
Techstars mentor critical of business models' of Techstars companies - sharpshoot
http://www.intuitive.com/blog/memo_to_entrepreneurs_advertising_not_strong_business.html
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sethjohn
$12 billion was spent in online advertsing in 2006...Google has built their
business almost entirely on advertising...Online advertising $ is skyrocketing
while TV and print are stagnant.

Advertising is a perfectly legitimate business model.

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bilbo0s
What?

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.

~~~
sethjohn
Agreed, building an advertising-supported startup is complicated...as starting
any company would be. Advertising is VIABLE business model, but this certainly
doesn't mean it will always work. Many startups will rely on advertising and
many will fail, but that doesn't mean that they would have succeeded if they
tried a different business model.

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.

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tyohn
According to Techstars and Ycombinator; they pick startups because they like
the founders not necessarily the business model but; I've looked at some of
the startups that have received funding and I know I'm not a zillionare but
they seem to have very questionable income models. If you take advertising out
of the equation, I'd guess many of them don't have an income model.

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.

~~~
zach
I know it seems like poor business, but I think it's well-suited to young
entrepreneurs:

\- 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.

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sharpshoot
xobni - has a business model - charge users,

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)

~~~
SwellJoe
Octopart - Order aggregation, take a cut (or sell company to highest bidder
and move on...rumor has it this may have already happened).

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.

~~~
keiretsu
freemium models ain't that great. i read somewhere, i think it was that
vitaminxxx site by the dropsend founder, that the average % of premium
subscribers is a pathetic 2%.

~~~
sbraford
think it's even less than that =)

