But I do hear a few murmers here and there that go something like, "I don't get it... what's the business model?"
A lot of people criticize Web 2.0 apps because they don't have an apparent business model up front. What people aren't seeing, however, is that value creation is a business model at such an early stage.
When semiconductor startups get funded, it takes quite a lot of money to design and build a chip, and revenues are often nowhere to be found for the first year or two of the company's life. No one complains about the business model, however, because its simple:
"We're building these little things and people will by them. See...we drew a hockey stick. We have a business model."
But having a business model in Excel has never stopped a hardware company from going under. Why? One of the main reasons is technology risk. Its entirely possible that while you're building your hardware, some genius at MIT will invent a chip standard that the whole industry adopts while you're still touring fabrication plants in China. Plus, you may not be able to build exactly what you want to build because, as Wile E. Coyote will tell you, sometimes it doesn't exactly work the way you want it to. For example, there was a company around a few years ago called AirFiber. AirFiber was supposed to solve the last mile problem by shooting teh interwebs around with frickin' laser beams through the air. The technology completely worked in the lab and you could get the internet from building to building without digging up the ground. The business model? Sell these laser routers to telecom companies. Simple, right?
Not so much. Turns out that the beam wasn't wide enough and when the telecoms tested the stuff out in the field, they kept getting blips... birds would fly through the beam. Telecoms balked before they could update the technology. Business model: Fekked.
The point I'm making is that today's web service startups have very different characteristics. There's little to no technology risk...because you can build just about anything. Ever hear someone say, "We were going to have a wiki in it, but we just couldn't get the thing working." Therefore, people assume that you should automatically fast forward the development of the business to the point where you should pretty much start generating revenues as soon as you build it. That's a little bit unfair, because these things are different animals. Its not entirely clear exactly how some of these things will get monetized and sometimes it takes creating value first to see it.
Take Google and Skype. Google created lots of value for its users by building a great search engine. Only then did someone realize you had a great inventory of expressed demand that you could advertise against. So, instead of technology risk, investors took the business/execution risk that the smart folks they surrounded the company with would figure out the business side.
In the same way, Skype, as a P2P app could never have charged for its services until it got to a critical mass of distribution. Just because you built it and it works doesn't mean the product is done.
So, we can all guess what Twitter's business model is going to be, but you know what, we'll probably be wrong. It doesn't matter because the metrics that count, like active user growth and engagement are all pointing in the write direction. This is a company creating value for its users, and doing it with more and more users everyday. It will find a business model and at first, value creation for users is, in fact, a business model. Its the very reason why Web 2.0 startups fail--they just don't build anything particularly compelling for users.
Others say that you had a similar problem with Web 1.0... poor business models... it was just about the eyeballs. This is a misconception. There wasn't any more crap in Web 1.0 than Web 2.0 or frankly at any time in the history of innovation. The issue was a capital issue. Venture got way overfunded, grew too fast on the cost side, went public too fast and blew up when valuations disappeared under the scrutiny of the public markets. Its not like these things didn't have potential. Webvan may have gone under, but Fresh Direct makes a really nice little business here in NYC and they didn't raise nearly the kind of cash that Webvan did. eToys may have gone under, but you can probably buy all that stuff on Amazon now.
Business model or no business model, it really comes down to careful, rational, smart execution, and realistic funding. I have no doubt that some West Coast firm probably wanted to put $10 million into Twitter and then probably would have followed up with another $15 million a year from now and that's the kind of thing that ruins businesses.