Is it just me or is this kind of an obvious (first) thing one should ask themselves when starting a business - "How will you make money?"
(1) build beta version and get some users, (2) improve product based on user feedback, (3) charge money for the product, (4) watch revenues increase
It sounds so simple. It's essentially the 37signals way, right? Build a product. Charge for it. It's so simple -- how can you possibly mess that up? And yet, the model above is simple, intuitive and wrong.
I think one of the key insights here is that you can have two groups of people who use your product: those who are enthusiastic about your product, give feedback and report bugs, and those people who are actually willing to pay for your product. In an ideal world those two groups overlap and it's easy to make money. What's often the case is that the two groups don't overlap very much, and if you listen to the wrong people you end up making a product that appeals perfectly to those people who have no intention of ever becoming paying customers.
It took me years to really learn this lesson, even though it was completely obvious in retrospect. In order to make a better product I should be talking primarily to my best customers (those who have subscribed to the bigger plans for an extended period of time), because the goal is to find more people like them and to keep 'em happy. If I listen primarily to the most vocal users the implicit assumption is that the most vocal users also happen to be the best (potential) customers. And that's a huge assumption that in my case turned out to be false.
And lots of sites seem to work on the principle that "First we get _all_ the users. Then something mysterious happens. Then we're all rolling around in cash."
Everything we do is best practices and guess work, there isn't a scientific formula to being successful, what works with X, probably won't work with Y. It's just a probabilities game, and by and large, 99% of companies can't approach it the same was that Google and Facebook did. (FWIW I agree with you, just not the way you phrased it).
"You can't monetize web services very well until you have an audience of scale. Jason Calacanis suggests that 10mm monthly uniques is where you have scale. I think it can be less in some cases (highly targeted services) and more in some cases (social nets). But every ounce of time, energy, money, and brainpower you spend on thinking about how to monetize will take you away from the goal of getting to scale. Because if you don't get to scale, you don't have a business anyway. "
Also, Groupon? :D
Digg comes pretty close to the first definition. They had around that number of monthly uniques, and have pretty much lots most of the visitors(and therefore ad revenue) in the last few years. They hemorrhaged money and weren't able to find a buyer.
It hasn't completely failed, especially after the reorg they did a couple of years ago, but it's definitely a shadow of it's former self.
As for the second, I guess Youtube around 2009 might count, considering that they were still losing money for Google at that point(Credit Suisse's analysis said that they were losing around $475 million, and RampRate's analysis said $174 million). However, this is pretty much only a business failure, not mindshare, and Google was still willing to drop money into them to get them to profitability.
In the aftermath of the announcement they sold, presumably at a fire sale price.
It is a high risk trajectory.
I mentor occasionally at Lean Startup Machine events. I would say that more than half the teams that get up and pitch don't mention a business model. Last time I asked the question, "And how will you make money?" so many times that it became a joke.
To be fair to them, it's a question almost nobody has to ask at work. We think a lot about products. We think a lot about users. We certainly think a lot about features and implementations. But most people work at places where the business model is so well established and stable that it becomes the background. For a lot of people it's like asking, "Will the sun come up tomorrow?" Sure, it might not, but it's just not something you worry about.