I was surprised to read Michael Arrington’s TechCrunch post on Friday that Edgeio was going to be shut down. On the one hand, it’s kind of scary, my being in the vertical search space and all.

There’s always that moment of initial fear when you read something like that. Maybe nuroa really isn’t going to work? WTF have I gotten myself into? And HTF did they burn through $5 million in less than a year without being able to generate any revenue or relevant traffic or enter into any significant strategic alliances? This is perhaps the biggest question in most people’s minds. (It still amazes me that a start-up that launched in Feb. 2006 could receive a cheque for $ 5 million from a VC only 7 months later! I’m assuming the valuation at that point must have been somewhere between $15 and $20 million?)

But upon closer analysis, it’s clear that Edgeio’s problems had less to do with being a vertical search engine and more to do with being more of a concept than a business. To me, Edgeio’s failure reflects the danger of creating a tech-geek project with very little appeal or applicability in the real world.

Following are the four main lessons that I think can be learned from Edgeio’s demise.

Not All Vertical Search Engines Are Created Equal: Whereas the majority of vertical search engines crawl classifieds portals like Idealista and ImmobilienScout 24, or have a direct relationship with real estate agencies like Sasi or Engel & Völkers, Edgeio’s model was to operate — as the name suggests — on the “edge”. Cutting through the PR jargon, this means that they only looked for classifieds listings on blogs or other RSS-enabled sources — this explains Michael Arrington’s involvement and value-added to the project. TechCrunch was the ideal platform from which to launch a blog-focused vertical search engine. As TechCrunch explained when Edgeio launched: “The Edgeio ethos is that content belongs on the edges, and that is where the name originates from (Edge input/output). Content on the edges means the content on the millions of blogs and other sites out there which Edgeio does a good job of aggregating and organizing.” So whereas property search engines like nuroa aim to disrupt the traditional classifieds space by crawling mainstream classifieds sites, Edgeio chose instead to bet that sellers would be willing to create blogs on which they listed their properties or other classifieds, and Edgeio would then aggregate those blogged classified listings. The basic problem is that a business focused only on classifieds in blogs is not currently very scalable, as the majority of people still use more traditional offline and online options (e.g., classifieds portals and newspapers) to advertise classifieds goods.

Classifieds Are Local: Given that their main market is the blogosphere, Edgeio was never focused on any one geographical market. If you take a look at their website (which is very well-designed by the way), the tagline is “search the world’s listings”. Their value proposition was that they granted you access to over 100 million listings in 1,484,953 cities and 166 countries What does this mean in practice? If I’m looking for an apartment in Barcelona, why would I care that there are lots of listings in 1,484,952 other cities? Also, I don’t really see why local advertisers would choose to advertise on an “international” website, particularly if this international website isn’t one of the leaders in its local classifieds space. In other words, if I am Expofinques and I want to strengthen my market position in Madrid where I’m not as strong as I am in Barcelona, why would I advertise on Edgeio as opposed to the other sites that are more focused on Madrid? And if I’m a property buyer in Barcelona why would I be more interested in searching “the world’s listings” than in searching “the most complete set of listings in Barcelona”? Start-ups have to focus on a market, or a product, or on something in particular. Being focused on “the world’s listings” is largely meaningless, other than as a concept.

Keep Your Burn Rate Down Until You Have Some Indice of Possible Success: Edgeio’s hype always had more to do with the connection to Michael Arrington and TechCrunch than anything else. Whereas companies like Trulia, Simply Hired and Indeed have generated significant traffic, marquee-name investors (Sequioa, News Corp. and The New York Times) and are growing nicely (e.g., Trulia’s U.S. traffic is up 130 percent in 2007, to 1.2 million unique visitors per month, according to Comscore), Oodle’s vanguardist and diffuse approach never seemed to catch on. Nonetheless, it seems that they were determined to buy their success and hoped to convince investors to continue investing in them, even though they had no material revenues, traffic or partnerships. Michael Arrington is pretty direct in explaining why Edgeio had to close down: “The company burned through [$5 million] according to plan, meaning they ran out this month. The product roadmap was fulfilled, meaning development lags didn’t hurt the company. But the revenues didn’t come in and user/partner milestones weren’t met. And that meant no one else was going to put more money into the company.” In the comments section, he’s even more reflective and frank: “In general I’ll say this - it is unwise for a company to spend a lot of money building out infrastructure before a product proves itself.”

