Online advertisements – even VCs wanna fund startups who rely on online advertising (and not premium service)

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It’s expected that by 2011, online advertising will go past the newspaper advertising (see the growing demand-supply difference in online advertising). Surprisingly, VCs too want startups to rely on online advertising (rather than charge customers for any product/service).

First, lets talk about the online advertising market for US.

  • Online advertising will grow by more than 21 per cent per year to reach $62bn in 2011 (while newspaper advertising is expected to total $60bn in 2011)
  • In 2007 the amount of time spent reading newspapers was overtaken by time spent online.
  • Use of media in the workplace increased, however, up 3.2 per cent to 260 hours per employee per year [Source]

Looks like, VCs are also ‘over struck’ by advertising bug and they do expect startups to build their revenue model on the lines of advertising dollars; VCs are far too comfortable with ad-supported startups than startups who charge customers for the service.

Why is that so?Venture capitalists tend to be fans of ad-driven sites since advertising revenue theoretically covers the cost of giving away a Web service free, and free sites attract users much faster than sites that charge money. Such sites are typically also cheap to run because there is often no need for customer-service agents or costs for physical goods. So such companies can have high profit margins if they succeed.

Startups are being penalized for non-online-ad-model.

“If you have a model that is different from the 90% of consumer-Web companies folks are seeing today … it’s difficult to break through that clutter,”…Nonetheless, some entrepreneurs trying to profit from non-online-ad models say they are being penalized for being different. EnjoyMyMedia, which charges people a monthly subscription to post and share family videos, photos and other materials through special online software, has faced some “hard questions” from investors over its business model, says CEO Keith Loris. (source)

To a certain extent, this looks very fair – because:

  • Startups don’t have a big “trusted” brand
    Will you pay for a service you aren’t aware of? Most of the startups face “credibility” issue with their brand. For e.g. lets say, if RotueGuru wants to charge 100 Rs. per detailed driving direction, how comfortable will you be with paying for their service?
  • Transaction based businesses face huge challenge from the biggies. Case in point – Y! Mail used to charge for 25MB premium space and Google gave away all for free. Result? Instant traction. Instant users. And Google’s 1GB storage killed almost all of the mail services that used to charge for storage etc.

I look at the Indian biz models and do feel the same – VCs have funded social networks who have no other revenue model, but to rely on adsense and other advertising networks.

What do you think? Do you see any innovative business model in place? Except for secondlife, where people trade goods/real estate (and real $$s), I see a binary version of revenue model – either free-to-use-and-ad-supported, or pay-for-the-service model.

tags: , revenue model for startups

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