How can I raise venture capital for a free and ad-free venture?
I am planning to start an online company, which would be a social tool, much like instagram and kik messenger, but I fail to see how these companies promise to return the investor's money. History shows that these companies are most likely to make money if a current software giant buys them out.(instagram by facebook, skype by microsoft etc.)
But planning for a buy-out would sound rather ridiculous in a pitch, but then how do investors see great opportunity in these kinds of companies? For example here is kik messenger, which is an absolutely free and ad-free messenger, but still has raised impressive amount of venture capital:
On March 7, 2011, Kik announced $8 million in Series A funding by
three venture capital firms – RRE Ventures, Spark Capital, and Union
Square Ventures. It also announced that Fred Wilson of USV and Adam
Ludwin of RRE Ventures would join the company's board of directors.
Venture Capital Monetization Investment Social
4 Answers
Union Square Ventures, one of the investors you named, has stated that their investment strategy is to invest in:
Large networks of engaged users, differentiated through user experience, and defensible through network effects.Note that nowhere in that strategy does it talk about revenue. The idea is once you have the network of users doing something that you control, the money will follow.
Case in point, Stack Exchange is funded by USV. Our only monetization of the network is currently via stackoverflow.com, even though we have over 100 other sites and those sites collectively generate more traffic than stackoverflow. The idea is that once you have the traffic, intrinsic monetization is not that difficult.
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However I'm sure SE still had a model in mind on what possible monetization routes are in the future. Networks are one of those weird equilibriums where you need to more or less operate with little to no revenue at start and then the revenue becomes like a broken dam – User60812 11 years ago
Venture capital is a relatively late stage source of financing. They invest based on proven results (traction).
If you have absolutely astounding traction, in terms of speed of acquiring new customers at low cost, retention rates, referral rates, etc ... they will invest.
Look at Skype, for instance. Video calling was science fiction when I was a child. Skype made it reality, for free. You've got to believe they had pretty amazing adoption metrics (traction).
Make a product or service that can show massive takeup or traction, and VCs will be interested, no matter how crazy the idea sounds right now. Your challenge is to figure out how to get the idea funded and working until you prove that people are adopting it at such a great speed that a VC would be crazy to pass it up. This typically requires hard work, and reaching out to the hidden financing sources, not VC.
A business model doesn't necessarily need to reflect direct charges to users, or indirect sources like ad revenue. However it absolutely does need to have multiple viable revenue streams. This may be a part of a future strategy, or a backend implementation (data collection, etc)
There is no VC/Angel/Investor of any sort that will look at a company that has no possible way to generate revenue. That said, don't worry, EVERY business has a way to generate revenue, you just need to find it. Think outside the box. Be a little UnOrthodox (Disclaimer: within legal limits of your jurisdiction). Be creative!!
Venture capital companies invest to make money. They typically make money when a company they invested in is acquired or goes public.
So yes, planning for acquisition is a viable strategy.
