What's Not Necessarily The Buzz?
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NEW YORK -- Can buzzwords really create a business model? That's the question that venture capitalist Neil F. Sequeira of General Catalyst Partners asked attendees at the AJAXWorld conference under way here.
Sequeria's said his venture capital firm isn't looking just to flip business for quick cash but rather to build real businesses and really big dollars. "Web 2.0 companies don't always need money," Sequeira said. "I think there has been an amount of early exits in the Web 2.0 space and that leaves a negative perception of how to build businesses today."
It's an area that Sequeria is certainly no stranger to. Prior to working at General Catalyst partners, he was at CMGI, the big venture capital firm of the first Web bubble that funded such stars as AltaVista. At General Catalyst he is an investor in companies such as Laszlo, Black Duck, rPath and Kayak among others.
"What are all the buzzwords good for?" Sequeira asked, then listed Web 2.0 terms such as AJAX, mashup, tagging, blogosphere, social software and others. "Truth is I have no idea what they can do when you're trying to build a business model for the long term. Will buzzwords get you capital? Sometimes."
He then advised the audience not to build a business believing if you build a viral business it automatically means it's a great one.
The key, he said, is to build a real business with Web 2.0 that is sustainable and takes advantages of the new dynamics presented by Web 2.0. Those advantages include the low cost of hardware and development, as well as a viral growth model that allows businesses to grow quickly and overall agility to change.
Sequeira then argued that venture capitalist aren't always a good fit if you really want to build a business. He explained that, with his firm at least, they are looking to help build sustainable business that can deliver significant return on investment.
The key to developing sustainable businesses is to focus on the business model. Advertising-based models that focus on CPM (cost per thousand impressions) don't really work. Sequeira argued that Web 2.0 companies that put dollar signs in front of their CPMs are unlikely to get them. He said most Web 2.0 companies should only expect to get a few pennies per thousand impression and not several dollars.
"Look at history; it's just not sustainable," Sequeira said. "Consider in the cents and then run the numbers. At 30 million page views put down a penny for CPM and see if you can cover your costs. It's difficult."
The CPC (cost per click) model that Google and Yahoo can help publishers with can work in some cases.
"But if you focus on areas where the caps are low, it'll be tough to make money," Sequeira noted. "Some per-clicks ranges are vast so build a business that has high bid CPC that can flow into your business model."
The venture capitalist also suggested that Web 2.0 businesses take a look at using a subscription-based model.
"'Subscription' is a bad word today; everyone wants an ad model," Sequeira said. "But it's our belief that subscriptions will come back as good business. You'd be amazed that people will pay for a product that is compelling."
"Buzzwords and the viral features are still important, but use them to acquire customers," Sequeira added. "If customers don't pay, it's possible that over time you're going to have trouble with your business model."