Banking on a Buyout: Is it really such a bad thing?

“Whats your Revenue Model?”. It sounds like such an informed question to ask an entrepreneur. I have been asked this question not only by the people who really matter, but even by people who are far from gathering even 5% of the courage required to start up. Its a glamorous question to ask, and its so much fun to show contempt when one doesn’t get a convincing answer, or when one hears that “advertisements” are going to be the revenue generator.

That brings me to think: How relevant is this question for an early stage start-up venturing into Consumer Internet. I have the following reasons to think it is not a very relevant question:

1. In consumer internet, the user never pays. If we look at start-ups outside India, in their initial days, they concentrate on creating value by getting a large number of users, engaging them deeply, and making a lot of them return to their service. They hardly ever concentrate on monetizing very early, and that, probably is behind the success of many start-ups.

2. When the user does not pay, but is engaged by the service provided by the start-up, then it makes Advertisements not only the only, but also the most lucrative way to earn money. Various innovative ways of Advertising and Promoting on web apps have evolved, and if one looks at the top 30 internet startups in the world today, a very large number of them are banking on Ad revenues as their primary revenue stream.

3. In my opinion, the raison-de-etre (The Reason to BE) for a consumer internet start-up is to create value by deeply engaging a very very large number of users. This is probably the only value that a consumer internet start-up can create today. Very few of them really succeed in doing this, probably just 1-2%. For those who are confident of doing this, it is a good thing to bank on a buyout by an established company which really knows how to monetize this huge user base.

This, I think, is the rationale that consumer internet start-ups abroad have followed.

Would love to know what you guys think about this. Whether it is, and is going to be any different in India? Why, and How?

14 Responses to “Banking on a Buyout: Is it really such a bad thing?”

  1. bankalar says:

    I have savings with ING direct and they are FDIC insured. It is the same level of protection that a normal bank has. Without it bricks and mortar mean nothing.

  2. srinivas says:

    Niraj- Good topic for debate.

    Rohit- You hit the nail.

    Alok- Good insight.

    Internet businesses cost little in terms of hard tangible assets and revenue models are innumerable. When I started my pet project on starting a online business for information sharing, I studied various sites and what they have to offer. I found out that in online business the positioning was the biggest problem. Differentiating your offerings from your competitors and creating great value for your visitors is the challenge.

    An integrated model comprising of b2b and b2c products and services ensures steady and sustainable revenues. We need to always keep in mind that for right informtaion at right time there is a premium. Content is the nectar to which hungry users flock. The organised retail industry has many solutions to the questions that Niraj has asked – when studied in depth you will get the right direction for your revenue and business model.There is no need to reinvent wheel you need to apply the knowledge in different context to be successful.

    Can Indians build great online businesses?

  3. Krish says:

    To generate interest from acquirers, the application should have more than just mass base. It will have to qualify as a potential media vehicle as well. User base though is one primary metric, acquirer $$ will also evaluate level of broad advertiser appeal, type and stickiness of its user profile. Does the user stay long enough there for the brand to have his straying eyeball, etc. Take IRCTC. It has significant user traction, but the user profile isn’t sticky. The visitors to this site are in a hurry to book their rail ticket/check their reservation status and move on. Porn sites may have high volume traffic, but they’ve hardly been ad revenue drivers – not even for condom makers.

    Internet consumption per se is crawling. Its user base is not spreading as fast as, say, mobile. Hence the insistence on transactional revenue model. Every moonstruck app developer hacks away dreaming of delivering a Google-sque something. But in the absence of sound commercial signaling, developer enthusiasm hardly drives investor sentiment.

  4. Alok Mittal says:

    I do agree that media oriented (ad revenue driven) businesses models have their first key indicators as user traffic and growth, and imho, its valid to show those as early metrics. In India, most businesses that we are finding interesting go beyond pure display advertising as revenues (given the small size of market there) and hence tend to demonstrate early revenue proof.

    Again, internet or no internet, media businesses are not for the faint-hearted — look at the TV channel sweepstakes!

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