Monetization is hard

Web 2.0 wasn't proclaimed a bubble for any of the criteria that define a speculative bubble. Valuations aren't particularly crazy (few startups have sold or had an IPO), there isn't any "flipping" or speculation, and there aren't many people outside of the industry involved. People saw what was going on and recognized the South Park gnome business plan that dominated the 90s. Startups were sporting spiffy UIs, large userbases, but now, found a way to make money: ads.

Only it wasn't that easy. Take Facebook. In a Motley Fool piece, one fool had this to say:

Since some of the finest marketing minds in the world have tried and largely failed to monetize social networking already, I see many years of losses and negative cash flows ahead for Facebook.

Google was able to monetize search because of the nature of search. If you're looking for information on digital cameras, there's a decent chance you're in the market for a digital camera, so an appropriate ad is shown. Social networks, on the other hand, despite having detailed information about you, aren't complementing their service with ads, but their service is instead competing with ads.

Or take an anonymous startup that's essentially many niche forums. They know what their users are interested in, but there isn't an advertising platform that has relevant, niche products, and a lot of advertisers are only interested in US pageviews. When they turned to adsense as a last resort, they were making $500 a day, but for 50 million page views.

Simply gathering pageviews, even by the millions, isn't enough to turn a reasonable profit. What's worse, what value these startups have isn't in their technology, but in their use. These startups are more apt to see new competitors than an acquisition--becoming devalued is more likely than growing.

My best startup advice

Strange for this to be such an early post in the blog--you'd think epiphanies like this would come later--but it's certainly useful early on.

Solve a problem that affects you.

Look at open source software; the developers are driven by a common problem, not by money (but perhaps recognition).  Define success as making your life easier and gaining experience.  You'll gain more--in both experience and recognition--through the completion of a profitless startup than by abandoning a potentially profitable one.  Yes, a business model is great, but don't focus too much on it.  A business model doesn't define a good idea; it's just a criterion for a potentially profitable idea.

Platform matters

The Facebook application platform didn't do anything particularly new.  Take Scrabulous, a top 10  Facebook app.  Games associated with friends lists are far from new; AOL, ICQ, and others all tried variants of this idea in Bubble 1.0, but none of them were able to bring IM to be more than just messaging.  Even without integration, sending a friend a link to Yahoo Games wasn't a barrier preventing consumers from playing online games.

Importance of platforms is nothing new.  IM took users from email, mp3 took users from CDs, and so on.  What you're doing matters as much as where you're doing it, and certain platforms do a better job facilitating tasks than others.  This isn't to say Facebook is the alpha-platform.  Facebook may be moving into the IM market, they'll undoubtedly see stiff competition from existing services, as well as web services, and while their entry into the email market didn't go unnoticed, "Messages" hardly displaced email.

Presentation is as important as function.  Not only are numerous startups, e.g. Meebo, based entirely on presentation, but superior presentation can quickly displace even a 5-year lead in time to market.

About the title

I owe Valleywag editor Owen Thomas a drink for the blog title.  It's his word (even if he wish he never coined it; I just couldn't think of a better name).

Markets and Audiences

There's a feeling among wantrepreneurs that they need to reach the widest audience possible. They don't have the knowledge to do anything particularly interesting, so they're led to the latest trend (web 2.0) and its business model. The problem with web 2.0 and advertising is that it's a low-margin business, so not surprisingly, there haven't been many IPOs, except notably, Google. Low margin, broad appeal: that's the Google way.

The problem is they're missing whole markets and over-saturating one. Web 2.0 isn't producing Microsofts, Apples, or Ciscos (or even Broadcoms, LSI Logics, or Seagates). That's not to say there aren't startups doing innovative things in limited markets, but the majority are so focused on one segment that they're missing better opportunities.

A coworker told me that the money isn't in the company doing something cool, technically, it's in the company with good sales applying technology to problems outside of Silicon Valley. If broad appeal and the internet was the recipe for profit, how did WebVan fail?