New Media Financing, Part 2: Who pays the bill?

At the dawn of the commercial radio era in the U.S., radio stations were established to sell radio receivers. Pittsburgh's KDKA, generally accepted to be the first commercial radio station in the U.S., was an experiment funded by Westinghouse in order to sell radios: People bought more radios if they had more things to listen to. NBC was established by RCA primarily in order to sell radios. The equipment sales-network relationship survived well into the television era; the reason that NBC's symbol is a peacock is that RCA used the network to sell its color television sets. People bought more color TVs if there were more shows to watch in color.

That concludes our history lesson for today, with the point being that business models evolve over time. Advertising wasn't the first, or the only, business model for broadcasters. The Internet is at a stage of commercial development similar to that of radio in the late 1920s and early 1930s, with a bunch of models but no clear path to profitability.

Companies and individuals are pursuing a variety of business models, alone or in a myriad of combinations:

• Subsidized: The content is provided by an Internet Service provider at no additional charge. Comcast's Fancast service is a good example of this model. Fancast is available only to Comcast subscribers, and is a part of the company's high-speed Internet service.
  
• Advertising: The content distributor sells advertising, and the content is usually (but not always) made available to consumers for free, in return for exposing them to the advertising. This is today's dominant business model.
  
• Subscription: Consumers pay a monthly or annual fee for access to content. The Wall Street Journal and Financial Times are examples of subscription-based content providers.
  
• Pay-per-View: Consumers pay a one-time fee to access content, usually for a single viewing or for a limited amount of time. This model is often used for high-value content such as movies, concerts and other special events.
  
• In-Game Transactions: Consumers get access to the basic game (or other content) for free, but to take full advantage, they have to buy virtual property and services within the game (everything from clothing and livestock to spacecraft and weapons.)
  
• Carriage Fees: I'm not aware of anyone using this on the Internet, but it's very common in cable television. Typically, well-established cable networks charge a per-subscriber fee to cable operators for the right to make their channels available to their subscribers. Those fees are then passed on as part of subscribers' monthly charges. There are also reverse carriage fees, which are paid by new cable networks in order to get carriage on cable operators' systems. As those networks grow and succeed, they can move from paying for to being paid for carriage.

There are other models, such as the "tip jar" approach where consumers pay whatever they want to a content producer, but these models are rarely sustainable.

The fact that none of these business models has clearly established itself (with the exception of search advertising, which is a special case) could indicate that we haven't yet found the right model, no such model exists, or we're following the right models but implementing them in the wrong ways.

Why the term "Exit Strategy" should be kicked to the curb

Mark Suster, a respected Los Angeles-based VC, has been taking a lot of flak for a blog post he wrote suggesting that the saying "fail fast" should be discarded. Many people took Suster's comments as a rebuke of Lean Startup principles, but they were in fact highly supportive of Agile and Lean concepts. Suster was targeting entrepreneurs who use "fail fast" as an excuse to fail using someone else's money: "If at first you don't succeed, quit and make someone else pay for it."

Recognizing that misery loves company, I want to take on another popular phrase that should be kicked to the curb: "Exit strategy", specifically when it's used in the following sentence: "What's your exit strategy?"

If a company is successful, there are lots of possible exit strategies:

• Sell the company to a bigger acquirer for a lot of money
• Merge with another company
• Go IPO

You can also continue to run the company successfully and grow from internal growth, or acquire other companies.  A successful company doesn't have to worry about exit strategies.

An unsuccessful company, on the other hand, needs to worry about exit strategies a lot. The options for an unsuccessful company include:

• Selling the company, usually for a fraction of the amount put in by investors
• Liquidating the assets of the company in the hope that something (a product, patents, etc) will fetch a good price
• Using available cash reserves to pay off creditors and shut the company down
• Going bankrupt

None of those are appealing options.

Moreover, the startups that are asked about their exit strategies are usually the ones at an early enough stage of their development that it's impossible to say what an appropriate exit strategy should be. So, the founders or managers make up an exit strategy that they think VCs will want to hear. If the IPO market is vibrant, that will be the first choice; in a period like today where few IPOs are launched, they'll emphasize acquisition or merger.

The appropriate question isn't "What's your exit strategy?", it's "What's your business model?" and "How will you make this into a successful business?". The answer to those questions will determine whether the startup will even get to the point where a positive exit strategy is possible.