I was reading an excellent article today that was posted by James Hong, one of the co-founders of HotorNot. It basically detailed HotorNot's rise to a multi-million dollar company, but it also discussed the broader implications of becoming too attached to your cash flow, and how you run the risk of becoming redundant if you don't continue to expand and innovate.

In the article, he says that due to the popularity of the HotorNot web site, the two co-founders were able to bank millions of dollars per year in profits with little work (10 hours per week.) The company, which started out as a simple picture rating site, morphed into an online dating site. The online dating portion of the site generated over $500k per month for the company.

The company ran into two problems. First off, the co-founders wanted to hire people to run the company, however they had a hard time retaining good people to work at the company. Why? They were hiring smart, entrepreneurial people to work there, and even though they were paying them excellent salaries, these people were tempted to start their own companies due to the relatively low cost of starting up an online business. Also, because the two co-founders had become attached to the positive cashflow of HotorNot, they refused to innovate, as they didn't want to disrupt their cash cow. Because they didn't offer equity to their workers, the workers soon left, tempted by stock options elsewhere.

The second problem is that online business models changed. Soon after the dot-com bust in 2000, online advertising dollars dried up, and many companies switched to charging their users for content. HotorNot did this, and they did this successfully. However, in 2004, the online advertising dollars started to re-appear, and it suddenly became viable again to offer free content that was financed by advertising dollars. Because of these increased advertising dollars, free competitors sprung up and started taking market share away from HotorNot.

The founders were faced with a decision. Milk every last penny out of HotorNot using its current business model, even though they were losing share by the day, or completely re-do their model, and stop charging users for content. They chose the latter, and I applaud them for it. They threw away a $500k a month revenue stream and they will be better off for it in the long haul.

This brings me to my point. Innovation and expansion is the key to keeping any business healthy, especially an online business. If you stand still on the Internet, you'll be run over by someone else. Things change so fast, that if you aren't on the ball, constantly thinking about how you can improve the experience for your users, your business will eventually fail.

The big "secret" to running a business on the Internet is user-generated content. If you figure out how to get your users to contribute content to your site for free, you are golden, because you will be able to monetize that content. You are providing the means for them to contribute content, they are doing the grunt work, and you are getting paid for it. That's the beauty of the web.

As the article says, "Stop clinging to the past and Jump into the Future." This is especially true when it comes to doing business on the Internet. If you aren't constantly thinking two steps ahead, your business will suffer.

Filed under: Internet Companies | Motivational

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