Advertising Can't Be Your Only Business Model

There have been a handful of news articles recently talking about how the advertising market cannot support all the startups going after that space. This brings me to something that I've always felt about startups and advertising - Adversiting Can't Be Your Only Business Model.

I know this is somewhat controversial among venture capitalists. Some VCs believe that advertising is a great business model. Others don't. If you look at a company like Google, you'll find a company who is in the business of delivering ads as a middleman. This is not the business model that I am referring to. Google's business will wax and wane as advertising dollars do, but it will always be in the business of connecting advertisers with portals for advertising.

In contrast to Google, you've got thousands of startups whose business model is based on advertising, page clicks, page impressions, etc. These are the companies who in my opinion have dubious business models.

There is only one reason that advertisers pay money to advertise - BECAUSE IT DRIVES COMMERCE. If it did not increase commerce, then that company would not pay for its advertising. In the business world, page views and eyeballs are only important if they can be translated into dollars.

Thus, I advise all companies that I am involved with that your business model should do something to drive commerce. If it doesn't, then it really is not going to be that valuable. If you can get X million page views, it is only worth something to another company because it could translate into big dollars. Why not figure out a way to get those dollars directly?

For those of you who are starting that next web startup, try incorporating some direct commerce to earn some steady revenue that is independent of the advertising market.

Comments

[Joe Suh]

Great post James. Googlers refer to social networks as a "CPM wasteland." I remember an analogy you gave me that I've held onto for a while - about trying to fill Central Park with a concert, and then trying to monetize the venue with an advertising blimp flying overhead. Not a great business model...