Early Advice 3: Know How You’ll Make Money

A few posts ago, I talked about how, to build a startup, you have to deeply understand the problem that your product solves. After all, in order to succeed as a business, you need to make money – so someone needs to be willing to pay you for what you’re building.

Willingness to pay isn’t the end, though. Once you’ve established that someone would pay for your product, you now have to figure out how.

I didn’t realize how much I’d been dismissing this problem until I began networking with potential investors (though this was before we began fundraising in earnest). “What’s your market size?” was the first question they’d ask – at least, if they weren’t already familiar with the massive potential in the gaming space. I had an answer to this one. But then the second question caught me off guard, and it really shouldn’t have.

“Is this B2C or B2B?”

Now, in many applications, this question need not even be asked. If you’re building a social app, you’re probably B2C. If you’re building a payroll service, you’re clearly B2B.

Modulate builds software meant to be used by individual consumers, but within the specific contexts of different games, apps, and other platforms. So, who was our direct customer?

It’s not that we didn’t have ideas about this. But until this point, we hadn’t reached a stage of execution that had forced us to pick just one. And that was the problem. It’s absolutely crucial to have a clear, discrete vision of what the company is going to do. Keeping options in case something goes wrong is fine, and you don’t have to know about every possible hiccup along the way, but you must have at least marked the path. This is crucial for 3 reasons:

a) It’s easy for investors or potential customers to get confused, especially during a short pitch, about what exactly you’re selling. This is a huge problem and almost certainly means they won’t be able to gain confidence about the idea.

b) Showing that you have a concrete plan demonstrates to investors that you’re taking this seriously and have really done your research.

c) If you don’t know exactly who is paying you, there’s no way you’ll be able to charge what your product is worth.

When we first began floating the idea of raising money, I did not have a clear plan. In fact, here are just a few of the ideas we had for making money from our technology:

– Build a B2C app, and sell it for a fixed price.

– Build a free B2C app, and sell specific voices of celebrities/characters.

– Build plugins for existing games and voice chat apps, and sell the plugins…or specific voices…or access to an account that saves your voices across different games…or access to a tool that lets you design new voices from scratch…

– Build a library to sell to games/apps for a flat licensing fee…charging extra for special voices like those of celebrities

– Other peripheral ideas like earning money from celebrities who wanted voice skins to earn income with less work, or selling our audio watermark technology directly.

So how did we decide between these different approaches? Well, to be honest, I didn’t have a rigorous framework to start – but looking back at how our strategic thinking evolved, I can definitely highlight some of the points that we came to focus on.

1. Technical Complexity

We want to get our voice skins out to as many people as possible, as quickly as possible – so being able to scale to a wide variety of platforms was crucial to us. This meant we were less interested in building, say, an app to interface directly with a user’s microphone – which requires a huge amount of technical work that’s different on every system – than building a library which would be fed the audio to process through other means.

2. Defensive Moat

Our tech is the best at what it does, but that’s not always enough to keep at the front of an industry. In fact, many startups which create a new market end up fighting the good fight to overcome the initial barriers – expending serious resources to do so – and ultimately get overtaken by a latecomer entering the space on their backs. In order to protect ourselves and our investors – not to mention the loyal customers who make bets on us early on – we needed to build defenses to make it harder for latecomers to jump in. I won’t talk too much about these specific protections here, but one portion of our moat comes from developing partnership with more established members of the game industry. By structuring our business model to allow for collaboration with major players – rather than competing with them over rights and sales – we decrease our cut of any given sale but both increase the pie overall and make it harder for someone to upend our work.

3. Up-front Customer Cost

Game developers are constantly low on resources – whether it’s engineers, capital, or simply time. Knowing this, we chose to prefer business models that would allow us to win alongside our customers, rather than forcing them to make a bet on recouping an up-front cost. An easy example of this is the revenue-share model. If games want to sell premium voice skins, we’d prefer to charge them as little as possible to build the skins – and earn our real profits as customers make purchases once the game is available.

4. Marketability

“Voice skins” seem, on the surface, a lot like the “voice masks/changers/filters/fonts” which came before. However, these predecessors had significantly different underlying technology that caused them to sound robotic or artificial and be difficult to customize – limiting the idea of changing one’s voice to be used as a gimmick or troll, despite many wishing they could change their voice in more serious or socially positive ways. Thus, it’s important for us to differentiate our technology from these earlier tools. One of the many ways we work to demonstrate this differentiation is by choosing a different business model and by carefully selecting partners and customers to build a reputation around the unique quality of our offering.

Given all the above concerns, Modulate ultimately landed on a B2B focus – working with the games and apps which already are where people spend their time voice chatting, in order to bring this long-awaited feature to as many players as possible. But I can imagine how these and other concerns might lead to very different choices for a variety of other products. As always, I don’t claim that these are a complete list of the concerns you should have in your business model – at minimum, logistical concerns like how often you’ll get paid and how you’ll track what you’re owed are often crucial as well – but hopefully this discussion will provide a helpful starting point as you work towards the best business model for your own products.

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