This is just further proof of what Fred Wilson of Union Square Ventures noted in a recent post entitled “Why Early Stage Venture Investments Fail“: “[I]t’s pretty clear to me that most venture backed investments don’t fail because the business plan was flawed. In my experience at least 2/3 of all business plans we back are flawed. Most venture backed investments fail because the venture capital is used to scale the business before the correct business plan is discovered. That scale/burn rate becomes the cancer that kills the business.”

It’s Easier to Criticize than to Do It Yourself: I can’t help but note a certain irony in noting that one of tech’s most noted and sometimes more hyper-critical bloggers — he created the Dead Pool with a certain glee — is the co-founder of the most prominent vertical search engine to enter the Dead Pool, despite all of the natural advantages that he has given his access to financing and marketing. Most of us would give our left arm to appear prominently in TechCrunch, but Edgeio is proof that expensive marketing can’t make up for an ill-conceived product.

And it also shows that like the old saying goes: “Opinions are like assholes. Everyone has one.” It’s a lot easier to criticize others than to create a successful product yourself.

The best we can do is hope to learn from Edgeio’s mistakes so as not to end up like they did.

A few weeks back, there was athunderstorm at TechCrunch regarding an article about how to make videos more viral. The guest post was written by Dan Ackerman Greenberg, a 22-year old Stanford graduate student and CEO of a company that helps make videos viral. His stated goal was to give the reader an insight into how to make videos more popular — he likens it to SEO for videos, arguing that companies need to understand video virality optimisation strategies as part of their online marketing campaigns.

It seems like he knows what he’s doing. His company has helped six videos to achieve:

• 6 million views on YouTube
• ~30,000 ratings
• ~10,000 favorites
• ~10,000 comments
• 200+ blog posts linking back to the videos
• All six videos made it into the top 5 Most Viewed of the Day, and the two that went truly viral (1.5 million views each) were #1 and #2 Most Viewed of the Week.

Among his key insights is that content isn’t king (this is what makes his job seem a little slimy). In his words, although great content is cool, it’s not essential to making a video really viral. There’s a process to making a video viral, and that process is often a lot more important than the content itself.

This seems somewhat unmeritocratic and counter to the point of community-based voting systems. You want the see the best content, as voted by an objective set of your peers, not as manipulated by clever viral marketing experts.

The post got 515 comments, a second post in which Dan responded to the attacks that people like him corrupt the purity of video sites like YouTube by manipulating users into viewing mediocre content (I guess the general reaction was that it’s like those SEO people who try to trick Google and eventually get punished for corrupting the results.), and an interview with CNN.

Michael Arrington posted a somewhat dramatic comment noting that “frankly I’m disgusted by this”.

But as they say in politics, “all press is good press”. Controversy is an effective marketing tool. This kid is now on the map, and I’m sure that lots of companies will be calling him. Random people like me are blogging about him and thinking about how much we need someone like him for our companies, even if there is something slightly unsavoury about “artificially” making your video popular.

But isn’t that the definition of a marketing campaign? Artificially making something popular? Isn’t all marketing/advertising on some level invasive/misleading/untruthful/manipulative? Maybe that’s what Mark Zuckerberg is learning given the backlash against Beacon . . . .

When I first heard about SEO, I thought it was “shady”, because it tried to manipulate Google’s results for corporate gain. And I guess I have the same feeling about Dan’s company.

But now I realise that start-ups like mine live or die by SEO. Manipulating Google (within their self-imposed limits) is the name of the game. And the same will probably be increasingly true about videos.

That’s marketing, folks!

