Nic has been investing in early stage technology and media companies since the tail end of the (last) bubble. He is a Partner with £300m venture capital fund Esprit Capital Partners and author of the blog TheEquityKicker. Esprit’s investments include WAYN, Buy.At and Lovefilm.

The Internet is creating enormous disruption across the business world in recent times. Whole industries have been turned on their heads. First this happened to music, and next it will happen to video. We’re also seeing the formation of whole new categories of business such as the social networks and user-generated content sites.

We’re also seeing the creation of value at an unprecedented rate. Skype, for example, came from nowhere to a valuation of $2bn in two years. And in some ways, this is not likely to change soon. The reason is that there’s a mismatch between people’s media consumption and advertising spend. The Internet accounts for 30 per cent of people’s media consumption, but only 10 per cent of total expenditure on advertising. As that mismatch is redressed, we will continue to see further growth.

Five Strategies for Making Money

1. Get Bought.

This is the option that tends to hit the headlines and seems to be happening a lot in the current media business, most recently in the case of last.fm, bought by CBS for £140mn. However, this is only going to happen to a very few companies, so it’s a good idea to have a few more strategies for making money out of your web business.

2. Advertising.

This is the big one. It’s the strategy employed by most of the high-profile new internet companies such as MySpace, YouTube and Facebook. It’s also the case with many smaller sites, through Google AdSense modules. But it isn’t just normal display advertising that’s occuring, since there are question marks over the efficacy of banner ads on social sites. Lack of control on these social sites is also an issue for many media buyers, which has led to low yields on high traffic sites.

The atomisation of content through RSS feeds and widgets means that there are different possibilities for placing advertisements than was the case previously.

To create successful advertising on social sites, everyone needs to follow the principles of the Cluetrain Manifesto - to join the conversation rather than attempting to command and control. This doesn’t just apply to brands, but also to people, politicians and organisations attempting to use these sites.

3. Microtransactions

This is a very popular tactic right now. People spend small amounts of money on accessories or add-ons for their social sites. However, it’s lots of people and relatively frequent purchases. Habbo made €51mn last year through people buying virtual furniture and other goods on the system. Stardoll is hitting revenues in eight figures right now, though its model is diversified and around half of that figure comes from advertising. Facebook gifts - at $1 each - is a similar model. Land sales on Second Life might also arguably fall into this category.

4. Freemium

Another popular model in Web 2.0 businesses. You create a free service that’s useful and then add extra functionality for users who pay an annual subscription fee. The best known of these are flickr, where you get extra storage space and upload capacity by becoming a paying member. Also Linked-In, where your ability to contact friends-of-friends is enhanced when you become a subscriber. Newspapers very often use this model for access to their archives. One of our own companies at Esprit WAYN is also a freemium service. At the moment, it is rebalancing the amount of services users get for free. There has to be enough to make it a useful service without paying before people will consider taking out a subscription.

5. eCommerce

This is one of the best established methods for making money out of an internet site and obviously lies at the heart of giants like Amazon. It might not be just a question of straight transactions, though. Lovefilm [another Esprit investment] uses a subscription model to give members access to films. It can also be bolted on to existing networks: flickr has added moo cards to its services, for example, whereby people can have business cards created from their photographs.

All of these good models explain why sites and services with high traffic but no apparent monetisation are being snapped up for huge sums or receive considerable venture investments. It is actually quite easy to add monetisation in several forms once the traffic and the community is in place. I would suggest that 2007 is the year of monetisation for social sites. The issues and the risks are in the tension between monetisation and growth. We are really at the very early stages of understanding how that plays out.

Multimedia Options

Nic has kindly made his presentation available; the slides are here. The podcast of Nic’s speech is available here, courtesy of our friends at Yada-Yada.