Watching financial news these days makes me feel I am in a Poseidon-like adventure film. Markets crash and burn, long-established institutions go out of business, gloom and doom is served with every newscast, and TV pundits advise people to take money out of stocks if they are going to need it in the next 5 years.
However if you are on Twitter and following any ‘weblebrities’, you would think you are on a different planet. Most are upbeat and optimistic. Until the last few days, when the mood has turned distinctly for the sombre. The carnage on Wall Street is now firmly on the High Street, the Main Street, Mayfair and Sandhill Road.
That cradle of innovation, Silicon Valley, is worried about how the global credit crunch will affect them. Although some VCs are still investing, the IPO window seems to have firmly shut as exits no longer make sense and indeed there is no liquidity in the markets to fund them. Small businesses, over at this side of the pond, are facing sudden and sharp hikes in their overdraft interest rates, which will make life hard for many.
So would any start-ups and small businesses survive?
It is difficult to answer that in an unequivocal ‘yes’, but some will. They will be the ones who have a sustainable monetisation model, i.e. a business model that is about making real, hard cash.
Survival may be easier for a small niche business, focused on, say, tailoring services, than it may be for a Web 2.0 firm with lots of VC money but no clear monetisation model. The demand for the former’s services may remain steady or even grow, because she can diversify quickly into updating or repairing services. Fashionistas, including those on a budget, swear by a good seamstress! Others may find use for extending the life of the contents of their wardrobe. The latter however need a serious look at their business.
Many Web 2.0 start-ups are focused on building communities of users, to which advertising can be served. Ergo, advertising is the business model. But when times are hard, advertising spends are cut. People also change how they spend, making advertising possibly less effective a tool than consumer promotions. Is advertising a sustainable business model? The opinion is divided. Some feel the model is doomed to fail; others think that if people cannot afford expensive entertainment, they may well get online and shop.
As a participant-observer, Facebook, Twitter, Tumblr etc all intrigue me. Mainly because I can’t see how they are making money at all. LinkedIn is an exception but it is not a consumer business, although it is a networking and community driven business. WordPress.com and other blogging enablers are also different.
LinkedIn has several revenue streams. It has a tiered, priced membership model for individuals, and it has a corporate offering. Paid services are available to corporate recruiters, and sometimes entire relevant sections of LinkedIn’s Answers service are sponsored by well-chosen companies. There is also a store for buying LinkedIn-branded kit and why not? The last one is a trick that all the consumer-centric businesses mentioned below are missing!
WordPress.com, the free hosted blogging service, makes money from advanced personalisation features such as URL mapping, CSS customisation, and additional space. I am certain their hosting relationships make them some money too.
What about the rest?
I can see advertisements on Facebook, which are never for anything I may be remotely interested in. There are also those ‘limited edition’, $1 a pop, virtual presents such as a Martini or a slice of cake, which I am sure someone buys for their friends. Tumblr is giving me, and many others, free server space for posting our musings in a semi-interactive, walled-garden sort of way. Now it has clone-like competitors such as Posterous and Publr.
Does anybody have an idea how Twitter may monetise? I can’t see one but then may be, I am just not ‘wrapping my head around’ well enough.
Fred Wilson, one of the investors in Twitter, was recently asked how these companies may make money. This is what he said:
“The No. 1 question I get about Twitter is, how do you monetize it? I think Twitter is no different from other user-generated content, like Flickr, YouTube, Del.icio.us, Blogger, WordPress, TypePad. Millions of people are creating content, and tens of millions are consuming that content on the Web. Those businesses are good businesses. And they make money in different ways.
People who can’t wrap their heads around trying to monetize these businesses aren’t trying that hard. It would be naive to assume that the management teams of Twitter or FriendFeed or Disqus don’t have four or five strategies for monetization in their business plans that they are evaluating. Just because people aren’t currently executing a business model doesn’t mean they don’t have two or three they are ready to turn on at the right moment.”
I think that right moment may be now. Or never. It depends on whether a business wishes to survive.
Related reading:
Fred Wilson on What To Look For Next
Pages 15 to 23 of Snowball, by Alice Schroeder (Warren Buffett’s speech to Silicon Valley VCs at Sun Valley ’99)