Funding Businesses With More Businesses
October 1, 2014
I’ve noticed an interesting pattern among a couple founders I’ve spoken to recently.
- A B2C food company paying the bills through B2B contracts with large companies
- A B2C transportation company funding their core business through B2B contracts with large companies
- A hardware company funding their R&D by licensing their software
Basically, use a reliable and lucrative high-margin business to fund an experimental, lower-margin part of their business.
I’m reminded of Amazon’s approach, which offers unprofitable features like Prime to get customers spending more money elsewhere on Amazon.
Amazon does it to capture market share. But decoupling products from their profitability offers other interesting implications. What if a company used high-margin parts of their business to fund harder-to-ethically-monetize businesses like social networks, media companies, or journalism?
Duolingo, a mobile app for learning foreign languages, funds the public-facing part of its business through a different business (selling their crowd-sourced translations), in order to keep its core offering free. By setting up their business this way, they don’t have to resort to ad sales like many other mobile apps do.
Ello, a social network that has recently gained viral attention, is guided by a manifesto which states they are committed to remaining ad-free, but they’ve also taken over $400K in venture funding. One wonders how they will produce an outsized return to investors without advertising.
Nonetheless, we can all agree that there is a desire to see an ad-free social network, given public interest in App.net, Diaspora, and now Ello. To some extent, acquisitions address this need in the market now: Facebook buying Instagram, for example. But acquisitions can also lead to more conflicts of interest.
I’m curious whether more companies use this business model to fund products that are valuable to society, but are hard to monetize.