On too much money

Fred Wilson says there has been too much money in VC and I agree with him. The truth is that there have been no grand slam businesses in the last generation of web companies. None have worked out a business model and become standalone, profitable businesses in the same way Amazon, eBay, Yahoo, Google and PayPal did in the previous generation. And between those there have only been two business model innovations: online auctions (eBay) and search marketing (Overture/Yahoo/Google).

The reason is that there has been no business model innovation in this generation is that there has been no pressure to come up with one. Companies which had built a large userbase would always be able to raise more capital, removing any pressure to come up with a reliable revenue stream. It is possible that the glut of VC money sustaining unprofitable businesses has actually retarded the growth of innovative business models.

However now there is reason to think this is changing. A severe recession increases the pressure to innovate your way to a reliable revenue stream rather than a cool new feature. The value of companies with such innovation will rise relative to companies with many eyeballs and no money. The collapse of CPM rates underlines the diminishing value of traffic.

Traffic is still important but it needs much better ways of being converted into cash. There is a theory that in the Internet age nobody will pay for anything any more. I disagree. If you create something valuable people will pay. And now the money is drying up we’ll have no choice but to work out what that is.

Pic:  Cobalt123