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.