Social networking, bookmarking, "eyeballs" -- those buzzwords are so 2008. Now, according to some VCs, unless you come with a specific plan for dollar-making, such words will not get your startup off the ground in 2009. That's right, if you're a startup looking to make it in the Web 2.0 space this year, you may actually need (gasp!) a business model.
The New York Times this weekend published a story declaring that, with the recession and all, the "Web 2.0 heyday" is over and startups will no longer be able to receive VC money on the premise that their free Website would eventually make money from advertising. Rather, says the Times, Silicon Valley investors are looking for sites that intend to make money off of concrete sales, such as subscriptions or virtual goods.
Shock and awe. Are the people of the Web admitting that ad-supported everything does not work? What's next? An acceptance of the fact that we've exceeded our quota for Websites promoting narcissism?
In an interview in November '08 (the good old days), Jeff Clavier, founder and managing partner of SoftTech VC , told Internet Evolution that he's changed his method for funding companies. "Years ago my goal was to deliver a company that had a product, team, traction -- but revenue model, business model? Eh, you know, whatever."
In 2009, however, says Clavier, any startup he funds will have to have three years of runway.
"You need three years to put your product on the market, get your product where you want it to be in terms of customer satisfaction and value, figure out your business model, implement your business model, prove your business model, and spend six months eventually fundraising," he says.
"Companies which have a business model will be much easier to fund than media companies, where they're going to get a bunch of traffic, eyeballs, engagement factors, going to grow that audience, and then and only then, once you have a million users or two, figure out how to make money."
Looking back, says Clavier, the largest chunk of Web 2.0 over-investment has gone into video, social sites, gaming, and bookmarking sites -- and these types of startups will have the hardest time getting funded and staying afloat going forward.
"There's the whole slew of social this, bookmark that... all those things which took existing ideas from important brands and said 'I'm going to reduce the market, focus on a demographic, do a couple of feature twists, and launch something.' The problem is this is not enough, so I expect a lot of those will just be wiped out."
So how should startups, previously working under the if you build it, they will come, and then you'll magically make some money pretense, that has built the bubble we now call Web 2.0, operate in 2009?
"Be smart. Cash is blood, so every drop matters. If you can raise a bit more money then do, because runway is the most important thing," says Clavier. "It's time to trade off hypergrowth or growth for figuring out a business model. It's good to make money."
I also feel that so so so many startups have been scrutinzed about revenue/profits before they've had a chance to mature. An easy oversight and a very obvious few are youtube and facebook - behemoths!! and they've yet to mature..and quite frankly I haven't seen anything like..and that is a very safe statement for EVERYONE. I'm a few clicks away from barring classmates.com's email notifications already.
Obviously at the end of the day, it still comes down to business..needs/benefit/service/product, and stacking a surplus of cha-ching.
I still firmly believe the start ups will have the ball far as dictating how funds will be disbursed via vision and the market atomospheric changes that are driven by these start ups.. not necessarily the VCs. I only hope that the VCs are able to incubate the deserving start ups with focus on tomorrow's dollars versus here and now. (which is so darn present and yesterday at the current accelerating pace of change).
Paul, My ideal situation would not be a world recession, the likes of which we haven't seen since 1931. Inovation will never be hindered by lack of funding. In fact bad times can spur creativity. The Internet does not have to solely depend on VC money, there are othr sources of funding, private equity, angel money, IPO investing, partnerships, and more conventional means...banking.
That said, the impact on the Internet on a broad scale seems obvious. Fewer dollars, fewer products brought to market. Inovation will always be there, funding may not.
One of the trickiest aspects to VC funding this year will be accurately nailing market demand. With spending cut so severely, startups are going to need a good eye for what folk will spend on innovations of any kind.
I'm not saying that there are no smoldering ashes, sorry if i wasn't clear enough. I was just trying to interprete your statement to mean that smoldering ashes comes from funding bad internet ideas. I may have interpreted it wrongly though and would be glad to hear from you what you were refering to in that statement.
So you will prefer the ideal situation of having a couple of spectacular innovations and not the mushrooming of recycled bad ideas? How does this though impact internet innovation on a brad scale???
Paul you got to lend me your rose colored glasses for just one day. "There are no smoldering ashes", really? First, do you have any idea how high the percentage of VC's money turns into just that, ASHES, or at best a capital gains write off?
VC's look over 100 business plans for ever 1 they finance. The average success rate is less than 10%. The average VC intial invstment is $3 million+. To me that seems like a lot of ashes can be produced from all that money going up in smoke.
Furthermore, Do you know how many Internet IPO's went public in 2008? Total 0, Zip, zilch, not a one Internet related IPO came to fruition in a US major market. First time in modern Web era. The slow down is obvious in 2008. Dire predictions coninue for 2009 according to the NVCA, (Nat'l Venture Capital).
So it's safe to assume that VC money is getting smarter and more selective then ever. This could produce a couple of extremely spectacular inovations and not so many recycled ideas.
"But out of the smoldering ashes of fiscal discourse........blooms the next flower on the Internet"
I pretty much enjoyed the above statement and would like to follow up the discussion from that. I know these are grim times for all of us but how does the new measures by VCs affects internet innovation? It is true as you said that good money chasing bad ideas is a recipe for disaster but as also mentioned in the statement above, how do we get the next flower on the internet when there are no smoldering ashes??
It's true that many have recycle bad internet ideas and have come up with very good ideas that thrive successfully. In going after the so called bad ideas, does this not also affect seemingly good looking ideas by killing them in the bud?? We all could agree that the internet thrives on innovation, so should we see a slow down in this front as a result of this drop in VC funding???
I agree to your point about having a good Business Model in the coming years especially in the domain of online businesses. There is also a raising trend of measuring ROI in social media. Connie Bensen's blog that talks a lot about this stuff.
I'm not sure I catch your meaning, Terry. I absolutely agree that people need to do solid due diligence, I just think they need to think about the arbitrage a little better. If they are expecting an average 20x outcome, than they can fund 18 losers and still make a profit on their investment. They won't get instantly rich, but I think there is a big open space for people to come in and fund mid-tier risks and treat it more like a business than like a gamble, particularly when you can link those companies up.
Startups are so strapped for cash that this is an oppurtunity to make even more of those bets, cheaper, which means long-term profits.
Three years of runway may not be realistic for a lot of companies, but there at least has to be a happy medium between that and what's been going on. I agree with you, Terry, re: due diligence. I also think (hope?) this will essentially weed out the weak companies, of which there are plenty. This is generally the upside of a recession.
However, it does sort of sound again like nobody knows what they're talking about. According to the NYTimes, now VCs are banking on companies who, for example, sell virtual goods. Isn't this yet another buzz-model? Is everyone going to rush to fund a bunch of new Web 2.0 companies banking on this virtual goods model?
Thomas Tusser qouted back in the 16th century, "A fool and his money are soon parted." That includes the VC capital. But out of the smoldering ashes of fiscal discourse........blooms the next flower on the Internet. Good money chasing bad ideas, is a recipe for disaster. However, smart money investing in great inovation leads the Inernet Evolution.
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