We’ve got 6 or 7 (depending upon how you count them) would-be consumer internet companies at TechStars this summer. Some will morph and become something else, so who knows what the final count will be. The others are making on-demand applications for businesses. The latter often get made fun of by the former. I defend the B2B guys, of course, having come mostly from that ilk.
With the consumer web startups, most of them started the summer thinking about advertising (selling, hosting, or building inventory) as their business model. And they got called out on it, perhaps correctly, right away. Especially those for whom this was a default answer more than a real answer. Then again, perhaps some of them were thinking about the 16 billion dollars spent for online advertising last year. That money is going somewhere.
Now before we get too deep into the whole business model discussion, let me be clear. By this, I mean simply “how they will make money.”
In week one at TechStars, Brad Feld explained that there really are no new business models on the internet. He cited “advertising” and “getting paid for your software one way or another” as the only business models that have ever existed on the internet, and the only ones that ever will. Keep in mind that we’re talking here about companies that have only internet based products, not those that really sell “goods” via e-commerce or simply exist to extend their brand onto the Internet.
A few hands went up to ask about the fact that many companies that don’t have “business models” (and/or have never made much money) have recently been acquired. Just build something people will like, and you’re all set, right? The rest will take care of itself. I suppose – but you had better build something people love instead. Either lots and lots of people, or at least one acquisition hungry company.
After being pressed on this some in the past, I now like to say that you better build something people will love and flock to in droves, or you had better build something people will pay for. It’s best if you can do both, of course.
It’s completely possible that some of these startups will build something really compelling, never make any money beyond a trickle of advertising dollars, and yet still have a successful exit in a strategic acquisition.
But I’m not counting on it. Hopefully, neither are they.
While “attempted acquisition” technically fits my description of a business model (“make money”), the problems with this approach are apparent. First, people are overly influenced by a combination of The Law of Truly Large Numbers and the massive publicity associated with notable exits that match their ideal scenario. Put another way, you are in reality much more likely to actually be acquired if you are building value (i.e. “making money”) because it’s simpler math for a larger company with a strategic stake in what you’re doing. As nice as it looks, in the universe of exits viewed one at a time, YouTube is statistically insignificant.
So, maybe you could argue that “attempted acquisition” is a business model, especially if you understand the risks. It’s not an impossible feat, certainly. I have friends and acquaintances that have done it with enormous success. But almost none of them set out with this plan and instead were just trying to make something hugely popular. And they did it. But armies of entrepreneurs who you’ve never heard of and some you have, many of whom are just as smart as you, tried and failed.
So no, acquisition isn’t a sensible business model. More accurately, it’s a wish.