What If Facebook Were a Nonprofit?
March 26, 2014
Philip Evans of Boston Consulting Group recently gave a talk about how the traditional business model - one with a scalable value chain - is breaking down. For some companies, including marketplaces and user-generated content platforms, the vertical value chain is breaking up into a horizontal one with many microsuppliers. Evans suggests that business strategy is becoming about curation of the herd rather than executing upon a traditional business model.
This is why AirBnB is expected to claim a valuation of $10B in their IPO filing - more than the InterContinental hotel chain, despite not carrying any inventory themselves. Instead, AirBnB curates a marketplace for other people to put up their own microinventory.
That, in today’s world, is valuable. But that’s not in line with how we expect businesses to look.
When innovation doesn’t meet business
In the case of AirBnB and other marketplaces, or what Homebrew likes to call the “Bottom Up Economy”, the companies in question are revenue-generating and can still benefit from a more traditional funding model, one that eventually leads to an expected liquidity event (IPO or acquisition). What about companies that also deliver a lot of societal value, but don’t have a clear revenue model?
I’m talking about audience companies, mostly, because by definition, successful ones are delivering a lot of value at scale. Companies like Facebook, Twitter, Snapchat and Instagram. Companies that enable us to communicate with each other, which open up entirely new markets and deliver unique value that is predicated upon these companies, but which themselves have no interesting way of monetizing.
Customers won’t pay because they’re essentially public goods: goods that are nonexcludable (if they want to reach scale, they can’t prevent people from using it), and nonrivalrous (one person’s use of Facebook doesn’t diminish another person’s ability to use it). People don’t pay for public goods, at least not directly.
As of now, we’re seeing two common ways to fund a public good on the internet: 1) advertising, or 2) donations, whether crowdfunded or through a benefactor, which usually suggests nonprofit status. The thought of Facebook ever becoming a nonprofit sounds laughable at first, but consider what happened to Wikipedia. They could have monetized through advertising, but they chose not to in order to preserve the neutrality of the service. Instead, they’re supported by the Wikimedia Foundation and an annual donation campaign from their users. Jimmy Wales is looked upon as a maverick among his peers, but what if he was actually onto something?
Facebook provides a service to us. It connects us. So much so that mobile providers internationally offer “social data packages” with access to Facebook and WhatsApp (now owned by Facebook). In other words, having Facebook on a mobile phone is more important than being able to browse anything else on the web or use any other mobile app. It’s a communication lifeline. But Facebook didn’t choose the nonprofit route. They chose the for-profit route, in which case there were only two exits available to them: acquisition or IPO.
Some in their shoes, like Instagram or Reddit, chose acquisition - a safer way to kick the can down the road while still delivering value back to investors. Others, like Facebook, chose IPO. And under the current constraints of how we define business, that meant Facebook needed to demonstrate that they would be able to monetize their customers.
So they started collecting data on their users. A lot of data. And then they got really smart about their advertising.
At this point in the story, some of you may not see a problem here. And you might be right. Given the current rules of the game, there is nothing really wrong with Facebook’s decision to monetize through advertising.
But what if the rules had been different?
What if tech were valued in our society because it helps us build useful things for the world on the cheap, not because of its inflated valuations and perceived glamorous lifestyle?
What if Facebook had become a nonprofit because they believed it was more important to create a neutral space for communication and protect their users’ privacy than to IPO? If they had continued running quietly in the background like Wikipedia, providing a service to its users?
What would Facebook look like now? What would our society look like now?
The right time
It’s not just the biggest, most universal connectors that face this issue, either. Tinder, a mobile dating app, provides a lot to value to the 10M matches it makes per day. But Tinder doesn’t have to worry about making money (yet) because it’s majority-owned by IAC, which also owns Match.com and OK Cupid.
Pocket, a bookmarking tool, is just starting to get into the big data game to figure out how to turn a service valued by over 11M users into a business.
All of these are audience-based companies of varying scope and scale, and all of them face the problem of an unclear monetization model outside of advertising.
This type of company didn’t exist before the Internet, and arguably, not before 2002, with the launch of Friendster. We didn’t have a set of rules for them yet, so we backdated them into our existing business rules. But maybe now is the right time to start revisiting those assumptions. Now could be the right time for a couple of reasons:
- Companies are becoming easier to start than ever before, which has forced people to rethink how to get them off the ground in the first place, which has led to a growth in bootstrapping and angel investing.
- As a result, we’re seeing the democratization of fundraising come to fruition. Angel investing and crowdfunding are exploding, allowing for more options outside of traditional VC.
- Ephemeral and anonymous apps are having their day. It’s a clear evolution in how we should be communicating online, but it’s also very difficult to monetize through traditional advertising. So now we’re faced with a choice: do we stifle innovation, or do we find a new way to fund these products? (Snapchat, for one, has begun to backpedal on some of its initial features by allowing replays and encouraging one-to-many sharing with Stories.)
- We’re seeing the negative repercussions of too much personal data in the wrong hands with last year’s NSA controversies. Even if some don’t mind their data in the hands of advertisers, more might mind it in the hands of the government.
In the offline world, not everything that provides value is a for-profit corporation. The online world, as it matures, will eventually follow suit. But that requires recognizing that not every valuable tech-related innovation needs to go multi-billion IPO.
We’ve got some exciting new funding vehicles appearing in the horizon. AngelList launched Syndicates last fall, allowing angels to combine their investing power. Maiden Lane was announced as a fund of funds investing in those syndicates. Kickstarter and Indiegogo help people with big ideas seek crowdfunding. Alphaworks, created by Betaworks, is a crowdfunding equity platform. Breakout Labs, under the Thiel Foundation, is a revolving fund for innovations in science. And Y Combinator funded their first nonprofit last year as a donation rather than an investment.
What could a funding vehicle look like that encourages audience companies to focus on impact rather than money?
It would be naive to assume that startups will learn to do the “right thing” and not pursue their dreams of mega-billion unicorns. They’re currently not being incentivized to do otherwise.
It’s up to funders - those who are writing the checks - to take a step back and think about what kind of world they want to create, and how they can use their dollars to influence what that world will look like.
Change is coming to the world of fundraising. Let’s not make it boring.