Flipping is not a business model

I’m getting ready to grade the final projects for my tech strategy MBA class. One of the projects is about a Web 2.0 company seeking a business model — a common problem.

Near the end of the presentation, one slide summarized the revenue model options:

1. keyword advertising
2. promotional services
3. freemium
4. sell the company

With the last point, I hit the roof. (Figuratively — I tried to be patient with students no matter what they say.) This is wrong, wrong, wrong!.

Sure, it’s wrong conceptually, theoretically, legally. Getting an investment is not the same as generating income.

But it’s also wrong from a business standpoint. Yes, the founders and VCs get what they want — but the founders have failed to solve the fundamental problem of their business.

Perhaps someday Google will be able to monetize the $1.7 billion they paid for YouTube; there are certainly going to be cases where the acquiring company has economies of scope (or distribution channels or negotiating leverage) to pull off business models that wouldn’t work for a stand-alone company.

But for every YouTube, there’s a MySpace (bought by Fox), Bebo (AOL), or Skype (eBay).

On the one hand, it’s hard for stand-alone tech companies to get established and compete against diversified and integrated tech giants — whether Apple, Cisco or Nokia. On the other hand, the idea that entrepreneurs should seek an exit prior to creating something of lasting value is part of the “born to flip” mentality that was briefly in vogue during the past decade.

So I think there are a few students in one MBA course at one university who are getting the message. Let’s hope that others do, too.