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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.

David Cohen
(@davidcohen) Founder & Managing Partner of Techstars, previously founder of several technology companies. David is an active startup advocate, advisor, board member, and technology advisor who comments on these topics on his blog at DavidGCohen.com

  • What a great post. This is not something we’ve been “struggling with”, but it’s certainly something we’ve talked about and considered. While everything for us at Georneys is “pie in the sky” right now, it seems clear that the goal while building the company/service should be all about the number of users, rather than selling out at some point. If you don’t build a large user base, nobody’s going to want to acquire your company in the first place (for the most part). My personal opinion is that the company/service should be started to fill a need, not to get rich. If getting a fair amount of money from the trip is in the cards, that just makes it more fun. I’m all for both, of course. But if your company is raking in the users and the dough on its own, and nobody offers to acquire it, are you missing out? I wouldn’t think so – but my tune may change over time :).

  • Dan

    What about the affiliate marketing business model? In this model, you are getting paid a commission to drive sales for other companies. I don’t see this as selling software or advertising. It’s really performance marketing (ie, direct marketing) — very different from advertising.

  • Jim

    Its not to hard to get metrics on how much a particular type of content makes on an effective CPM (cost per thousand) or RPM (revenue per thousand). Look at a lot of sites and ideas on sitepoint.com for sale. That is where a lot sites and simple user services end up and you can see revenue and traffic. Many people run profitable websites based on adsense, affiliate ads, text links, etc. Its just a matter of what your costs are and keeping them low because if a service or site does have some sort of appeal or at least a model for traffic arbitrage there is money to be made. I think the problem is too many people are thinking techcrunch and not site point or other web business market places where business get 5-500k valuations and exits every day. Too many web startups are WAY overfunded and shooting for a long/long/long shot google/yahoo/msft buyout. Its more reasonable sometimes to build something that makes you a nice living a la Dave Taylor then swinging for the fences and needing a home run to even come out even. I think people on Dave’s side of the fence are much more successful on average because they are internet marketers and build their services and sites around an idea that is known to make money if you get traffic.

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