How to value internet companies

Unlike the conventional business plan advice given to you by business school professors, it actually doesn't make sense for developers of new internet applications to bother with a business plan.  The problem is that these professors don’t understand the fundamental difference between the internet “applications”, and the internet “ad networks”.

Internet applications are like hit TV shows.  They draw in audiences who like the experience of the “show”.

Internet networks are like the TV networks (think ABC, NBC, CBS, Fox).  They have developed serious business plans that know how to turn the audiences into money. The equivalent in the internet-world is Google, Yahoo, and Microsoft.  These are the guys that have the ad delivery mechanism figured out.  And, as a result, they shop around for newest applications that are drawing in a big crowd (such as Facebook, MySpace, and the like).

An internet application (like YouTube) is very similar to a TV show (like Friends, Seinfeld), in that they bring in viewers and attract an audience.  So, like a TV show such as "Friends", the producers, writers, directors of the show should not be particularly concerned with commercializing the show. They do not need to think about the business model, but rather they should focus on creating an excellent experience for the consumer.  

Then, someone else (TV station, network) can come along, and figure out how to make money off of that audience.  

But, where does a company like google fit in?  They are like the TV networks of old...like ABC, NBC, CBS...in that they have the infrastructure in place to commercialize an audience.  They have the advertising and the ability to wrap content in advertising.  Google, Yahoo, MSN seem to be the big 3 of online advertising...and they are out there shopping for content that people want to watch, so they can wrap that content in advertising (just like what the big 3 TV networks do).   

So, what is the implication to small start-ups...well, it means that (contrary to what your business school prof says), you do not really need a business plan, or any real plan for how your website is going to make money.  You just need to develop a very user-friendly and necessary tool that millions of people will want to use on a daily basis (not easy to do all by itself).  If you can do that...you have essentially come up with a hit TV show, and the big networks will compete to see who can buy you....think Facebook, MySpace, Twitter, etc....all of those internet based "companies" with valuations that business school profs scratch their heads trying to understand.

If you can start to think about internet “applications” as the TV shows (such as Friends, Lost, etc), and the internet “networks” as the TV networks (such as ABC,NBC, etc)…then it becomes much easier to understand which sites should have a business plan (networks) and which ones should not (the applications).  Confusing these two concepts has led many a small company down the wrong path.  If your goal is to develop the greatest TV show the world has ever seen (internet application), then focus just on that, and let the business guys (the networks) figure out how to make money off of your audience. 

Roundup: Alibaba’s ads, Flying cars don’t fly, Google’s switches, more

Alibaba launches its own ad platform — The third-biggest ad platform may soon turn out to be Alimama, which was launched today by Alibaba.com. Alibaba, you may recall, is 39 percent owned by Yahoo, and recently went public at a high valuation. Its ad network will try to dig into the spaces that Google Adsense and Baidu Union haven’t yet reached; according to the company, it already has 150,000 small websites and 135,000 bloggers ready to use it. TI is splitting revenue 50-50.

News Corp Gets Serious On Online Advertising: Fox Interactive Ad Network To Power Other Sites

Posted: 26 Nov 2007 07:33 PM CST

Fox Interactive Media (FIM), the online arm of News Corp has plans to become a full service online advertising agency that provides advertising to non-News Corp sites.

FIM President Peter Levinsohn told the audience at the Reuters Media Summit today that the advertising network is already in discussion with other News Corp sites for ad sales and that an expansion outside News Corp could come as soon as the first half of 2008, according to Reuters.

Levinsohn said that the service, known internally as “FIM Serve” was originally built to serve advertising on MySpace, which would be presumed to be part of, or the same service announced by MySpace November 4. He also noted that the service focuses on graphical advertising and would not conflict with the Google/ MySpace search listings deal.

It would however see News Corp go head to head with Google presuming that Google’s acquisition of DoubleClick is finalized.

News Corp continues its push towards becoming the major online player behind Google; the company’s purchase of MySpace for $580 million in 2005 turned out to be the bargain of the century, particularly now that Facebook has been valued at $15 billion. News has purchased a range of online properties including IGN, Flecktor, Photobucket and Rotten Tomatoes amongst others, and was rumored by TechCrunch UK November 22 to be in talks to acquire business social networking site LinkedIn. That list excludes the already enormous traffic captured by News Corp’s online destinations of its vast media empire which will shortly include the Dow Jones company and the Wall Street Journal. We are not that far away from waking up and possibly seeing a world online where the competition is no longer Google vs Yahoo, but Google vs News Corp. Others have failed in challenging Google but so far News has bought wisely and in areas where it believes it can add value and provide synergies across existing properties, and its size and scope may well see it passing Yahoo shortly as Google’s main competition.

AdBrite raises $23M to keep up with ad network race

Online advertising company AdBrite has raised $23 million in a third round of funding from investors led by DAG Ventures and including Sequoia Capital, Mitsui Ventures, and hedge fund Artis Management.

The funding comes as an increasing number of companies are building ad networks, lured by the lucrative buyouts of such companies of late. Microsoft, Yahoo, Google and others are shelling out billions for the best of them. Originally, Adbrite’s specialty was to provide publishers with an ad opening on their page with a simple sentence like “Advertise here for $1,000″ Advertisers, seeing the space, could then call then sign up to advertise there — cutting out the middlemen.

It has since expanded its offerings, to keep up with the fast-moving industry. The company, based in San Francisco, now offers an ad auction system, a full-page ad feature, a branded video player, and playful offerings such as an easy way for regular people to insert ads into online photos. Many of the ideas are masterminded by founder Philip Kaplan, who previously started the gossip site FuckedCompany.com as a forum for dot-come company employees to trade information about layoffs and other bad news during the bursting of the Internet bubble after 2000.

Kaplan says that it’s the third largest ad network, behind Google and Advertising.com, with over one billion page views a day across a network of 50,000 publishers. He says that AdBrite will use the funds to accelerate growth and expand the network’s targeting capabilities, including behavioral targeting.

The latest investment also continues the special relationship between one of Silicon Valley’s top venture firms, Sequoia, and Artis, where a son of one of Sequoia’s partners, Pierre Lamond has worked. The two also backed YouTube together, and several others.

The company previously raised $12 million over the past three years.

We’ll have more shortly (within the hour), but wanted to publish this news immediately since it is beginning to leak out elsewhere.

[Updated: AdBrite has confirmed the funding took place and that DAG Ventures led the round. There were rumors that the deal hadn’t yet closed.]