So with that in mind, I’ve posted two videos:

• Dan’s interview on CNN explaining his vision of SEO for videos; and
• a video that various French friends have been sending me about a musical group that performed on the subway in Paris. Their video already has more than 1 million hits on YouTube! It’s obviously a viral marketing campaign to promote an upcoming album, as was the performance on the train. It’s a cool little video that cost absolutely nothing to make, but who knows. Maybe Dan’s company helped them make it popular on YouTube . . . .

Naturally 7 (live on the Paris subway)

Dan Greenberg on CNN, SEO for videos

It seems that everyone is talking about the fact that online real estate sites are increasing in traffic despite the overall drop in demand. The story’s been getting a lot of press recently, and El Pais, a leading Spanish newspaper, is the latest to jump on the bandwagon, noting that in 2007, Spanish real estate sites doubled their traffic even as demand dropped dramatically.

The relevant data includes:

• 50% of all home seekers begin their searches online
• The total number of Internet users that search on online real estate sites to find apartments has more than doubled, from 1,6 million in 2006 to 3,5 million in 2007
• The increase in users can mainly be explained by the rapid growth of Internet usage in general
• Fernando Encinar, Idealista’s communication director, points to Germany’s ImmobilienScout as an example of the fact that a stagnant market combined with strong growth in Internet usage can still create a highly profitable online real estate business (I’m trying to compile more detailed info to analyze this last assertion in more detail, but the facts speak for themselves — Germany has had a relatively flat real estate market, but ImmobilienScout just got bought at a valuation of €545 million).
• Fernando also notes that properties in Madrid now stay on the market 10% longer (on average, apartments stayed on the market for 189 days this year vs. 172 days last year), while in Barcelona apartments stayed on the market for 35,5% more time (183 days this year vs. 135 days last year).
• 1/3 of the apartments listed on Idealista have decreased in price, and prices have fallen over the last 3 months by 0,5% in Barcelona and 0,9% in Madrid.
• After years of more aggressive increases in the price for listing on their sites, some real estate portals have waived price increases to retain existing clients with lesser budgets.
• The article suggests that the four main challenges for the existing real estate portals are:
  • Finding ways to improve their search filters
  • Offering more and better features
  • Playing a more active role in the sale and purchase process, apart from just providing listings and similarly general information. Alternatively, offering the real estate agents a better return on their investments will be essential in deciding which websites survive and which sites fail.
  • Getting to know the Internet user better, offering more personalized service and the option to participate in helping to generate content/count on the user’s feedback.

I couldn’t agree more. The ideas are clear. Now it’s time to see who executes best.

Sorry, that’s a random reference to one of my favorite “dumb” movies — White Chicks from the Wayans Brothers. It’s basically the ghetto equivalent of saying “Bring it on!”or “Let the Games Begin!”

Long story short, News International has invested in a UK property vertical search engine called Globrix. A few key facts:

