I had a really interesting lunch conversation recently with the founder of Match.com and the three founders of Ignighter.com. The Ignighter.com guys, a new start-up in TechStars, were asking us our thoughts on whether they should charge for their dating service or make it free and then make up for it in volume (ad & sponsorship revenue).
Both of our responses were the same. We are for-profit guys. Provide a valuable service and charge for it. Both of our companies were profitable within the first million of revenue. Both of our profit margins grew as we got bigger. We both sold for a lot of money BECAUSE of incredibly strong real profits that had a lot of growth ahead.
That’s not the end of the story or conversation though. We all talked about how many companies have been worth a lot of money with no real profits (or revenue) on the horizon. That becomes a much different game that almost always involves a lot of VC money and hinges on a popularity contest versus a profitably contest.
Ignighter is the type of service that could become very popular very fast. The company could be worth something great because of that popularity. They have two models to choose from: profitable growth like Match.com or the popularity-growth model like YouTube. At the end of the lunch we came to the conclusion that they need to decide what feels right for them. I’m a profit-model guy and always will be. I love sustainable growth through profitability (vs. fundraising). But, there are lots of successful people out there who like to create value the other way and go bigger faster with the popularity model. No right or wrong, just what feels right and resonates most for the founders.