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Twitter, Revenue Models and Venture Capital

I love it when Michael Arrington takes off the here’s the tech of the day hat, takes the gloves off and talks about the real issues (more, more!), like he did that today with his post Twitter and The Revenue Dilemma. I wrote about potential business models for Twitter about a year ago, it generated a nice phone call from a venture capitalist, but not Twitter itself. Perhaps that will change now that Dick Costolo is COO of Twitter? Time will tell.

Michael clearly lays out the valuation issues with a situation like this.  My issue is that startups need to discover and map their potential data and revenue models before launching much more than they currently do so that it is incorporated into the user value proposition so that users don’t get rubbed the wrong way when large, seemingly random terms of service and/or privacy changes take place (and I’m not picking on Twitter, I’m pointing out an issue to the startup community at large). I’m not saying they should necessarily implement them on day one – Michael’s post points out why based on the way the world  currently does business cases.

If greater thinking through of revenue and data models is to occur, it can only happen if sites like TechCrunch and folks in venture capital demand that as the price of entering the game. I’m not going to name names, but there is evidence that some types of investors work off of the 1999 model, this guy has been successful in a startup before or he was a strong player in one and all too often emotional investments take place rather than ones based on the merits of the idea. There are regional variances to this of course and this is not the case in certain locations. I get exposed to some great ideas and business plans.  I’m currently in touch with a few very well thought out ideas with serious revenue models and they aren’t getting the investment checks written because they are serious non-sexy B2B businesses or they are well thought out B2C plays and they get push back on things like adoption. The behavior Michael described will not change until investors and to a lesser extent technology press put people’s feet to the fire on these issues prior to A rounds being granted. Bill Hartzer said it in his comment on Michael’s post:

“Sure, Twitter costs plenty (lots of money) to run. It’s a money pit, actually. And it appears that they don’t have a revenue stream (yet).

When are the VCs going to realize that they need to dump money into startups that are actually profitable?”

I think Bill meant “workable revenue model” instead of profitable as if they are profitable they rarely need growth capital, but his direction aligns with my views – have a well thought out business and data model. I’m not against freemium, but you need to be able to add features that people are willing to pay for and have a clear plan to succeed. To do this you need a management team that is customer focused and has the right balance of business and tech folks – too much of either and you’ve got a real problem.

So what are your views on how this should evolve? The dot com boom was focused too much on valuations, the web 2.0 boom was focused too much on tech and not enough on business models. Are we close to finally getting the balance right in the next few years? The net is still young, it’s not mature, new rules and breakthroughs will come but only if we move past legacy dogma…

Make sure you go back and read the comments on that post, it contains some really interesting ideas for you to ponder, I’m not  going to point out which ones are the best right now though as I have to run to a client meeting.

5 thoughts on “Twitter, Revenue Models and Venture Capital

  1. I agree with all your sentiments as someone who has been working in the Valley for 30 years, funded a number of companies, and had a couple of successes (thank the Gods). It has always amazed me that the web2.0 folks were able to sell the “we’ll get it running and then monetize it” for as long as they did.

    As far as business models go, btw, the question that any company wanting to make $$ of an online business is “how do my customers use my service to make money?” If you can answer that, then you understand:

    a. what they are willing to pay for the service

    b. the mechanisms that make it easiest for them to pay you (and thus build your business model.

    In this regard, please see my post and its follow on – as I try to build a business case like this for Twitter.

  2. Twitter is an extremely valuable tool for Internet Marketers however I agree with you in saying that it needs more financial backing…They definitely need to find a way to make it profitable.

    Twitter itself though has made lots of people lots of money. One of my favorite Twitter sites is I use this a lot.

  3. Some of the biggest blockbuster acquisitions on the Internet have been pre-revenue companies. YouTube to Google for $1.65 billion in 2006 is one example. Reaching back further, Hotmail to Microsoft for $265 million in 1998 is another. Neither had any revenue to speak of, but both “owned” a new and fast growing market. And there are lots more examples.

  4. Hi

    Astonished that things like twitter attract funding TBH.

    The bottom line with any site/venture should be the question “will people pay to use this”

    Yes = Go for it
    No = run a mile

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