Web 2.0 startups.... start ditching those Ad revenue bizplans

Every so often the real world intrudes into Geekland - about once a week over the last 2 weeks something about the Credit Crunch surfaces on Techmeme. This week its BoomTown noting that Yahoo is probably soon to swing its axe. (Update - Valleywag via Techmeme said today they will bring in Bain & Co*). Underlying this article is the assumption that online Ad revenues may fall:

according to several sources at Yahoo, for example, top execs are telling some employees that the company is considering options to get itself sized right for an expected slowdown in the advertising market.

Let us repeat that in caps:

OVER THE NEXT FEW YEARS, ONLINE AD REVENUES MAY ACTUALLY FALL

Yes, long term they will grow, but most trends go in fits and starts. And the biggst financial crisis since 1929 will have an impact on advertising, its an early cut spend in many sectors.

A few weeks ago we made a similar aside to the startups at Seedcamp when we saw that nearly all their plans had Ad revenue underpinning it. Our research into the Online Ad market was already pointing to a slowdown in Online Ad growth versus previous assumptions, but the events of the last 2 weels change that picture substantially - we now believe there is a very real chance it may actually drop - y'know, like in 2001.

We would also make another prediction now - that the amount of funding propping up FreeConomic models will start to dry up, simply because as we move into more straightened circumstances the chance of a liquidity event will reduce, and the runway needed to fly such kites will lengthen. Its no accident Marc Andreessen felt he had to get his war chest before nuclear winter set in. The Web 2.0 kids probably don't recall what San Fran's South of Market area was like in 2002 - a wino wasteland. There is an increasing possibility that it will look the same by 2010.

Enough of the doom 'n gloom, I hear you say - what should we do?

So here are some thoughts based on surviving (or not) the first time round:

- Find real customers with real money. "Free" obscures things - if all this Web 2.0 gear is so good, why does it have to be given away for free? (Answer - because Google subsidises their stuff with Ad revenues. Get off that pitch)

- Get the burn rate right down

Chase the cash and keep the costs down - not exactly rocket science then (though you'd be surprised how many tech Co's build what they want rather than what customers will buy).

But wait, there's some nuance here. Real customers are people who derive sufficient value from your services to give you money. If you can't work out how they get that value from you, you ain't got a service that will survive.

A second thing is to choose your market. Everyone says go after big markets, but in Hard Times there are some more nuances:

- Find customers in industries where there is a large surplus (and that usually excludes very competitive markets), and/or


- Find customers in industries where there is rapid growth.

Trying to flog stuff in declining markets with low profitability is a hiding to nothing.

Another thing that is often said is to Do Something Hard. In tough times we'd add that its more important to pick a good market first, and just try and Do Something Well

*You know you are Olde Media if you are bringing in one of the Big 3 Strategic houses for rationalisation