[jpatokal]

Let me just quote one bit of that:

Our service was free as we were working out the business model. We actually had a genius business model but hadn’t implemented it yet. We wanted more users so we spent money on marketing.

Maybe the real problem wasn't the insurance?

[fusiongyro]

My takeaway was, if you're going to buy non-paying users and then hunt up VC money to keep the engines firing, you'd better count on being able to go viral, because that's what the VC want to see.

If they had simply charged a reasonable fee, maybe they could have grown the business the old-fashioned way. It would have meant smaller sums of money all along, but maybe they wouldn't have experienced this explosion.

[tptacek]

No, the real problem wasn't insurance; it was that a firm-seeming commitment to fund the company fell through at the worst possible moment.

A lawsuit wouldn't have fixed anything for them; it'd have taken years to resolve.

[coryl]

The real problem was they had no business model; spending money to get users when you don't even know what your return is? That's ludicrous. That's a core business issue from day one.

[tptacek]

That depends on what kind of business you want to start. I'm a fan of growing slow and not taking outside capital. It worked pretty well for me, and working with VC, not so much. But the fact that bootstrapping works for some products doesn't mean it works for all of them. In particular, a product with serious operating costs and high cost of user acquisition is hard to bootstrap.

It's one thing to sell products to, say, every freelance developer in the world. Freelance developers are (relatively speaking) wealthy and interested in products that improve their practices. Parents are not generally in an ambient state of seeking products to secure their kids Internet connections. That makes them hard to reach and sell to.

[erik_landerholm]

We did have a business model. Jason didn't talk about it much, but if you look at my original post and Brandon's more in depth post it's there.

Was it a billion dollar business? Probably not, unless we owned most of the space if not all the space. This was inconceivable when you looked at the players.

[damian2000]

twitter, google & facebook might disagree

[jonathanjaeger]

Twitter/Facebook grew virally, not through paid marketing to acquire users.

[joewee]

They would have been in a much better position if they had actually turned on the revenue model before asking for money. Without that, the only metric they had to impress investors was user acquisition which was dropping.

[tptacek]

Or he'd be in a much worse position, because his cost of customer acquisition was high and the money he'd earn from charging wouldn't come close to covering his operating expenses, and charging would slash his new user signups, which were probably the only realistic lead gen he had to work with. Which is, you know, the situation that gets most people to consider venture capital.

[jpatokal]

Sure, if the "genius business model" was "charge everybody money for it", but the way that was phrased implied they had something more devious in mind. By going the VC route and asking for $7 million straight up, they bet big and lost big.

[fnordfnordfnord]

I think it's not uncommon for companies get volume this way. I even saw on the recent PBS special "Silicon Valley" that Fairchild Semiconductor (then it was FCI) sold actual real-life transistors below cost, wagering that it would allow them to scale up their manufacturing. Ingenious, risky move. But, it worked.

[lsc]

hell, many years ago, I gave people "first month free" VPSs.

Good god, that was a bad idea. I got lots of users, ended up buying a bunch of hardware, and worse, signing contracts on more datacenter space. I got a whole lot of abuse complaints, and had to get a larger bandwidth commit, too. (my provider at the time had the very common business model of having very high overage charges, but you could get out of the overage charges by signing a long-term contract at the new 95th percentile.)

Of course, many left when they got the first bill, leaving me about where I started revenue-wise, and with much larger monthly bills.

several years later, vastly increasing the resources I gave per dollar, /then/ getting featured in a blog[1] many months later, brought me up to a reasonable scale. I do think that the lower prices were necessary (but not sufficient) to start that growth.

I suppose that might be more like the transistor situation than anything else; Yeah, the company was "Profitable" but only because my time was free. I was selling at a huge loss if you counted market-rate for my time.

[1]http://uggedal.com/journal/vps-comparison-between-slicehost-...

(I owe that one post so much; revenue more than tripled in just a few months, and I was able to go full-time. I should probably do something for that guy.)

[reddiric]

In the Fairchild case, additional volume brought marginal cost below price. In this case, the price is zero.

[batgaijin]

The money was in the bank, man.