Thursday, August 23, 2012

The Only Kind of Product That Can Pull Off Freemium

The Wall Street Journal finally picks up on the freemium trend (it's only been 2-3 years, right?):
Read more at the Wall Street Journal ›

The problem is, anyone reading the article is probably under the impression that what succeeds and what doesn't is an art, not a science. It quotes one entrepreneur as saying:

"He blames his woes on the freemium model, which he likens to a Samurai sword. "Unless you're a master at using it, you can cut your arm off," he said."

People treat freemium like a generally applicable strategy. The truth is that only certain products can pull off freemium.

You can't make freemium work based on features. A crippled version of a full product is a terrible lead generation mechanism. You're not putting your best foot forward, and you're asking people to pay for features they haven't experienced.

Quantity limits are better, but hard to pull off. Potential customers twist themselves into knots to avoid user limits. Rate limits are better (e.g. up to 50 invoices/month) but are tricky to set.

The ideal freemium product bases upgrades on a persistent, cumulative metric. That is, something that always increases with usage, and is difficult to game.

It's no surprise that some of the top freemium companies like Dropbox and Evernote specialize in storage--storage has both these qualities. I even tell my companies, "When in doubt, charge for storage."

Before you simply sprinkle freemium pixie dust on your startup, ask yourself if you can base the model on a persistent, cumulative metric. If not, no amount of freemium expertise can make it work.

Tuesday, August 21, 2012

Facebook, Part Deux

Nearly two years ago, I asked the question, "Did Peter Thiel Make The Single Best Investment In History?"

Today, now that Thiel has sold most of his remaining stake in Facebook, it's a good time to re-examine the math surrounding his investment.

Two years ago, I wrote:
In 2005, Peter Thiel paid $500,000 for a 10% stake in Facebook.

Today, with Facebook's estimated value topping $33 billion, his stake is worth between $2-3 billion. That's a 6,000X return on his capital in 5 years.
As it turns out, this most recent sale came with Facebook's market cap at approximately $50 billion, which means he sold these shares at a price that delivered a 9,000X return. Not too shabby!

Of course, Thiel sold nearly as many shares at the IPO price of $38/share, about double today's stock price of $19 and change. That means that the shares he sold in the IPO represented a 17,000X return.

Pretty exciting. Of course, the more exciting Thiel news I saw recently is that the Thiel Foundation has donated money to a company that is trying to make a 3D printer for meat. I can't wait until I can enjoy BBQ without guilt!