When consumer internet companies should get a business model

Frank Lee, who is a new partner at Lightbank, the VC behind Groupon gave an interview to Business Insider last week.  His comment on consumer internet companies and business models summed up my own thinking neatly:

the point that I’m cognizant of is that at the end of the day, these things [consumer internet companies] need some semblance of a business model at some point. There’s notion that you can create something and you’ll figure out a business model much later on, after we’ve aggregated all these users with a ton of engagement. It’s valid, and it has happened, but statistically speaking, the odds of hitting that lottery are pretty slim.

To the extent that you’re not limiting yourself by being tied down to a specific business model, all that said, I think that you still have to be mindful that there is a path to creating a real business at some point down the line.

The kicker for me is the part in bold in the final sentence (emphasis mine).  It is often the right strategy to grow traffic first and monetise second but if there is no clear path to driving revenues then you are into the lottery that Frank describes.  The path may change, in fact it probably will, but at least you know early on that there is a path.  Otherwise there simply might not be.

  • Anonymous

    Personally I’ve been wondering whether the grow traffic first model just comes from the era when you could generate plenty of revenue through ads – but so many people are now after the ad revenue it dilutes the opportunity. If you have a highly focused demographic then you have a story to tell to potential advertisers, but if your traffic is generalised, and not on the scale of Google, Facebook et al then the revenue opportunities are not going to be great.

    Of course, one business model from a founder/funder perspective could be to keep getting more rounds of funding until someone buys you…

  • I think it is more nuanced than that. Even if you have a transactional revenue model it can make sense to focus on traffic growth before revenue, depending on your access to cash.