• The investment was for “a multi-million pound funding round”. Combined with the valuation that Properazzi got from Mangrove just for the initial idea of a vertical search engine a couple of years ago, it shows that the property search engines like nuroa are an increasingly interesting area.
• The company, Globrix, still hasn’t launched, but intends to launch during this month. The company was founded in 2007. If you go to their website, you will see that they are still in private beta. This makes me a little better about all those people who asked “When are you going to launch nuroa?” Sometimes the prize doesn’t go to the person who launched first.
• The million-pound investment appears focused on marketing and advertising, as the goal is to make Globrix one of the most trafficked property sites in the UK within the next 12 months. So they’re going to buy their way into being a market leader.
• Globrix’s business model appears to be exactly the same as nuroa’s.
• News Corp claims that the technology is “next generation”, which is simply another way of saying “a web 2.0 property search engine”, just like nuroa. As the CEO of Globrix explains: “Globrix is about answering a fundamental need in this marketplace - creating a Google-style model for the property search industry. By enabling agents to list for free we cover virtually every property in the UK, which in turn provides a hugely compelling proposition for consumers and creates a new opportunity for an ad-funded model.“
• News Corp argues that investments in vertical search are a key part of its digital strategy (it should be remembered that News Corp invested $13.5 million in the US jobs vertical search engine, Simply Hired ( www.simplyhired.com), which Google is reportedly in talks to buy, a fact confirmed to us by a News International representative at a conference that we attended recently. In any case, News Corp appears committed to vertical search. As Clive Milner, Group Managing Director, News International, said: “Through its digital and print media, News International is one of the largest single players in the UK property media market, so this investment is about us remaining at the forefront of what’s happening commercially and technologically. Globrix is set to be a truly disruptive business in the online property search marketplace - it essentially turns the economics upside down and creates an unparalleled consumer offering from an innovative business model.”
• News International invested in a property search engine, despite already owning 50% of the number 2 property portal in the UK (Property Finder — www.propertyfinder.com). As mentioned above, they note that the new technology is the next step forward, even taking in account their years of experience in the classifieds sector, both print and in web 1.0 vertical real estate portals like Idealista and ImmobilienScout.
• All of this despite the fact that the UK property market is one of the most difficult, given the economic power of Rightmove (a valuation of €1.2 billion) and its exclusive control of the real estate agents (the top 3 real estate networks that control about 60% of the market are their original JV backers). No other market in Europe has barriers to entry as high as the UK market or as many strong already existing competitors. By comparison, the France, Spain and Germany are relatively easy — the market leaders aren’t quite as dominant and there are fewer property search engines covering those markets.

I think this is good news for other vertical search players, particularly those of us not focused exclusively on the highly competitive UK market. It seems that Globrix will do essentially the same thing, but will now count on a few million pounds to attack other UK players such as Extate, OnOneMap, Nestoria, Zoompf, Right Move, etc.

More news to come tomorrow about the recent ICMA conference, and the present Web 2.0 conference that I’m attending.

The Wall Street Journal is reporting that Microsoft is in talks to buy 5% of Facebook for $300-500 million. Facebook is courting multiple investors and is asking for a valuation of at least $10 billion.

Google is apparently also in the running, though Google has a lot less cash saved up than Microsoft does.

Must be nice to be Mark Zuckerberg.

Facebook is growing quickly. It not boasts 40 million users, up from 9 million one year ago.

But the funny thing is that the Journal reports that Facebook has chosen the investment approach, because their business model can’t sustain an IPO. The valuation isn’t based on actual earnings or profit. It’s estimated that Facebook has earned the majority of its $60 to $90 million (with no profit) in annual revenue from an advertising deal with Microsoft and that this year it will have a profit of $30 million on revenue of $150 million.

That’s a multiple of 300x profit, which is a bit exagerrated, particularly if you take into account that the payments from Microsoft are effectively a subsidy to create a relationship with Facebook. Although social networking sites like Facebook have huge audiences, most of their members don’t want to see ads. Their click-through rate is relatively low.

But the valuation is more about the clash of the Titans — Google vs. Microsoft — and the fight for the future of the Internet than it is about Facebook per se.

The Journal also has an interesting “where are they now” study of GeoCities, a social networking site that was the Facebook of its day. In August 1998, GeoCities was the 3rd most visited site on the web, and Yahoo bought the company in 2000 for $4.7 billion. But GeoCities failed to update its technology quickly enough so that less than a decade later, the site and its technology are obsolete. Apparently, Yahoo was more focused on building traffic than on improving the service, which meant that Facebook, YouTube and MySpace were soon able to dominate the social networking space.

As the Journal points out, of the top 20 most visited sites in 2003, only 9 still occupy market-leading positions. Innovation — and finding a viable business model — are the keys to staying relevant.

$500 million should go a long way towards making that possible.

Did you know that the English term “mortgage” originally meant “dead pledge” in French?

Real estate (or property, as the Brits say) almost meant “dead pool” for me. (”Dead pool” is the term that Michael Arrington of TechCrunch uses to characterise failed tech start-ups.) I ran my own real estate business for three years, so I fully appreciate the challenges that small real estate agencies face.

We started out as a franchisee of a well-known Catalan agency, but we soon found out that we were paying 2-3x more to advertise on a weekly basis than if we had called the newspaper and placed our own ads. The extra money was to subsidize the franchise’s expansion, but we never received anything of equal value in return.

