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The Road to Liquidity

Lots of buzz today about Fred Wilson's post calling for "A New Path to Liquidity." Fred is describing, in broad terms, how he and many other VC's are faced with a dilemma with respect to their portfolio companies. Many of these companies are not strong enough financially to withstand the scrutiny of the public markets so the only monetization alternative for investors is to sell out to larger companies. These big companies, shockingly, tend not to be such good stewards. As a result, often the product denigrates in their hands.

There are plenty of obvious responses that you could make to this post. For instance, the easiest response would be, so why don't you focus your investments on companies that do make money? Or you could ask why, if you loved the product so much, did you sell it? You know how once you sell your car you kind of lose all rights to complain about whether the new owner keeps it clean? The same goes here. You might also comment on the issue of whether all businesses need to be big businesses. Perhaps some of these companies aren't destined to be huge money earners and as a result aren't good early stage capital investments (kinda like a dry cleaner or a deli - good small businesses, but not a VC profile investment). Those are easy and legitimate questions.

But, in my best passive aggressive manner I will ignore those and focus on the real issue: why aren't these businesses profitable? As anyone who reads this blog knows, for many ad supported Web 2.0 companies its because the CPM rate for ads pretty much blows for everyone other than search companies. Don't believe me? Go ask the newspaper companies.

The white knight that everyone seems to be banking on to fix this dilemma are brand advertisers, who because of increase and web usage and decrease of other media, will be shifting their budget online. But they're not here yet and, as I wrote the other day, I wouldn't be surprised if they never fully made the transition. My argument is that the web does not provide a contextual experience for brand ads. TV is an entertainment experience - is it a shocker that most effective brand ads on TV are also entertaining? The web, on the other hand, is an information experience. So is it a shocker that the only ads that actually work online are informational, i.e. search ads? So how do you move one to the other?

A commenter to that post correctly added this insight:

[T]he real challenge in terms of contextualizing for the web is for ad supported destinations (and the ad networks that power many of them) to get more creative about how to do promotion beyond simple IAB-standard units.

He's 100% right. Online publishing needs something to sell that actually allows people to pay the bills if it is going to survive as a stand-alone business (as opposed to a hobby). In my mind, this is real opportunity: find and fund that model. Yes, its harder than coming up with a new Facebook application that can be pumped out in a weekend of coding, but that's why it will be so rewarding if you can figure it out.

My advice to Fred and other VC's who want to both make money and a difference for lots of people, focus on cracking the nut of the publishing ad model. If your successful, we won't need to ask for a new path to liquidity.


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This page contains a single entry from the blog posted on April 10, 2008 1:38 PM.

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