Everything for free?

This has been bugging me for a while.

Seems like a lot of people expect / behave as if everything is free in the startup ecosystem. On one hand, free advice, free space and free mentorship. And on the other hand, when you are a new company, you are expected to offer free trials and frequently foc customization too.

Recently a few startups ask me how they should reply as they have been asked by a non-profit (which is not exactly a non profit after I dug a bit further) to sponsor their activities.

So, not just founders expect things to be free now.

How did this mindset come about? I don’t know. But here are some theories I have.

1) incubators gave everything for free. Free space and free mentorship etc. But it’s not really free… Their funders or LPs are footing the bill. Thing is, startups are paying via equity – or rather paying via future income / future upside. That’s the incubator business model. So i guess when there is no cash outflow, it just feels “free”. Startups don’t feel the pinch… yet. Also with the high failure rate, few actually really pay for it. Interestingly, there were snide comments on such hidden “fees” taking lion’s share on smallish exits. Well, that’s the business model. So it really isn’t free after all.

2) many mentors and advisors advise for free. Yeah I do that too and somerimes I pay for the teas or coffees at these sessions as well. We do it to pay it forward, but at the same time, we do it to re-live the entrepreneurial excitement (or even torment if you will) via someone else. But how long can we last doing this? I can continue to afford the drinks but when my enthusiasm runs out, I will very likely stop. From eco system POV, how do we sustain this, and if possible, entice the pools of expertise beyond the exited founders?

3) startups offering services for free. This is the basic play book rule #1, since internet 1.0 days and it got stuck. I have heard of people who outright said: you are a tech start up, you are not supposed to charge at all.

Offering services for free allow new startups to acquire users to test their products and later grow market share fast. But why don’t we expect the same of the new cafe down the road? Somehow we understand it costs to open cafes, but we think tech startups survive with just O2 and H2O and we all have parents’ garages to squat for free.

That said, some well known startups, are still offering free services despite already easily 4-5 years in operation. So outside looking it, I feel it’s just because they fear losing (big chunk of ) their users once they start charging. Their VCs are footing the costs of maintaining the operations, and to continue growing user base with no foreseeable revenue stream. This really begs the questions: An interesting service no doubt, but costs $10 (if not $100) to maintain, and I am only willing to pay $2 (but likely $0 if I am really honest) to use the service. Is this model really right? Is the cost structure right? Who are the kind philanthropists propping this up? Are we just kidding ourselves that there is really something here? So what if you have large numbers for traffic? They are paying the telcos to access your site but you have already trained them to not pay you and you have told them it’s ok for years. You are not just killing your own business but you are breeding a mindset that kills all other similar businesses. Business schools teach that price competition kills not just competition but the whole industry. I wonder what it would say about extended free services in years to come. So VCs who fund pre revenue startups (for years!) beware.

Many things in the startup ecosystem are seemingly free from the surface. Founders please do recognize that your goal is to become a business owner with real sustainable long term growth (aka have products that people are willing to pay for). So do not fear charging and do not be delusional if you can’t convert buying decisions.

Free is great for getting started. It’s a feature of the beta testing stage. It cannot become a fixture of the ecosystem. As a founder, we need to graduate into “business owners” and stop relying on investments to burn.

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