We were too dumb at that point to realise that it was larceny.

We asked them why they didn’t improve their website to cut expenses, but they treated us like silly little kids and told that Spaniards don’t use the Internet to look for apartments. That we were being too American.

They were wrong: Most Spaniards initiate their real estate searches online. It’s not an American thing, it’s a common-sense thing.

And the franchisor’s website still sucks.

So we asked them to buy us out of our remaining franchise payments, and they agreed. And so we moved our staff to our independent office.

Things were going better for a while. We had more money to spend on marketing, and we used an approach that included 2 local newspapers and various online sites, including Loquo and Idealista.

We found that sites like Loquo and Idealista generated loads of new clients, but there were key differences in the types of calls that we received.

At first, Loquo was a phenomenon. We were getting at one point 100 calls a week, and maybe 20-30 of them were from Loquo. And best of all, it was free. But at some point, Loquo became too glutted with real estate ads without any effective search or filtering mechanism, and it stopped generating calls.

Other free sites claimed to have hundreds of thousands of monthly visitors, but they never once generated us any leads. They seem to rely on Google ads to make money without offering any real value to their users.

Idealista was also generally quite solid, but not so much as Loquo at first. And, it was a pay service, so that meant that we weren’t quite as enthusiastic about it.

We’d get a solid 15 calls per week from La Vanguardia, a local newspaper, but it was the most expensive single advertising outlet. My agents tended to favor the La Vanguardia clients, because Internet clients tended to be more demanding. They didn’t want any pitch. They don’t want to see 10 other apartments. Their bullshit-detector is on high alert. They just wanted to know if you had the advertised apartment, if it met their criteria and, if it didn’t, they didn’t want to leave their details.

Newspaper clients tend to be more willing to meet up. They are more trusting. They’re not going to do loads of searches on the Internet. They liked it if you did the work for them.

That was our experience, in any case.

And with this combination of marketing outlets, as they sang on the Jeffersons, we were moving on up.

But all of that came to an abrupt end in late 2005, when all of a sudden the market dried up. People were still looking for apartments, but banks weren’t giving out any money given all of the talk (IMF, the Economist, etc.) about a real estate bubble in Spain. They started to ask for double guarantees and to scrutinize mortgage applications more deeply.

But here’s the conundrum: The average Spaniard earns about €1500 a month from what I read in one of the free newspapers. (I say that as a disclaimer.). But the average price for an apartment in Barcelona was about €6000 per metre squared. Assuming that a small apartment in Barcelona is about 40 metres squared, that meant that the buyer would have to pay about €240.000. The Bank of Spain requires that the buyer should have about 20% of the purchase price as a down payment. So that’s €48.000 for a deposit, plus another €24.000 (10% of the purchase price) to cover expenses, meaning that a buyer of a mediocre, small apartment in Barcelona should have about €72.000 in cash to buy a flat — or the equivalent of about 4 years’ salary, assuming that no taxes are paid on the salary and that the buyer has no other expenses (maybe he’s been living at his parents’ home and has no car or social life?). And this means that the apartment should not be in any need of refurbishment and no designer furniture should be contemplated.

And of course, most buyers don’t dream of buying a 40 metres squared apartment. In Spain, they’d rather continue living at home with their folks. Or increasingly, they are moving outside of Barcelona.

For a while banks were offering creative solutions to fix this misalignment of realities, but the Bank of Spain soon got serious and become more vigilant in disallowing lax mortgages. The Spanish economy was at risk.

On top of all of this, a lot of real estate agents are badly trained, accustomed to being able to sell junk to eager buyers — most didn’t have the talent to actually convince someone that a mediocre apartment could be transformed into a dream home.

And, of course, you had all of the clever home owners and investors who refused to accept discounted prices / offers, sure as they were that the prices would continue to grow by an average of 17% per year.

A recipe for disaster, that I must admit, the Spanish government appears to have averted.

