Techstars mentor critical of business models' of Techstars companies
intuitive.com
intuitive.com
Advertising is a perfectly legitimate business model.
That is a VERY simple assertion relating to something that is a bit more complicated. I think most people here should brush up on the idea of attachment networks, or organizational ecology. I'll give you the short version, the top two companies win where preferential attachment is what determines whether a user stays with you.
Of course there are exceptions. For instance, one could be providing information on a web site that would be a challenge to get elsewhere. The Wall Street Journal comes to mind. With these companies, attachment is irrelevant, if a user has a great need for the information s/he MUST go to the Wall Street Journal.
Most of the web 2.0 startups I have reviewed, and there have been many, are NECESSARILY based around preferential attachment. I understand this tendency. After all, if startup Y can implement the idea of startup X in less than 3 months time, then startup X will have an issue to deal with. So it is in the interest of startup X to make sure that users prefer them. Add to that the fact that most are banking on providing the user convenient access to his OWN data, and you have the makings of a good number of also rans.
I always ask, what happens if the user takes his data elsewhere?
"It'll never happen", is usually the answer.
I inquire as to the possibility of a recession and a concomitant slow down in internet advertising. Like all of the 25 year old mortgage brokers 4 years ago, most of the founders look at me like I just came from Mars. There is a new economy, get on board or get out of the way.
So I walk a little ways off...
And wait for the wreck, maybe I can get a good deal on parts.
There are, of course, both advantages and disadvantages to an advertising-based business model. As you say, advertising is likely to be volatile during a downturn. Also, the type of sites which rely on the eyeballs--advertsing are often easy to 'spoof'. (Low attachment.)
The advantages of advertising is that it's simple to implement. For a YC-type company, with a few $K funding and a few people writing code, there is probably no easier way to start generating revenue. No sales team neccessary, no 'critical mass' of business customers, no need for corporate partnerships.
There are risks in any business model, succeeding will alwyas take incredible skill and incredible luck, but with $12 billion in advertising spending each year, many successful companies have been and will in the future be built upon advertising.
Here's my guess at the business model; get the mentors at Techstars or Ycombinator to help you develop your company. (i.e. get as many people using your site as possible, probably for free) Then since there really isn't a real revenue source, after you get a lot of eyeballs you sell the company to some larger company. Wah La ~ Web 2.0
I don't want to sound like I am indorsing or rejecting anything I would just like to see more creative income models.
- It lets them focus on their presumed competency of making something people want. They don't know much about running a business, selling on a day-to-day basis, managing employees or even doing business development.
- It proves the product's worth quickly. A good business with a lousy product is not worth much, so focus on getting a great product first. You can criticize PG's "internet companies don't die from overpopularity" as a business model, but it's correct in practice.
- It tends to maximize the advantages of young founders: motivation, risk-taking ability and fresh analytical approaches.
- It fits with the life investment strategy that says that you take risks for large gains early in life as you build up your earning potential. Sure, young founders are undervalued, but even if they were properly valued they should still go for it.
That said, YC still does some stuff that isn't in that exact mold.
I don't know how many more creative models there can be. The list by sharpshoot above gives a pretty good picture of a wide array of business models. I'm sure there are other ways to make money...but most of the obvious ones (and a few non-obvious ones) are covered by the past YC companies. I don't know anything about the TechStars companies, so I can't speak to that.
auctomatic has a business model - subscriptions
weebly could have a business model - pro features
virtualmin has a business model - charge users
whitenoise networks - charge bands & managers
View 3 - licensing
Buxfer - subcriptions/pro features
Justin.tv - build userbase & eyeballs - advertising (traditional tv model)
And going back into previous YC groups:
Wufoo - upsells to larger accounts
TextPayMe - Something to do with Amazon, apparently. (But even if that's a misunderstanding, they can take a cut of all transfers.)
Inkling - Charge businesses
Loopt - Partnerships ("I know where you at!")
But there are a number of YC companies for whom ads will be a significant portion of revenue. Up-selling to premium services can be a challenging business. We (Virtualmin) basically are in the up-selling to premium services business, as well, because we have millions of users of our Open Source software and currently only hundreds of paying users. It's not as hard as I'd feared it might be, however...if there's a compelling value in the upgrade, it's a no-brainer for anyone that uses the product to make money. Anytime buying a product for a few bucks can make your job easier and your customers happier, it's a win, and most successful business people know that. Upselling individuals is much harder--they value their time differently.
So, I believe free-to-premium works great for business-oriented services and products, and not so much for consumer-oriented businesses. I'd be curious to know how much flickr was making on its premium service before the acquisition, as it's one of the "knock out" success stories for the free-to-premium model, but I wonder if they were actually making enough to make payroll and sustain growth.