blog.tonyconfrey.net

The obvious big question, for me, with the start-up route is the potential for payback. To try to get a better sense I’ve read a number of articles on the business models and funding plans for web companies. The ‘Monetizing’ question also came up at a Mobile Monday on social networking sites recently, (with no great answers from the panel, IMO). It seems that there are a lot of people groping around for answers on (or ignoring the question of) how to make money developing web apps, but not a lot of hard data or firm opinions. Here are a few of the pointers to information sources that I came across (I use the word ‘information’ lightly).

• Commercializing-Web-2-0-Hype-vs-Reality : Its a year old but the post remains valid. Dharmesh Shah takes a critical look at the statements that are thrown around claiming Web 2.0 is the best thing since sliced bread.
• joelonsoftware : A quick run down of the popular ‘business models’ for making money with web apps.
• Folknology : A quick run down on the lack of models for making money with web apps!
• O’Reilly : Even O’Reilly’s excellent and highly referenced Web 2.0 article (with Business Models in the title) doesn’t seem to talk about how to make money
• Web-2-0-Crashes-Another-Startup-Being-Sold-On-eBay : Seems the last resort is to sell the whole thing on eBay. [Note, a data point here - 3000 hits a day was netting them $1!].

So to summarize how I read these and other sources:

• Advertising - Yes, Adsense and Amazon referrals can generate some revenue, but you need a *lot* of page views and a lot of click thrus. Extrapolating wildly from the HuckaBuck data point (and corroborated by some conversations at MoMo), it seems like you need a few million hits a day and/or a finely targeted site, to generate any kind of reasonable revenue, even for a small team.
• Freemium/Subscription - Free for the individual, with premium or corporate subscription priced versions. Folks like 37-Signals seem to be somewhat successful at this and LinkedIn does it, but I don’t see a lot of successful examples.
• Revenue Sharing - The Ebay model - bring a transaction together and take a small cut. I like this one because you only charge people when you provide value, and it scales nicely. OTOH I don’t see many examples of this one either, especially amongst the smaller players.
• Buyout - This is the big non-advertising model that everyone hangs their hat on. Its hard for a small player to gain enough traction to make money in the everythings-free web 2.0 world, but there are lots of big guys out there racing each other to capture marketplaces and mind-share. If you build something good surely someone will buy you for lots of money.

Since this latter model is where most focus as their endgame, and since for any given idea I can see how I could guesstimate the probability of success with the other models (and since my wife Nancy is most skeptical of this one) I wanted to try to get a bit more quantitative. There’s a lot of information out there on acquisitions. In particular buyouts by the big three - Google, Yahoo and Microsoft - always make news. Wikipedia has entries listing known details of all transactions (ex List_of_Google_acquisitions, but I also found a neat little site which shows them in a time line. Check out - g-y-m.htm .

Here’s a grab bag of purchases from across the web app spectrum:

• Zimbra - Office suite bought by Yahoo for $350M on 9/17/07. Zimbra released on 10/05, first blog post 8/05, development began ~1/04 (there’s a reference to “almost two years”, in a 9/05 blog post).
• Feedburner - RSS aggregator bought by Google for $100M on 6/07. Feedburner launched on 2/04, started maybe 6 months earlier.
• MyBlogLog - Blog plugin tool bought by Yahoo for $10M on 1/07. MBlogLog. Launched 3/05, started 3/04
• YouTube - Social video sharing site bought by Google for $1.65B on in 11/06. Launched 2/05.
• JotSpot - Hosted Wiki creation software, bought by Google, 10/06 for 10’s of millions. Founded in 04.
• JumpCut - Online video editing acquired by Yahoo 9/06 for ~$20M. Jumpcut Launched 4/06.
• Writely - Online word processor bought by Google 3/06, price unknown but “many millions”. Writely Launched 9/05, beta 2/05.
• Flikr - Online photo sharing/tagging bought by Yahoo for $40M in 4/05. Flikr Launched 2/04, husband/wife team no VC

OK, so much for the random walk through the data, how about some random observations and conclusions. The best source I know at documenting web startups is TechCrunch. A quick walk thru their archives shows an average of 40 or so new companies discussed every month, this jives with my intuition which was telling me it seems like one a day. Obviously not everyone shows up on TC’s radar, and there are also the TechCrunch40 type events which announce more new startups in a single day than one person can comprehend. But lets go with the assumption of one to two new companies a day on the supply side.
On the demand side Google has been averaging about one acquisition a month for the last few years (google-acquisitions) but ramping up recently. Yahoo and MS are not far behind (see the wikipedia articles, eg Microsoft Acquisitions). These are not all in the web app space, maybe half of them are. So that makes for one to two acquisitions a month. Of course there are a lot of other purchasing players out there - other ISVs like Ebay (Paypal for $1.5B), Adobe (who just announced a Buzzword purchase) etc; the media players (MySpace bought by NewsCorp for $580M, Club Penguin bought by Disney for $700M etc); the big systems integrators; the telcos, etc, etc. So lets double the monthly demand rate to between two and four.
Making yet another enormous leap of quasi-logic we compare the numbers (apples to wingnuts?). One or two new companies announced per day, one or two acquisitions a fortnight - looks like maybe a 10% chance that a web startup will get acquired?

Obviously there are a huge number of other factors to any given companies success, but this analysis makes me personally a bit more confident that if you attract a strong team and build a compelling application thats somewhere in the whitespace that the big players will need to get in to, then you have a fighting chance of seeing some return.

This entry was posted on Monday, October 1st, 2007 at 9:35 pm and is filed under business model. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.