First, Everpix had revenue, yes, but they had negative marginal profit (http://en.wikipedia.org/wiki/Marginal_profit). Since their business is based around charging customers $X/month, their unit economics are incredibly important. If I buy candy bars for $3 and sell them for $2 I can also show "real revenue," but nevertheless this is still a terrible business.
Second, what's a better business, Google + Adwords or Google + charging $5/month/user. The latter puts a tight upper limit on the total size of your market. Google is unquestionably more profitable with the former business model rather than the latter, but it took Google years of not being profitable before they made it happen. If you look up articles about Google in the late 90s they were filled with hand-wringing about how they'll make money. The same goes for Facebook, which I think most HN users still dismiss as a fad. Nevertheless, they're very profitable and have been for many years.
VCs care mostly about the size limiting case and how likely we are to reach that limiting case. You can say this is stupid, counterproductive, etc., but for whatever reason that's the course Everpix decided to pursue. The logic of VC investing makes sense and it was Everpix's decision to take that route vs. remaining small-but-profitable, assuming the latter was actually an option.
Third, we can also contrast SnapChat and Everpix's situation from a game-theoretic perspective. Let's say SnapChat was charging, I dunno, $5 to download the app. Conservatively, let's assume that had no effect other than X% fewer people downloading the app. So, fewer people download the app, but we now have a very, very nice gross margin. In fact, let's say there were 5 similarly-sized SnapChat clones, each charging the same amount.
What would you do if you were one of those competitors? I can tell you what I'd do — I'd make my application free and build up the largest network I possibly could, knowing that the main value users get out of a communication app/network is the number of people on the network with whom they want to communicate (cf.http://en.wikipedia.org/wiki/Metcalfe's_law).
Since a player in this hypothetical SnapChat space could improve their situation by changing their strategy unilaterally, we see that the "charge for SnapChat" situation is not in a Nash equilibrium and it'd be irrational for us not to adopt this new strategy ourselves.
Of course, this only works when the new strategy is viable — in this case, the "free for users" strategy. Because their marginal costs are much lower, it is significantly more viable for Snapchat than Everpix. Indeed, for Everpix it will just make their overall situation worse.
It depends on the business and product.
First, Everpix had revenue, yes, but they had negative marginal profit (http://en.wikipedia.org/wiki/Marginal_profit). Since their business is based around charging customers $X/month, their unit economics are incredibly important. If I buy candy bars for $3 and sell them for $2 I can also show "real revenue," but nevertheless this is still a terrible business.
Second, what's a better business, Google + Adwords or Google + charging $5/month/user. The latter puts a tight upper limit on the total size of your market. Google is unquestionably more profitable with the former business model rather than the latter, but it took Google years of not being profitable before they made it happen. If you look up articles about Google in the late 90s they were filled with hand-wringing about how they'll make money. The same goes for Facebook, which I think most HN users still dismiss as a fad. Nevertheless, they're very profitable and have been for many years.
VCs care mostly about the size limiting case and how likely we are to reach that limiting case. You can say this is stupid, counterproductive, etc., but for whatever reason that's the course Everpix decided to pursue. The logic of VC investing makes sense and it was Everpix's decision to take that route vs. remaining small-but-profitable, assuming the latter was actually an option.
Third, we can also contrast SnapChat and Everpix's situation from a game-theoretic perspective. Let's say SnapChat was charging, I dunno, $5 to download the app. Conservatively, let's assume that had no effect other than X% fewer people downloading the app. So, fewer people download the app, but we now have a very, very nice gross margin. In fact, let's say there were 5 similarly-sized SnapChat clones, each charging the same amount.
What would you do if you were one of those competitors? I can tell you what I'd do — I'd make my application free and build up the largest network I possibly could, knowing that the main value users get out of a communication app/network is the number of people on the network with whom they want to communicate (cf. http://en.wikipedia.org/wiki/Metcalfe's_law).
Since a player in this hypothetical SnapChat space could improve their situation by changing their strategy unilaterally, we see that the "charge for SnapChat" situation is not in a Nash equilibrium and it'd be irrational for us not to adopt this new strategy ourselves.
Of course, this only works when the new strategy is viable — in this case, the "free for users" strategy. Because their marginal costs are much lower, it is significantly more viable for Snapchat than Everpix. Indeed, for Everpix it will just make their overall situation worse.