Great article from Josh @ First Round Capital: “Catch And Release” Business Models. He dissects companies that are sticky enough and viral enough to spend zero on advertising, and still acquire users, and folks that have trouble getting sustained traffic. I wrote about a similar issue previously, called “Eyeballs versus dollars: What should startups focus on?“
Here’s Josh on the “catch and release” model:
In sharp contrast, most social networks out there have what I call a “catch and release” model. They can generate buzz, get written up in the blogosphere, and even get 53,651 beta testers, but few of those initial users ever return to the site. There can be many reasons for this. The site may appeal to a group of people that just don’t need to communicate on a daily basis, for example old classmates, or distant relatives. They may have a cool feature set that presents data in some unique or surprising way, but is not enough to compel someone to come back on a daily basis.
Later on, he discusses Classmates and Zillow as examples of this.
In particular, Classmates is in the class of “paid advertising leadgen” companies that are basically arbitrage vehicles. They acquire traffic through lots and lots of remnant ads, which are optimized like crazy. Once they get people to the site, some % ends up buying a subscription, which they keep.
The main problems with companies, and the reason why they have low valuations ($100MM) despite 40 million users and plenty of revenue, is two fold:
- First, they have terrible margins from buying ads – and the market is getting more competitive every day
- Second, thousands leadgen companies compete for limited eyeballs, and long run it’s caused the industry to plateau
Long run, it strikes me that you need monetization engines, in the form of subscriptions and compelling products that capture purchase intent, yet you want to wrap that with the sticky things that make people come back again and again.