People Don't Hate Ads -- People Hate Bad Ads

"People don't hate ads. People hate bad, interruptive ads." That was the response of noted venture capitalist Fred Wilson when I asked him why Twitter and Tumblr have eschewed the online ad industry's standard display ads in favor of their own, native ad formats. The exchange took place during an onstage interview I had with Fred on the past, present and future of digital advertising at AdTech here in New York.

Fred is co-founder of Union Square Ventures in New York and one of the most respected venture capitalists in the world, with an extraordinary track record. He and his partners at USV were early investors in Twitter, Zynga, Foursquare, Tumblr, Etsy, Indeed, Kickstarter, Boxee, Flurry and dozens of other hot companies (disclosure: Fred was an investor in both TACODA, my last company, and Simulmedia, my current one). Fred is also one of the highest-profile venture capitalists out there. His blog, AVC, is among the most-read venture capital blogs, and he has almost a quarter of a million followers on Twitter.

Fred has an interesting and unique perspective on the online advertising ecosystem. In the mid 1990s, he had great success backing companies like Geocities, Yoyodyne and StarMedia. He was right in the center of the Web 1.0 world and the development of display advertising. Today, he has a front-row seat (and time in the cockpit as a close advisor to his entrepreneurs) in the development of a wide range of new Web 2.0 advertising formats and monetization models at companies like Twitter, Tumblr, Etsy and Foursquare, none of which use conventional display advertising, but which are among the Webs largest consumer properties.

Over the course of the interview, Fred highlighted six key issues as critical to advertising-based Web services as they build their businesses for the future (credit to AVC community member William Mougayar for helping summarize them). Here they are:

1) Native monetization is key. The atomic unit of your content is what you should monetize. For Twitter, it is the tweet. For YouTube, it should be the video.

2) Focus on scale before revenue. It's not an accident that Twitter and Tumblr focused first on building massive audiences before they focused on monetization. Each service reaches more than 600 million folks every month. Fred's belief is that if you focus on revenue too early, you may never get to a scaled platform. Monetization can be distracting, drain resources and inhibit user growth.

3) Everything is going to mobile. That's where growth is coming from for most Web services, and where all should be focused.

4) Social will reshape commerce. Fred believes that social will be an extraordinary driver of commerce and that e-commerce companies are better positioned to exploit it than social companies. His view is that it's better to make e-commerce more social than to turn social media into e-commerce.

5) Build mobile first. Try designing for mobile first, then move it to the Web experience. This is easier and more effective than going the opposite direction.

6) Amazon is more dominant in its best business than Google is in search. Guess what? Fred's not talking about e-commerce. Fred loves Amazons Web services and views them as much more powerful businesses for the company than its retail business. As he puts it, Amazon is more dominant in Web services than Google is in search. That's a big statement!