To advertise or not to advertise

This recent NYTimes article is worth a read and sparked some thoughts.

With the market tanking, the pendulum for consumer internet space monetization, which has largely relied on advertising as their primary business model, is quickly swinging the other way – to direct user charging methods such as subscriptions or virtual goods. I think this is a good, necessary, and inevitable outcome. While I wholeheardly still believe broadly in the internet advertising model, I think too much emphasis had been placed on this single form of monetization at the expense of billions of dollars of venture capital, private equity, and public offerings which funded money losing businesses for years.

The biggest problem I foresee though is that many consumers’ expectation have now been set – that people believe that internet services should be free. The last decade of internet companies has established this precedence and this will not go away easily or quickly. I personally think of one of the most widely used and under-monetized applications on the web – free online email accounts. This is a prime example of a product that created tremendous value but was not able to capture value.

The issue becomes pronounced for entrepreneurs when many newly established companies emerge without the benefit of huge and multiple venture capital rounds willing to keep funding money losing businesses. So, what should entrepreneurs do when they are faced with the situation of a) needing to generate revenue quickly because there is less funding available but b) having to compete with so many free services that already exist which may eventually die away but are still plugging along in a desperate race to the bottom.

While I don’t promise to have the answer, here is how I’ve been thinking about the problem and what kinds of business I’ve been looking at recently.

  1. Look at markets whose customers have been used to paying in the past such as marketing services, gaming, enterprise, SMB, etc. – generally originating from non-internet based roots.
  2. Think about niche audiences from a monetization perspective but build the platform for wider application to make investors believe in the ultimate size of the opportunity.
  3. Timing is everything – be thoughful not only about why your business is right but why NOW is the right time for it.
  4. Focus on product. Great products overcome the odds.
  5. Live and breathe metrics. The two most important for many of the businesses I look at are the balance of a) customer acquisition cost and b) lifetime value of the customer. Make sure your funding aligns with this ramp.

While most business I see now have multiple revenue streams, many are knee-jerk reactions to the market and haven’t really been thought through to see if they are realistic and viable. Do your homework and don’t force fit a model that doesn’t work. But opportunity is ripe and I do believe the next couple of years will be a wonderful time of innovation around business models.