Why Advertising Isn't A Strong Business Model
I am proud to be a mentor for the Colorado TechStars program, and this evening we had our first mixer, a typical geeky mixup with poor acoustics and a male:female ratio of about 30:1. The mix was young entrepreneurs who won the TechStars competition and are now seed funded through the summer (along with gaining access to an array of very sharp advisors and mentors), the mentors, and other folk in the community who are focused on startups and business development.
A nice group and it was a good opportunity to both visit with some of my Denver-based friends and meet the young turks who are hopefully going to be building the next YouTube or Flickr in our proverbial garage.
Except for one glaring problem...
I estimate that I talked with about seven different startups this evening, roughly fifteen different entrepreneurs who are eager to dive into their business ideas full-time, to really devote all their energy into building Something Cool and Meaningful. Hopefully there's the proverbial pot o' gold at the end of the rainbow, but there was very little sense of people tilting towards a payout (or what we finance types call an "exit event"), which was nice.
But time after time, I asked "interesting idea, but how are you going to monetize it?" and received back flowery explanations that boiled down to "advertising" or, worse, AdSense. One group was even more disconnected, explaining that their goal was to build a large community of users, then they'd "figure out" how to make money.
Here's a tip for all you budding startup junkies: A busy site can certainly make for a great hobby, a fun project to fiddle with, and maybe a few bucks at the end of the month, but (with precious few exceptions) that's not a business.
Advertising? Well, you can look at the slow dissolve of the traditional media -- newspapers, magazines, radio, broadcast TV -- to understand the great risks involved in believing that someone else will always underwrite your efforts, someone other than your users. Further, while there might be high-flying estimates of future advertising revenue in the online world, it isn't often highlighted that the competition is going to get tougher too. A company like IBM might spend millions on advertising, but their money is going to skew towards a small number of large sites, not a large number of small ones, meaning that unless you want to build a business on the nickel and dime PPC payouts of Google's AdSense, AuctionAds, and related, you've got a fundamental problem in your business model.
How much smarter to have a business that has figured out a compelling value proposition, a solution that's so slick, so useful, that users are happy to upgrade to a paid premium service. Not an awkward afterthought of useless tools for the less than one percent who upgrade, but something really revolutionary, something new and clearly cool. Unfortunately, there wasn't much of that thinking embodied in the groups I met this evening, and while I remain highly enthused about TechStars, I am a bit concerned about the likelihood that we'll see a bunch of home runs, or, heck, even a single or two out of the mix...
No question, it's going to be very interesting to see how these companies evolve over the summer as various of us mentors and advisors try to hammer home the idea that the difference between a good idea and a real business is a reliable revenue stream, and that the best way to create that is to offer a compelling, valuable business service.
Then again, there are plenty of startups that were acquired without much more of a business plan than "get lots of eyeballs", so maybe I'm completely off-base here. How important do you, dear reader, believe it is that a business have a clear and sustainable revenue stream identified in the earliest stages of its existence?
[Via Dave Taylor]
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posted by Business Analyst @ 7:31 AM
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