Advertising Is Not a Business Model
And You Don’t Have to Be a Business
The world of the internet demonstrates a reality where you make money simply by people experiencing a free product. This promise of money from nothing generally comes from one source — a source that many people call evil: advertising. But moral qualms aside, advertising should not be your business model.
What It Takes To Make $1 Million
Many startups that claim they’ll make money on advertising in the future simply don’t consider the massive scale required to make that a reality. Let’s take the average CPC (cost per click) of a Facebook ad and do the math on what it takes to make $1,000,000 from advertising.
Amount of clicks required to make $1,000,000: 3,703,703
Since the average CTR (clickthrough rate) sits around 1%, you need 100x the amount of clicks in terms of viewership.
Eyeballs needed to drive $1,000,000 in ad revenue: 370,370,300
You need about 400 million views per year to generate $1,000,000 annually. And as everyone knows, it’s NEXT TO IMPOSSIBLE to make anybody look at anything.
Either Growth is Your Business Model or You Aren’t a Business
Since it’s next to impossible for advertising to be your free product’s business model, you’re left with two choices. You’re either: 1. a startup where growth is your business model, or 2. you aren’t a business. Believe it or not, both can be viable.
Growth as a Business Model
Many new companies have recently shown me their pitch decks, where they describe how they’ll build an advertising platform that will be so custom and effective so as to demand higher premiums than your average social software. First off, I don’t think VCs actually buy that line; second, it’s a waste of time. If your intention is to remain a free product and potentially sell ads in the future, your business model is eyeballs. If your business model is eyeballs, you need to be talking about how 500 users becomes 5,000,000 users. That’s all that matters. VCs always talk about distribution because if you can’t break open that nut, you’ll never scale. And if you never scale...
You Don’t Have To Be A Business
Or, the part of this post everyone will disagree with
Many startups are acquisition fodder. Acquisition is not bad and can, in fact, be an amazing outcome — but investors want to hear how they’ll get their 1000x return and therefore don’t like to hear about exits. However, many tech companies find success by not becoming a business based around growth and the future of advertising, but rather building technology that is uniquely beneficial to one of the big incumbents (Facebook, Google, etc.). The technology can be so beneficial that these companies decide it’s smarter to acquire the entire company rather than build their own version.
Jason Lemkin on This Week In Startups talked about how most acquisitions are outsourced R&D. If company A is huge and wants to add location-based features to its product, they might just acquire a location technology company. Acquiring a team of 50 people who have already built the feature is purchasing an asset and is therefore a net positive, whereas hiring 50 people to build a feature from scratch becomes a loss.
Choose Your Poison
If you’re a huge growth company, make huge growth decisions. If you’re outsourced R&D, you better focus on building technology that no one in the world has. These are very different paths and require very different teams and execution. Don’t fool yourself by saying, “we’re going to build an advertising model once we hit scale.” What you’re doing is either scaling exponentially and forever, or you’re building tech that’s sexy enough that the big dogs don’t care you won’t make money. Pick the side that best reflects your company and product, and run with it.
As always, you can reach me at firstname.lastname@example.org.