a position to do given how much financing there is available today. The trend seems to be that entrepreneurs push the timing for getting VC funding further and further out. For early start-ups, I believe that traffic is still a good enough proxy for revenue that if you can prove exponential traffic, or qualified traffic, with a strong management team, VCists will fund you even if the path to revenue is fuzzy, which it always is at that stage. In other words: lots of traffic will get you funded, no matter what.
    2. “a lot of the “interesting” land (top app position on Facebook, top web 2.0 application mindshare for the moment, top 500 traffic rankings) has been claimed and it’s getting harder by the day to unseat those who occupy said land” Here my point is that this is a given for maturing industries. Facebook is maturing, Google has matured, web 2.0 app have matured. That's why start-ups must look (and are looking) at the next thing. Web 3.0, semweb, mobile apps, etc…

    I'll leave it at that that, as I think we agree on the general ideas.

    Note: I'll repost that conversation on my blog if that's ok with you. Should build more traffic for both 🙂 since we probably have different audiences (mine is very semweb-focused)

  • Sure, go ahead and post the conversation – thanks!

  • Steve

    Not sure, but I think your arguments are valid only when predicated on existing technology. Perhaps you implied this yourself, in 5) Silver lining – that a game changer can appear at any time.
    Interested?

  • Charles, good post and thoughts. I agree with you, quality and earnings will become more important than pure size over the next 12-18 months. That should also open up a lot of spaces where fast-growth operators currently grab market share without a real path to profit.

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