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Bubble 2.0

bubble 2.0I have blogged extensively about big raises haunting companies at some point in the future and I think we will soon see this really haunt companies as they are unable to find people to lead additional financings at valuations anywhere near what the last round was at.  As Sequoia has indicated, and has been blogged about extensively, there will now be a rush to profitability as people realize you can no longer ride the VC wave.

Wait, companies have no profits and lived off the fat of VC investments?  That sounds just like the last bubble!  What went wrong here.

Here is my analysis:  The theoretical difference between this round of site development and the last was that the last had very little hope of creating real ad-based revenue streams.  After the success of Google,, and others in building a monetization vehicle for ad inventory, it has been supposed that people could build popular web sites and they would be able to monetize them at any point by slapping ads on them.

The problem with this theory is that it is true, but really only at super scale.  If you are getting billions of impressions per day, then the fact that ad networks have low, low, low cpms can be overcome by volume.  Without massive scale, then you suddenly need you own sales force out hawking your site.  While the market is more comfortable buying online ad inventory than previously, you are still acutely vulnerable to a downturn and it still requires massive investment to build an effective salesforce and gain share of madison avenue mind.

As start-ups built increasingly niche-y sites with less and less obvious advertising monetization opportunities, the fact that there was a lot of traffic and the fact that they were able to build the 1.0 for $300,000 before hiring 150 people and raising $50 million became immaterial.  Today there are many companies that have raised a ton of money, are nowhere near profitable, and scaling them back down to three person zombie companies is impractical for investors.   Remember, was not a completely stupid idea.  Petmeds has a bang-up business today.  It is all about how you execute it.  Now that people cannot “focus on growing the site traffic”, they will find that being forced to rapidly build revenue streams is trickier than they probably hoped.

Just like last time.

6 Responses to “Bubble 2.0”

  1. Steve Goodman Says:

    I’d be interested to hear your thoughts on the possible maturation of behavior tracking and demographic tools for really niche sites. It seems to me that while sticking Adsense or ads on a niche site might not generate enough revenue to keep the company afloat, that there must be some opportunity to do direct sales or somehow increase your CPM without a massive sales force investment IF you have a clear enough picture of the users. Surely knowing that your users are really into gardening, or indy rock, gives you some leverage for sales. The less obvious the monetization opportunity, the less competition there is to get the same ad dollars, perhaps?

    This doesn’t really scale either, but it seems like a good strategy for non-VC backed start-ups.

  2. brent Says:

    In general, I would suspect not so much. In all likelihood, bigger web sites will probably always have a better picture of their users than smaller web sites because they can pay people like comScore more money.

    Certainly, if a site has a valuable audience, one would hope that the market would recognize that at some level and the site would reap the dividends (and hopefully valuable would be different than simply “yielding high CTRs”, the definition of Adsense value in many ways). However, I think it is hard to reap these benefits without your own sales force and I think that is the primary gating mechanism to high CPMs.

    If my blog is about indy rock and a third party confirms, yea, verily, this audience loves their indy rock, how does that translate to higher CPMs? It only gets there if a sales force repping it takes advantage of that information. You may expose yourself to marginally higher CPMs by qualifying into some network tier that offers higher payouts, but I think when most people complain about network CPM payouts, they want an extra zero, not 50% lift. That kind of increase probably only comes from selling direct.

  3. Steve Goodman Says:

    No doubt that selling direct is the only way to go. I’m just wondering where/what are the tools that will enable a company to do direct sales with one or two people on their sales force. Are there direct sales outsourcing companies? How much/what quality of data does an advertiser need to make the decision to buy ad inventory? Is selling ad inventory like selling used cars – only smooth operators need apply?

    It seems like direct sales is easier with a niche site because you’re already narrowing the potential advertisers, and in turn, have a user base of value to offer those advertisers.

    I’ve obviously done no research at all, and am a complete ignoramus on the topic. Again, in my ignorant mind, I feel like the more vertical a company is, the more successful it will be at surviving on advertising as the economy dries up.

  4. brent Says:

    Alas, direct sales outsourcing companies are ad networks, demonstrating that in a world where supply vastly outstrips demand, the value is in the selling, rather than the creation of inventory. Hence networks pay a fraction of the value of inventory to sell it on a companies behalf.

    Certainly some networks adhere more to a model of your liking than others. They pay higher rates and rep more aggressively. The more aggressively a third party is allowed to represent your brand, the higher they generally pay. It still isn’t gangbusters.

    As you indicate, direct sales with one or two people probably does not allow you to build a broad enough relationship across marketers to be able to effectively monetize inventory, meaning only large web sites will be able to build large sales forces because they will have enough inventory and cachet to work with many advertisers. Small sites can hope that one or two sales people can effectively liquidate their inventory at rates that justify everyone’s existence, but that is challenging.

    I am sure some can make it work. Seems challenging. I agree, awesome niche content is bottom-line more valuable than random social media inventory.

  5. Fred Kessler Says:

    Brent — your information may be out of date. There are direct sales outsourcing companies outside of ad networks. The direct sales outsourcing industry generates more than $1B in direct revenue/year outside of ad networks. My company, for example, represents entities ranging from middle market to the Fortune 500 providing direct branded representation (meaning they sell just for the client they were recruited for selling as if they were part of the client’s organization and we report to the client just as a director would report to a VP of sales). The model is more than a decade old and is used by companies ranging from Verizon to Sun to RH Donnelley to Microsoft to ADP.

    Within advertising, direct representation works but it requires a base fee plus variable commitment with any of the major companies. Financially, it is akin to hiring the team yourself but getting access to world-class recruiting, sales systems, sales management, and analysis process. Companies choose this because it provides a better ROI even if the up-front costs are similar to building internally.

    Fred Kessler, CSO
    Sales Partnerships, Inc.

  6. brent Says:

    It is certainly true that there is a spectrum of outsourced sales solutions, from ad networks that pay you right out of the gate for your inventory, to rep firms that take a percentage of revenue, to third parties that allow you to hire them to provide sales staff to you.

    As Fred indicates, the long term ROI may be interesting for a dedicated outsourced sales force, but the up front costs are substantial. The less dedicated they are, the lower the cost will be (with general ad networks paying you, rather than costing anything, at the furthest end of the spectrum), but the lower the CPM they sell your inventory at.

    If you hire a dedicated outsourced sales team, what does sell through look like? It will certainly depend. I suspect that ad networks are the predominant manner people monetize this inventory today.