Monday, January 22, 2007

Show me the Money..

Loads of analysis have been done by various experts over this - is the bubble returnin'? I am no expert, but since Web 2.0, there have been an upright increase in the number of services offered, most of them(if not all) based on Web 2.0. Well, its always great to have a plethora of services to choose from, but what sets a disconcerting pattern is that most of these companies don't have a business model to fall upon, i.e. no blueprint of how the revenue is going to be generated. Blogs (such as mine) are being written in huge numbers around the world, which try and keep track of the services being offered. What is notable here is that, these jazzy services are being offered for free. Further, its not that the innovators just launch these services of their own. They need the apparatus, say the high end systems, storage et al. They also need manpower to build these complicated and incredible systems, and more manpower which is required for their maintenance. But how do you afford such expenses - The answer comes from the investors. With a couple of laptops, a plan in mind and a prototype with a topping of brainvita, and voila.. they 'show you the money'.

Story goes on, the application is developed and given away for free. All's well, but then the investors soon start feeling the pinch, they want their money back and everything slowly starts going for a toss!

Of late, BitPass, a startup that gave people a way to make micropayments online died, although it took two rounds of funding and was able to generate $11.75 million. Another one, Endforce was sold to Sophos for a loss last week. The list goes on..

A couple of PhD aspirants from Stanford along with their faculty did pretty much the same. What started as an inquisitive project slowly was becoming a huge one. Soon they had to find their investors, and they did in Sequoia Capital and Kleiner Perkins. Rest is history..

Anyways, what are the options one has when a startup needs to 'show the money' -

1. Still keep offering services for free - parallely try and devise a revenue model. Well currently it seems there isn't one apart from clicks-per-ad. Although this model was already there before Google came into being, but it really became the 'master model' when they built on top of it by giving more value to the advertisers. They still offer their search for free, and the revenues generated from the ads alone are so huge that now its not just the search, but a whole lot of other services that they have started to offer.

2. Initial Public Offering - Not all startups can have their IPO at $85, which is why the IPO isn't the 'all so easy' option for generating money. The reason it worked for Google, was the incredible revenue it had generated before the IPO itself.

3. Get Sold - Well, this is probably the most lucrative option for them. Flickr, developed by Ludicorp, a vancouver based company is one of the most prominent example. But then, Flickr was one of the earliest Web 2.0 applications, and again for free. Moreover, not a lot of such applications had come by then, and in the age of social networking the 'first' of its kind had to work. The key here is to do it first, and do it really well. Since then there have been quite a few in the same genre, but none other than Riya, have been able to create any news. Riya again worked probably because of its unique service. I mean it is quite cool, to just enter your name and a pic of yours pops up from nowhere. Moreover, it was not just taggin' in Web 2.0. What really goes in Riya's favor is the use of some core concepts of Computer Science(read Image and Pattern Recognition) - that gels really well with their jazzy concept.

Of late, I commented about quite a few of startups offering services like virtual trading of words, to social networking, free news, et al.. But the question always pops up - for how long can they sustain? In this age of mashups, how long can they live? Three things come to my mind -

1. either be the first one to do the job
2. be the second one. but it has to be significantly better thant the first one
3. be the third one, but u've got to be a forceful established player so that you get noticed

No one probably knows the answer. Such was the case during the 'Great bubble' period as well. Dotcoms were everywhere. Everyone was creating loads of free dotcoms and Silicon Valley was 'the' buzzword. We know what happened thereafter. Pundits say that since then, both the investors and the creators have wisened. But then off late, I somehow feel that its all happening again. Dion HinchCliffe, a Technology writer, tries to devise this model on Monetizing Web 2.0. Read more here..Well, if you can figure it out, here it is represented in a schematic form.

Meanwhile, keep sending in your comments on the same. The quest goes on..
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1 comment:

amol said...

There is nothing unusual about this.... it is a cycle and would keep coming back. Despite so many recessions etc we still only look at its timing and really we cannot avoid it and perhaps with these latest technologies delay it... but more than that there is little scope.

After a setback, the economy starts picking up slowly and then gears up, which is then followed by additional capacities being set up in anticipation of future growth.....then as economy picks up, prices increase and after a point people cannot pay and stop buying.. this leads to slowdown.. huge capacities become idle and we have a recession.....

Similarly, it is the case of internet. Whether you call it web 1.0, web 2.0 or web 2.2 does not matter.. These is simply namegaming nothing else.

The point is internet has now become a very important part and it is very difficult to do away with it. The evolution of business models would keep happening and few would succeed rest would either have to reorganise or shut shops.