Are VCs Turning Their Backs on Pure Ad-Based Revenue Models?

Are VCs turning their backs on companies that present a pure advertising-based revenue model? In response to my last post, someone left this comment:

"....We raised our first round about a year ago and are now talking to potential investors about another round. After 10+ investor meetings over the past month, mainly east coast, it seems there is also a transition on the investor side away from advertising-based revenue models, and even in some cases away from freemium models. Much more than I saw even a year ago. Is that accurate in general or is my sample size too small? If it is accurate, a post from your perspective about the reasons behind it would likely be welcomed by many. From my much more limited perspective, it does seem like there is a saturation of companies offering candy, and not enough selling medicine."

I totally agree that there is still a saturation of companies with a pure advertising-based revenue model. The number of companies that have popped up trying to dominate a niche and then trying to build a $100m business around it seems endless. Pick it - we see sports related web sites, ones around pets, etc. Unfortunately, it goes on and on. Many of the features they offer are already covered by other sites. And some of them get funding mostly by angel investors though.

Negagtively impacting some of these models is that ad spending growth continues to slow down. The ad models that have the best chance of success is when the spend is connected to a measurable ROI (results include new sales, a new sales lead, etc.)

So for our firm, ads are ok, but we like to see a model with other potential revenue streams as well. What is the backup plan if the ad model doesn't work out?

Btw, there are a lot of other VCs talking about this right now and they go into it a lot deeper so hopefully this helps as well. Here is one that shares my opinion and another.

Comments

[Ruth]

I recently came across your blog and have been reading along. I thought I would leave my first comment. I don't know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.

Ruth

http://ramupgrade.info

[Robert]

What if you had a national branded product that you could cross market thru internet promotions feeding it into a call center for immeadiate contact to close with an ROI around 60%.... I have this model looking for some input on the internet promotions and call center... Any suggestions.

[Brian]

Jason, frankly advertising only models scare me. I recently read about some internal unloading of stock at facebook so the early-onners could get some cash out and wouldn't be pressuring the company to a deal or ipo prematurely. The effective valuation that these liquidations were done at were far below the $15B number that has been talked about. To me this means that strictly ad supported sites are on shaky ground if they don't evolve to create true value to the consumer. I think we will see an evolution of the online ad in the future and the true value of social media will be tied to value based interaction. By this I mean there is no dollar value associated with reading news or content on a site or friending other users on a social network. These are examples of non-value based interactions. You just hope that people will respond to advertising around these activities or that a bigger company can use your audience. Startups that evolve toward a "value producing activity" i.e. buying concert tickets, or paying for fitness classes, or reserving restaurant tables or activities where users are already in the buying mode and money is changing hands is a critical point to add valuable service for a nominal fee to connect an offline experience with an online enhancement. You can bundle services that are useful and currently are extremely low-tech offline brick and mortar user experiences that could highly benefit from gentrification via web 2.0 practices. And then if you happen to throw a couple ads in there and make some money on ads on top of that...why not?

[Joe]

VC dollars will go wherever the most opportunity for ROI is. If majority of companies turned in to premium based revenue models, they would not be able to stay afloat because majority of internet users are not going to pay for anything. This has been a trend that has been building since the napster days. There is a delicate balance of premium sites vs. free sites. There will never so many of one as to dissolve the other. Look here better ideas of how to make a killer revenue model... www.readtheanswer.com/index.php?RTA=web2

[Dean Bundschu]

Jason:

I also seem to remember you saying that we were about to see another Internet bubble...in fact one of the other VC blogs you point to in this article mentions that. You all need to take a look at history...we are nowhere near a Internet bubble. here is a great point make by Marc Andreessen (Netscape/Ning):

He's constantly annoyed at people who say 2007 is another Internet bubble. His key point: As of early 2007, no Web 2.0 companies had gone public. In a bubble, hundreds of companies go public, get astronomically high valuations, and soon after turn out to be worth nothing. Like anything else, Marc has studied this. "If you look at all the bubbles of the last 500 years, very few are not associated with public stocks because they are mass psychologies, not just insiders getting lathered up."

I do agree with the basic point of the article...you should not 100% rely on website advertising. Sites should focus on providing a true service. But old media is dying and advertisers do need a new place to go.

Thanks to a growing population of Internet users who rely on the web for entertainment, information, and even personal interaction, online advertising continues expansive growth. Advertisers have also taken advantage of the ‘niched’ nature of websites, which have very specific content and highly targeted readership. This allows them to direct advertising efforts to market segments that are most likely to be interested in their products and services, which provides a much more efficient strategy than making placements in mass media.

Just wanted to point out that there are two-sides to every story...my opinion is that the online advertising market is just starting to take-off. The sites that build a strong user-base will do very well once the economy begins to pick back up.

Your buddy,

Dean

[Scott Burkett]

I agree, Jason.

Personally, I would never invest in a pure advertising-based model, irrespective of the market. Why? Single point of failure. Ad market goes down, so likely does the ship.

Diversify or die when it comes to revenue streams. Consider ad revenues gravy, not the main course.

Cheers.
Scott