If there was one message delivered from the venture capital pulpit recently (aka Sequoia, Ron Conway, et al), it’s that if you don’t have a business model, you’re cooked.
Gone are the days when you could start, grow and finance a business based on the notion that if we build it, they (consumers and advertisers) will come…and then somewhere along the way we – just as Google did – will find a viable business model to make it work.
That concept is as dead as the Detroit Lions’ playoff hopes.
What’s amazing is the “Hey Mom, no business model” model was allowed to exist. You would think after the dot-com boom went bust that entrepreneurs and investors would have a better focus on fundamentals such as, say, how to generate revenue.
Not to pull a Robert Scoble and suddenly go doom and gloom but maybe we got suckered again. All the lessons learned seven or eight years about crazy schemes, companies raising lots of capital without a plan on how to sell stuff, and the hype/euphoria surrounding the Web’s Next, Great growth phase was mostly forgotten.
Instead, tons of venture capital has been poured into companies that have little, if no, the chance of finding a business model. And even if they did discover one, many of them don’t have a business that’s ever going to be viable.
Not to pick on Seesmic but how did it raise $6-million a few months ago? It doesn’t have a business model and there doesn’t appear to be a strong demand for its video comment service. Sure, it’s seeing more videos made but that’s not a business.
In many ways, Seesmic illustrates the ugly side of the Web 2.0 landscape – and there are a lot of Seesmic-like startups out there that have been financed because it was perhaps a cool, new idea, it had an engaging entrepreneur or someone believed it was a potential acquisition target as the online giants looked for services to differentiate themselves.
Today, the business model is back in vogue. Without a way to make money, startups will have a difficult time getting financed. And startups who don’t have a business model right now better find one soon, which explains why many of them are slashing costs to give themselves more time to find a viable way to make revenue.
This includes Twitter, which has rumbled along attracting lots of users but, amazingly, still has no way to make money. I mean, they haven’t introduced a simple concept as advertising yet. That’s just dumb but this kind of behavior won’t exist for long. (Note: I stand corrected. Twitter launched advertising in Japan last year. I wonder why it hasn’t been expanded into other places.)
More: BusinessWeek has a good column on what the financing crisis really means for venture capital. As well, Rafe Needleman put together a list of 11 “troubled” companies, including Twitter, Zillow, Pandora and DailyMotion. That said, I would argue his inclusion of Skype, MySpace, and Second Life is puzzling given their large revenue-generating businesses.
Finally, a new study suggests VCs are – surprise, surprise – less confident these days. You don’t need a study to recognize that!