November 21, 2008

VentureWire

Monetization On The Minds Of Web Start-Ups

In the good old days of 2006 when venture capital funding was abundant and the economy was still flourishing, most Web start-ups paid more attention to traffic than to monetization.Now, faced with the real possibility of a deep recession and a slump in venture funding, attitudes are finally changing in Silicon Valley.During the final panel of the VentureWire Technology Showcase on Wednesday, four venture capitalists spent nearly 20 minutes talking about how Internet companies will need to come up with a faster path to revenue if they want to stick around. The VCs had spent the day listening to 10-minute presentations from dozens of promising start-ups in technology, including several in the Web space.'Monetization is on everyone's mind more than it used to be,' said Steven Baloff, general partner at Advanced Technology Ventures. 'There's going to be a lot of pressure on new forms of advertising, and it's going to be harder to succeed in the current downturn.'While some in the industry argue that monetization should have been the No. 1 priority for Web start-ups to begin with, the majority of young companies on the Web haven't fulfilled revenue expectations.

Mike Kwatinetz, a general partner at Azure Capital Partners, said he's often disappointed by presentations where companies still talk about how they will generate traffic but nothing about their business model.But he's encouraged by start-ups like San Diego-based ProQuo Inc., which presented earlier in the day and demonstrated how it could generate revenue by helping people get rid of junk mail. The free Web service lets consumers opt out of postal junk mail, yet sign up for marketing offers that they want.'They're taking something that most people view as a negative and turning it into a monetizable thing,' Kwatinetz said. 'What it shows is that if you're in line with helping the consumer at this time, then it gives you an opportunity to monetize.'Another Web start-up at the conference that the VCs said shows promise for its potential to effectively monetize during tough economic times is Redwood City, Calif.-based BillShrink Inc., which last month announced an $8 million Series B round led by Trinity Ventures. The company's Web site continuously monitors the market for credit cards and cellphone plans to suggest the deals best suited for individual consumers. It generates revenue by helping these businesses score customers.Matt McIlwain, a general partner at Madrona Venture Group, believes that BillShrink may eventually be able set up a premium service to charge customers a small fee if the company can prove that it indeed saves money.'If somebody like a BillShrink could actually shrink your bills, as a consumer I might be willing to pay for that,' he said. 'I think a company like that may find that with a premium subscription they can monetize the consumer and on the other hand there are opportunities for them to monetize through other types of direct response avenues.'McIlwain brought up one of his firm's former portfolio companies, Classmates Online Inc., which very early on figured out a way to create a new Web brand, Classmates.com, that could attract the masses and make money from premium subscriptions.

The company successfully used low-cost, high-frequency display advertising to promote its brand and generate subscriptions. By the time it was acquired in October 2004 by United Online Inc., it had 1.4 million subscribers paying between $15 and $59 for memberships, which made up 75% of total revenue and contributed to $54 million in total revenue through the first nine months of the year.'We're in an era that's going to have some aspects of the '01, '02, '03 time,' McIlwain said. 'And in that era, companies tended to have subscription-based businesses, transactional-based businesses and they used the downturn in advertising to their advantage.'Another company at the conference that is trying to go the premium subscription route is San Diego-based KidZui Inc., which sells a Web browser designed to be suitable for children ages 3 through 12. The Internet service, currently in beta testing, logs more than 1.5 million Web sites approved by teachers and parents.

The service costs $9.95 per month or $99.95 per year.'It looks very compelling and they have done a nice job with initial traction,' Baloff said, 'but the question is whether consumers will pay for a premium service in this environment.'Some of the VCs also mentioned digital goods and virtual currencies as an emerging monetization scheme that shows promise. While they admitted that consumers may not necessarily spend real money on virtual currency these days, there may be other ways to generate revenue in this way.

Doug Pepper, a general partner at InterWest Partners, said companies could offer a 'cost per action,' or CPA, pricing model where a player of a virtual online game, for instance, could receive virtual currency in exchange for registering for an offer by an advertiser, who in turn would pay the operator of the online game.He pointed to presenting company Mig33, of Burlingame, Calif., as one that might be able to take advantage of this type of scheme. Mig33, which provides popular Internet applications like email, instant messaging and photo sharing on the mobile phone, has quickly captured 17 million users mostly in Asia, Eastern Europe and Africa. It said it's planning to make money off of premium services, though it didn't provide details.'Typically your first gut reaction would be to monetize those users through advertising,' Pepper said. 'But in those markets that's going to be incredibly difficult to do. I think there will be opportunities for those users to leverage virtual goods and virtual currencies, and other value-added services to potentially monetize a service like that.'