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Zero customer acquisition costs essential for investing in companies with traffic and no revenue model

AlarmClock:Euro posted on the mediatech event yesterday saying that VCs (and indeed Yahoo!) were happy investing in companies with audience but no revenue model.  I wanted to leave a comment, but they have disabled that feature so I’m putting it here.

This is more or less a direct quote from Ben Holmes of Index, but if there is no revenue model then the only way you can invest is if customer acquisition costs are zero, or very close to.  That way you only need to be able to make a small amount per user to make the business model work, and it is pretty safe to bet you can get that from somewhere.

MySpace is a good case study of turning traffic into cash.  if anyone has seen a good write up I’d love to know.

  • http://www.thealarmclock.com/euro Valerie

    Hi Nic,
    It’s Valerie here from the a:c euro. We really were sorry to turn off the comments – but the spam was unmanageable – still looking for a solution, by the way.

    But thanks for posting your comment here. The additional insight into what investors are thinking when they invest in web companies that don’t have an immediate revenue model sheds light on the subject.

    You said you were looking for a good case study about turning traffic into cash. There is a good blog, that I have been meaning to link to, Startup Review (sponsored by Sierra Ventures) that does just that. It provides a lot of insight into various social media type companies, including Facebook, HotOrNot, istockphotos, Digg and some others. URL is http://www.startup-review.com/

  • http://www.thealarmclock.com/euro Valerie

    Hi Nic,
    It’s Valerie here from the a:c euro. We really were sorry to turn off the comments – but the spam was unmanageable – still looking for a solution, by the way.

    But thanks for posting your comment here. The additional insight into what investors are thinking when they invest in web companies that don’t have an immediate revenue model sheds light on the subject.

    You said you were looking for a good case study about turning traffic into cash. There is a good blog, that I have been meaning to link to, Startup Review (sponsored by Sierra Ventures) that does just that. It provides a lot of insight into various social media type companies, including Facebook, HotOrNot, istockphotos, Digg and some others. URL is http://www.startup-review.com/

  • http://www.5280angel.com 5280Angel

    I have looked at several companies where the business plan has no clear revenue model but huge expected traffic. I have been uncomfortable to say the least in considering a company that just hopes someday to generate ad revenue because of their user base or get lucky with a huge acquisition. Either way it doesn’t feel like investing…more like russian roulette.

    Most companies are going to have to spend real money to generate significant traffic so the odds of picking the anomalies with small customer acquisition costs seem pretty slim. I’m not that smart or lucky.

  • http://www.5280angel.com 5280Angel

    I have looked at several companies where the business plan has no clear revenue model but huge expected traffic. I have been uncomfortable to say the least in considering a company that just hopes someday to generate ad revenue because of their user base or get lucky with a huge acquisition. Either way it doesn’t feel like investing…more like russian roulette.

    Most companies are going to have to spend real money to generate significant traffic so the odds of picking the anomalies with small customer acquisition costs seem pretty slim. I’m not that smart or lucky.

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  • http://www.i-together.net/weaverluke/weblog.html weaverluke

    Try this write-up from the excellent Startup Review, Nic:

  • http://www.i-together.net/weaverluke/weblog.html weaverluke

    Try this write-up from the excellent Startup Review, Nic:

  • nic

    Thanks Val. Re the spam, I run WordPress and need to sort something out for my spam problem as well. If you find anything let me know..

    Thanks for the pointer to startup review, also to weaverluke.

    5280Angel – I agree that not many companies will succeed in generating traffic with minimal cost, and that it is very hard to predict in advance which are the ones that will. Most VCs (including us, so far at least) are only investing in companies that have already cracked this problem. We pay up a bit for that privilege though. At the angel level this is more difficult.

  • nic

    Thanks Val. Re the spam, I run WordPress and need to sort something out for my spam problem as well. If you find anything let me know..

    Thanks for the pointer to startup review, also to weaverluke.

    5280Angel – I agree that not many companies will succeed in generating traffic with minimal cost, and that it is very hard to predict in advance which are the ones that will. Most VCs (including us, so far at least) are only investing in companies that have already cracked this problem. We pay up a bit for that privilege though. At the angel level this is more difficult.

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  • http://www.azeemazhar.com azeem

    Per our conversations in Paris, I completely agree with this.

    Once you have an audience, that is somehow engaged, you can find a monetisation model, whether it it Pixel lotteries, advertising or something else.

    The critical thing is that your customer acquisition has to be dirt cheap if your customer lifetime value is unknown (but positive).

    Otherwise you run into the web 1.0 problem of paying hundreds of dollars to acquire customers and then have a business model than only generate a few bucks per customer. Nothing wrong with either of those attributes, just don’t put them together.

  • http://www.azeemazhar.com azeem

    Per our conversations in Paris, I completely agree with this.

    Once you have an audience, that is somehow engaged, you can find a monetisation model, whether it it Pixel lotteries, advertising or something else.

    The critical thing is that your customer acquisition has to be dirt cheap if your customer lifetime value is unknown (but positive).

    Otherwise you run into the web 1.0 problem of paying hundreds of dollars to acquire customers and then have a business model than only generate a few bucks per customer. Nothing wrong with either of those attributes, just don’t put them together.