Depends on the business. I'm willing to bet that neither Google nor Facebook had a concrete idea of how they were going to make money when they started up.
And lots of sites seem to work on the principle that "First we get _all_ the users. Then something mysterious happens. Then we're all rolling around in cash."
However, Fred Wilson (Venture capitalist) does advocate something of the sort:
"You can't monetize web services very well until you have an audience of scale. Jason Calacanis suggests that 10mm monthly uniques is where you have scale. I think it can be less in some cases (highly targeted services) and more in some cases (social nets). But every ounce of time, energy, money, and brainpower you spend on thinking about how to monetize will take you away from the goal of getting to scale. Because if you don't get to scale, you don't have a business anyway. "
Just out of curiosity, can anyone give an example of a company had massive scale (10m mau), but then ultimately failed because couldn't convert them into payers? There are probably some, but I can't recall any. So I'd love to study them.
I guess we should define failure here. Is it basically bankruptcy, where the startup couldn't survive(or could barely survive) even after several rounds of funding? Or are we talking about situations where the startup is bought out, but just continues to lose money for the new parent company?
Digg comes pretty close to the first definition. They had around that number of monthly uniques, and have pretty much lots most of the visitors(and therefore ad revenue) in the last few years. They hemorrhaged money and weren't able to find a buyer.
It hasn't completely failed, especially after the reorg they did a couple of years ago, but it's definitely a shadow of it's former self.
As for the second, I guess Youtube around 2009 might count, considering that they were still losing money for Google at that point(Credit Suisse's analysis said that they were losing around $475 million, and RampRate's analysis said $174 million). However, this is pretty much only a business failure, not mindshare, and Google was still willing to drop money into them to get them to profitability.
XMarks is a classic example -- in 2010 they announced that they would be shutting down because their user base (2m mau or so?) did not bring in revenue to support operations.
In the aftermath of the announcement they sold, presumably at a fire sale price.
Maybe not 10m, but Kozmo comes to mind. They raised $250mm They had huge demand but expenditures were too high (doing stupid stuff like delivering packs of $0.50 gum)
Everything we do is best practices and guess work, there isn't a scientific formula to being successful, what works with X, probably won't work with Y. It's just a probabilities game, and by and large, 99% of companies can't approach it the same was that Google and Facebook did. (FWIW I agree with you, just not the way you phrased it).
True, and they fail to realize that this rarely happens most don't have Facebook/Google type growth and need to generate enough revenue to at least finance operations before they get to the end of the runway.
And lots of sites seem to work on the principle that "First we get _all_ the users. Then something mysterious happens. Then we're all rolling around in cash."