Friday, April 16, 2010

Ning's Problems Totally Unrelated to Freemium Model

By now, everyone has heard of Ning's internal announcement yesterday that they have decided to focus on paying members and discontinue their free offering. (See Ning's CEO post on Ning's Blog for the official announcement today).

Some may see this as a move spurned by investor pressure for monetization after pumping $120 million into the company at astronomic valuations, others see this as a vote against the advertising model, and some have even gone as far as questioning the viability of the freemium model.

What I like to point out is that Ning's problems are totally unrelated to the viability of the freemium model for startups.  As a matter of fact, I think the problem with Ning is not a reflection on the viability of the Freemium Model, but rather the dangers of raising too much money, too quickly (a problem that is not commonly shared by many startups, fortunately!)

As previously mentioned in my last post, in a freemium business the entire organization needs to focus on the fundamental metrics of the business, and then do rapid iteration to improve those things such as conversion rates, which may not seem as important if you are sitting on $100 million war chest. Freemium is an exercise in cold, hard, mind-numbing analytics. Not as glorious as throwing Hollywood parties and meeting with celebrities, but nonetheless essential to success.

There are many examples of startups that have successfully figured out the freemium model, but I like to mention my company Webs as the closest example to Ning:

At Webs, with a small team of 40 and having raised only $12M in venture capital, we have been able to create a social website creation tool that became cash flow positive and has been quietly used to build and host over 50 million websites (yes, that was not a typo, FIFTY MILLION!). In fact, before raising venture capital, we grew the company profitably to 6 million users by bootstrapping it with only $2,000.

Do those numbers sound surprising to you? Well, that's because we used our limited cash and resources to focus on the fundamentals of the business rather than PR and marketing. Happy to report that the freemium model is alive and well!