The Swinging Pendulum Between Distribution and Monetization

After the crash at the end of the last decade, web startups clamped down to focus on their core value proposition and were forced out of necessity for survival to hone their revenue models. However, for the past couple years, the metrics of “success” with early-stage digital media startups (especially consumer-facing ones) have clearly focused on distribution, as opposed to monetization. The stories of tremendous growth in adoption with the promise of revenue later on has been enough to excite both entrepreneurs alike. Yet, with the current economic climate driven by the looming recession, it’s been interesting to see the pendulum swing the other way in the past couple months.

swinging%20pendulum.jpgIf the notion has reached the popular business press, then it’s indeed a pervasive story. A few weeks ago Businessweek’s article Widget’s Worth talked about “cracking the monetization code,” wondering how social widget applications are going to make money.

The old playbook six years ago was that the web distribution could be bought for a price with Google Adwords. Now the new plan for distribution is facilitation through low-cost viral strategies via Facebook and other social media. In fact, Facebook literally published a playbook just over a week ago on marketing virally through their platform. I am not arguing that distribution has been commoditized, but it does point to the fact that the bar has certainly been raised for what meaningful traffic/distribution means without a business model behind it. Not all traffic is created equal, and that is certainly more the case than it was five years ago before the mass proliferation of social media pages (and a new floor for pricing of remnant inventory).

But it goes beyond just widgets and social networks. Of course, with the numerous notable acquisitions in the advertising network space has resulted in a proliferation of companies looking to help publishers monetize their content through new technologies and packagings. And even beyond the media front, there’s a renewed sense of optimism that the Enterprise2.0 could be the next big thing, especially given that there’s real potential customers willing to pay real dollars in that domain.

Of course, with any trend, there are notable exceptions. And there should be – the true high flyers command tremendous network effects which create value well beyond an immediate revenue base. But for the typical web startup, thinking about a business from the mindset not of “how do we get big fast?” to “how do we get big fast and monetize it?” is a progression in thinking.

I found it notable that just in the past week, I’ve seen a handful startups of startups seeking Series A financing – all with significant traction on the adoption front – with pitch decks touting phrases like “projects profitability”, “roadmap to profitability… [with] high margins [to] enable positive cash flow”, and “path to profitability.” Those terms were largely out of place in most plans a year ago.

Theoretically-speaking, entrepreneurs raise capital (whether it venture or otherwise) to accelerate growth ahead of cash flows because of the opportunity-cost of time involved in self-financing organically. So in reality profitability isn’t the first order step in creating real enterprise value. As it was put by Keith Richman on a panel at the EconSM conference on Tuesday, “profitability… is a choice.” Or at least the goal is to work towards having that choice. Starting without a revenue model in mind, even if it will change a few times along the way, leaves that choice to chance. It’s always possible to get lucky, of course, but less likely so in an economic climate which is less forgiving. So it isn’t surprising to me to see startups realizing these facts and incorporate this thinking into their pitch, and more importantly, their plans. The pendulum has begun to swing back the other way…

David Beisel

David Beisel is a co-founder and Partner at NextView Ventures. He has been focused on early stage Internet startups his entire career, both as an entrepreneur and venture capitalist. As an investor in the digital media space, David was most recently a Vice President at Venrock and previously a Principal at Masthead Venture Partners. Prior to becoming a venture capitalist, David co-founded Sombasa Media, an e-mail marketing company best known for its flagship product BargainDog. Sombasa was successfully acquired by where David served as Vice President of Marketing. David holds an MBA from the Stanford Graduate School of Business and an AB in Economics, magna cum laude and Phi Beta Kappa, from Duke University. He also founded and leads the Boston Innovators Group, an organization which holds quarterly entrepreneur events drawing a thousand attendees.