The US wasn’t so lucky, because they gave out “no-doc” subprime loans (i.e., you didn’t have to verify the borrower’s income, even though the borrower was a credit risk) and “ninja loans” (i.e., the borrower didn’t have to have income, a job or assets).

But the bottom-line is the same in both countries:

• The real estate market is struggling, meaning that it takes a very long time to sell a home;
• Many real estate agents have had to look for new professions, as commissions are harder to come by; and
• A lot of small agencies have closed, unable to weather the storm.

Real estate is a tough business.

And the key to the whole thing is marketing your portfolio of properties at the cheapest possible price to the widest possible audience. For a variety of reasons, the only options that used to be available in Spain were handmade Xeroed fliers that were placed on cars and expensive but generic ads in local newspapers. And then there are free sites like Loquo, which are cool as long as they don’t become so big and glutted that they lose all value. Or pay sites like Idealista and Fotocasa, which are great values relative to newspapers but not necessarily relative to sites like Loquo (at least from the agency’s point of view).

We are hoping to disrupt those approaches by giving talented real estate agents with a little bit of vision a new opportunity.

For most small agencies, even €300 a month on one portal or on one source that is generating mediocre lists of leads is too much. That’s why our service is free.

We understand that our property search engine will succeed only if we are able to generate real and meaningful leads for real estate agencies and sellers in general, so that we can all avoid the dead pool.

It’s that simple.

eMarketer has an interesting study today of the shift of local ad dollars away from traditional offline yellow pages to search engines in the United States. The argument goes as follows:

• Local offline yellow pages directories are a big market ($12.4 billion), particularly compared to national offline yellow page markets ($2.2 billion).
• Internet yells page directories (IYPs) don’t function as well, because people searching in a phone book go to the business categories as determined by the book’s index. People on the Internet go to search engines and do keyword searches.
• If only 20% of the ad dollars from offline classifieds and directories (a combined $37 billion market in the US) to online classifieds and search engines that would add up to $7 billion of additional local online ad spending in the US alone.

The following chart demonstrates both the current power and future potential of online classifieds and local search markets in the US.

Internet Yellow Pages sites, on the other hand, are expected by most analysts to grow a lot more slowly.

eMarketer notes that not every analyst supports the conclusion that local search will grow more quickly than Internet Yellow Pages.

But it appears to be clear that, regardless of to which destination they might go, people are moving online to find out more information about local businesses, whether in the form of Internet yellow pages, local search, local directories or newspapers online.

It’d be interesting to see the relevant numbers for Europe.

Simon Waldman, Director of Digital Strategy for the Guardian Media Group in the UK, has posted a very insightful presentation about the intersection of the Internet and Web 2.0 on his blog. The text reflects a speech he gave to a German general media audience in Berlin. There is also a pdf version of the script of the presentation.

Simon makes the following arguments:

• Newspapers that want to survive need to embrace, exploit and excel in web 2.0. “There is no denying that our industry — particularly in Western Europe and North America — is structurally challenged, and that is almost entirely down to the net. . . . But I fundamentally believe that newspaper publishers who are prepared to experiment, innovate and invest online will create significant cultural and commercial value as a result of their efforts.”
• Internet moves quickly and probably a lot more quickly than the pace to which traditional media groups are accustomed. “Being online is like having a shop in a mall– you have to keep up with everyone around you, even if they’re not a direct competitor. Otherwise, you seem very tired, very quickly.”
• There are four axes of Web 2.0. “I know that there are all sorts of definitions of Web 2.0, but in my mind there are four key characteristics in the boom: Social networks, search and aggregation, collaboration and video.”
• Google is a frenemy. “Google and its impact on every sector of the economy’s attempt to grapple with the Internet are undeniable — and the newspaper industry perhaps more than most. Some of us see them as a competitor and a stealer of content; others see it as a source of traffic and revenue . . . . [B]ut all I will say is that defining and understanding a relationship with Google and other search players and aggregators is a crucial part of operating effectively in the online world.”
• There’s no turning back, even though most newspaper companies and traditional media groups might wish otherwise. “I wish Google would go back to being a nice, cuddly search engine that does no evil, rather than a global advertising bohemoth. Or at the very least, I wish they had to pay big bucks to carry our headlines and first paragraphs on Google News. I wish free classifieds sites would go away, or that the Internet has recruitment advertisers rushing to spend more rather than less. . . . [B]ut I also know that they are not going to happen. . . . The point is - this is about change. Not a gentle, start of the new school year, kind of change — but disruptive, shifting of tectonic plates kind of change.”

