Investing in Advertising Based Business Models
Over the past few years, investments in companies with business models that monetize (or plan to) through direct ad sales are increasingly common. In terms of these investments, I am specifically referring to companies who do content creation (Funny or Die) and / or have consumer facing products (Facebook) where advertising based business models are appropriate.
Ad based businesses can be tremendously successful - I do not have anything against them. That being said, I believe that building a successful, scalable direct ad sales business is more challenging than building an underlying product or technology that can differentiate itself in the marketplace. Based on the investments that I have done and seen over the past few years, I thought it would be interesting to highlight some of my challenges and learnings about these companies and ad sales teams in general.
1. Building and scaling a successful, effective ad sales team is MUCH, MUCH more challenging and time consuming than one thinks (even conservative thinking).
2. With few exceptions, startups relying on advertising based business models will take longer to scale and will not scale as quickly than underlying technology plays (obvious, but often understated).
3. Trying to introduce new ad units into the market rarely works. Agencies and advertisers go with what they know works.
4. A poor economy makes advertisers and agencies risk averse. Marketers and agencies will go with television, DR and other true-and-tried advertising forms - at the end of the day, they can still say to their boss - “Heck this has worked in the past, now is not the time to change.” Note: this is the same logic often why companies select Goldman as an investment banker - if something goes wrong, the company decision maker can always say “hey - what did you want from me, I chose what has been successful in the past.”
5. Even an effective sales force is costly and expensive
6. Good ad sales teams can be amassed through trial and error, GREAT ad sales teams are very, very few and far between (even with many tries).
7. Even great content takes work to sell.
Just a few conclusions that I thought were interesting when looking at the challenges behind startups that have a direct ad sales based business model. I would be interested in hearing others thoughts, so please send your thoughts my way. Unfortunately I haven’t had time to focus on this blog over the past month, but one of the things I am dying to add is comments.
