20th March 2007

Growth, Money in Advertising?

posted in Business |

There is quite a discussion going on right now about growth prospects for startups, and projections based on advertising revenue.

Hillel’s central point is more about the effect of taking VC money rather than the viability of advertising as a revenue source. In the specific focus on advertising revenue a couple of points got confused. First of all, the fairly low CPM numbers are typical for a low-volume business based on AdSense but once you get into more specialized networks, you should expect your revenue to go up. AdSense (as well as the affiliate networks like LinkShare and Commision Junction) are the bottom of the barrel in terms of advertiser spending. Its their throw-away money typically. “Sure, I’ll toss a couple of grand into the budget- if I get a site visitor for $.25, thats such an incredible deal, why not?” Now, there are plenty of people advertising with AdWords where its their main thing, but they are themselves pretty small. Back in 1994-1995 I remember looking at ad-rates in MacWeek and just being knocked over that it cost thousands just to get started in that game. Never mind that I didn’t understand the importance of repetition in advertising and how much of a waste of money running a single ad once is.

Having said all that, even assuming you are making more like $20-$50 CPM, you are still talking more than a billion page views needed to get to $50M in revenue. I’m not going to go into any specific numbers, but when I think about the traffic that I’ve seen on fairly successful sites in this wonderful web 2.0 world, and how many orders of magnitude they would need to grow to get to a billion page views a year, lets just say that its sobering.

But I don’t think its a huge surprise that these sites individually aren’t going to get to that lofty goal. But another trend that I’ve seen in some of the VC plans is that the fund companies not just with revenue for their own operations (often the amount of money they give you has very little to do with what you need), but to also acquire other companies. So while its not realistic for an individual media property to necessarily make that $50M on its own, sometimes that money in the bank can be used to grow the company beyond just its own organic traffic growth and hiring.

The other factor to look at is the nature of the business you are in. Many of the online media businesses are not winner take-all. Just because one magazine is successful, doesn’t mean that its going to be the only magazine on the rack. In these cases Hillel’s caution about the effects of big funding (the need to push growth rapidly, shoot for not just big but huge opportunities) seem most relevant.

Other businesses, even in the modern web world are winner take all. I don’t really get what they are doing, but when you look at the pattern of investment from Zillow, they seem to be acting like they are in that kind of space. In those cases being highly capitalized and focused on rapid rapid growth can be the only plan. Build your business the slow organic way in one of those spaces and someone else will come along with a big bank account and buy the market. In these spaces the behavior of the company often seems non-economic in the early days. Its classic for people to be wondering what the heck they are doing and how they expect to ever make enough money to justify all that early spending. Of course once their target market matures and they own it, they then have a license to print money and just go to the bank and with hindsight everyone says that they were brilliant.

The trick is- in the early days its pretty hard to distinguish those situations from bubble-fantasy-craziness. Sometimes it just comes down to whether you know the people running the place and trust that they haven’t lost their minds.

There are currently 4 responses to “Growth, Money in Advertising?”

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  1. 1 On March 20th, 2007, Jackson Fish Market » No Money In Advertising? said:

    [...] On IM (and in his blog) Alex pointed out that there are plenty of startups taking large investment who are targeting big markets. And even though winning is a longshot the payoff is worth it. I agree. And I think it’s great. I have no problem with high risk/high reward. And frankly, there may be some day where we have a product or a service that requires further investment where we would partner with a financing firm. My criticism is of startups that are not being honest with themselves about the real likely size of their business relative to the amount of investment they’ve taken. In these situations the multiple expected by the investors starts distorting the managers’ view of how to grow the business. And a business that might have been solid, healthy, and self-perpetuating, is now trying to scale beyond what’s possible, with often disastrous results. [...]

  2. 2 On March 21st, 2007, Jeremy Wright said:

    1B pages/year is only 80M pages/month, right? That seems pretty doable to me, over a period of 2-3 years. I’m not sure what average traffic in the Web 2.0 space is, but we’re at around 10M pages 5 months after funding, putting 80M/month within reach within a couple of years.

  3. 3 On March 21st, 2007, Alex said:

    10M pages per month is pretty good from my experience. From what I can tell your organization is an aggregation of 100s of blogs, right? That can be a somewhat different equation since there is no single focused topic/application/user base you need to build. It will be interesting to see if you can continue that kind of growth or whether growing the network will become more difficult over time as many of the prime candidates have already been snapped up by one network or another. Nevertheless it sounds like you are doing great.

  4. 4 On March 21st, 2007, Jeremy Wright said:

    Alex, it’s certainly an interesting and uniquely challenging model. You’ll see us come up with some unique offerings this year to extend our reach and leverage our platform, in addition to the natural growth that a network like ours creates :)

    Still too early to tell if it’ll be a long-term, industry-defining success though ;-)

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