LinkedIn

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LinkedIn, a great site which provides a good service, is a good example of the difficulty of monetizing web traffic.  Should they survive on service fees (mostly from headhunters) or from advertising? I hear that, like most other networking sites, the majority of their revenue comes from advertising.  This fact underscores a really interesting problem.

There are so many cool industries that have popped up from Web 2.0 -- social/professional networking being one of the most exciting.  But like Web 1.0, many of them are simply surviving on the ad model.

What is it that makes these companies say, "hey, we've got this awesome site that millions of people love and are using daily, why don't we take away from the experience by distracting our users with ads?"

I think the answer is that they simply can't come up with anything else.

There are three possible solutions to this problem, I think.

  1. Continue using the ad model (a great short term strategy but in the longer term users will only get better at ignoring the ads; oh, and just as important, the advertisers will simultaneously get better at measuring their effectiveness.)
  2. Use the service-fee model (which, for what it's worth, I happen to think is a great long term strategy but it could never support the ridiculous valuations that LinkedIn and others are chasing.)
  3. Discover a new revenue model.

Until companies can be as creative about monetization as they are about generating traffic, the industry is stuck with 1 and 2.

Raising Capital

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A couple thoughts on raising money.

  1. Venture Capital financing is only done out of desperation. There’s simply no other way to get $1 million plus investments if you’re a private company.
  2. Venture Debt.  Basically this is when an entrepreneur uses equity to back a loan from a venture firm. If the loan can’t be paid, it turns to equity. Often, if the loan is paid, there’s an option for the investor to transfer a portion (or all) of the loan into equity.

This is a great deal for the VC. If things go bad they can use equity (ownership of the company) as a backup. If things go well they own equity in an early-stage, high-value company.

Too often what's good for the VC is bad for the entrepreneur.