Making money from internet investments

The heady days of the dotcom bubble are long gone, but the Internet remains a daunting area for investors.  In a world where technology is rapidly converging and most business models incorporate an online element, knowing how to harness the Internet – and make money – remains a highly valuable skill. 

Private equity backers generally look for market leading businesses in fast growing markets, with proven management teams, a resilient business model and a proven record of growing revenues / profits. 

But when it comes to the Internet, it can be hard to find businesses that are both ahead of the curve (or have the potential to be), and have a solid and proven financial model. Nobody could deny the success of Facebook, for example: the number of people using the site in any given month – there were 340 million unique users in June 2009 – is bigger than the entire population of the US. But its audience monetisation has lagged far behind its audience growth.

Natalie Tydeman

Which are the most attractive internet businesses for private equity investors? A useful starting point is to look for differentiated, value-added content / services, particularly in a niche area.  Then, does the business have an established brand that can rise to the top amid the proliferation of media offerings available? Also, does it have an ability to capture the benefits of network scale – bringing together the largest group of consumers or suppliers or both – to create a proposition that is significantly more valuable than smaller competitors’? Finally, can it build multiple revenue streams in order to maximise the monetisation of each customer segment?

As we see with Facebook, building a successful brand and attracting a significant audience are important but only half the battle. The next step needs to be monetisation: converting audiences into revenues. It is estimated that Facebook generated revenues per active user of only 10 cents per month in 2008, primarily through advertising. By comparison, Tripadvisor, through lead generation and advertising for travel services companies, generates about seven times this amount. Bigpoint, one of the top three gaming portals worldwide, through virtual items sales, and Meetic, which owns dating sites such as DatingDirect.com, through subscription revenues, generate 25 to 30 times this amount.  

One of the most successful emerging business models is “freemium” – offering basic services for free, while charging a premium for advanced or special features – which maximises the value of the different subsegments of an online community.  

For example, Bigpoint provides a highly popular game-playing experience for free, to an audience of more than 100 million registered users. But it allows players to pay if they wish to personalise their experience or speed up their acquisition of in-game virtual items. 

With revenues growing at nearly 150 percent annually, Bigpoint demonstrates the increasing appeal of online games offerings as well as the strength of the freemium business model. It also shows that even in an economic downturn, having the right business model and offering, can make Internet businesses highly attractive investments. It’s all about knowing where to look.

Natalie Tydeman is a partner with GMT Communications Partners, a London-headquartered firm that focuses on the media and communications sector.