It’s good to see this kind of realistic optimism from the traditional media. There are obviously a lot of synergies between newspapers / media groups on the one hand, and search engines on the other. Indeed has The New York Times as an investor and strategic ally. Simply Hired has News Corp. Yahoo and Google are also increasingly trying to create cross-selling opportunities with newspaper groups.

But it’s also true that when we spoke to some investors initially - and even more recently - people seem to have the concern that search engines and aggregators “steal” their content, rather than they are partners that can redirect traffic to their businesses for less money than traditional media outlets, like newspapers, that charge a lot more for reaching target audiences.

In any case, it seems that the “slow death of newspapers” at the hands of search engines, aggregators and online classifieds sites is in the news a bit this week. Don Dodge has also an interesting post entitled “Online classified ads take $3.1 billion from newspapers,” which is review of an article in the Washington Post about the same topic. The post article is particularly interesting because it examines how vertical search engines such as Edgeio and Oodle are disrupting traditional classifieds businesses.

The bottom line: Search engines and aggregators are here to stay. Not all of us will survive, and most of us will be co-opted or bought. A few may become large, independent IPO-friendly companies. But the technological and economic disruption to traditional media companies can not be ignored or denied.

The Wall Street Journal had an interesting article last week entitled: “Investors to Web Start-Ups:
Where’s the Advertising?” The article mainly traces the experience of Glenn Kelman, who runs an online real-estate brokerage called Redfin Corp. Unlike migoa (or Trulia or Zillow, both of which are also mentioned in the article as advertising-based alternatives to Redfin), Redfin allows consumers to buy or sell homes online. Its model is based not on advertising, but rather on the commision that it receives for each real-estate transaction that it facilitates. The commissions are less than buyers would pay traditional brokers, so everyone is happy.

The main point of the article is that (as Kelman explains): “Today, there’s nothing more fashionable than having an ads-driven model.” So much so that most Silicon Valley analysts told him that he’d have more success if he switched to an advertising model. Kelman is “swimming against the tides,” meaning that he is one of the few Internet entrepreneurs whose business model isn’t based principally on advertising, and for that reason alone, he found it more difficult to raise funds from investors.

Steven Carpenter, CEO Of Cake Financial, makes the same point: “If you have a model that is different from the 90% of consumer-Web companies folks are seeing today … it’s difficult to break through that clutter.”

The logic is clear from the VC’s point of view. The Wall Street Journal explains:

“Venture capitalists tend to be fans of ad-driven sites since advertising revenue theoretically covers the cost of giving away a Web service free, and free sites attract users much faster than sites that charge money. Such sites are typically also cheap to run because there is often no need for customer-service agents or costs for physical goods. So such companies can have high profit margins if they succeed. Many of today’s hottest Web properties are based on the online-ad model, including Google Inc., which pairs ads with search results, and social-networking site Facebook Inc.”

I couldn’t help but think that our experience has been almost the opposite in Spain. A lot of VCs told us that they didn’t believe in an advertising-based model — that it was sufficiently discredited in 2001 — and that we should contemplate a commission-based model that would be secure. We kept telling them that serious money is being made based on advertising models, but many seem to believe that Google’s success is a fluke.

For me, the key question is: How do you build traffic? If you are available to create a product that can generate interesting traffic numbers, the money issues should resolve themselves in the mid-term future.

After all, online ad spend is growing at monster rates, with no apparent decline in sight. Many traditional media sectors, on the other hand, are in decline or at best growing very modestly.

In any case, let’s not cry for Kelman and Carpenter just yet. Kelman eventually raised $12 million in funding, and Carpenter also received VC funding.