Any recent entrepreneur who thinks that it is different this time and the way web 2.0 works is by keeping the product free for all should read this excellent article titled – Free: A tactic, not a business model.
The rules of economics have not changed. The best way to make money in the new economy, in the Web 2.0 economy, comes down to the same fundamental business model that has always existed: create something of value for people who will pay for it.
To be fair to these VCs, they’re not advocating doing everything without pay. They’re suggesting free as a tactic towards getting paid in other ways: through advertising, or by premium services, or maybe even through being acquired by a company with a large wallet. Free is only a tactic, though, not a business model.
That’s one lesson that I’ve also learned the hard way, after talking to many venture capitalists and mentors. You better figure out who is going to pay you to keep your product free for the users (if that’s what you want in the first place). It’s one thing to design cool applications and services, it’s another thing to make money from it.
In context of the above, you should read this one too: In Defence of Free.