Written by Darren Herman - February 24, 2008
Roger raises an important issue when it comes to assessing company valuations and inventory: how much of it is monetizable? This is an extremely important question and often gets answered by the associate or general partner of a venture firm who is building the financial model for the startup they are looking at investing in or the M&A team who is looking to acquire an ad-supported startup.
One of the top concerns of mine and I’ve been through it first hand: when venture capitalists or corporate development teams are working through a financial model to figure out how much your inventory is worth, I can almost guarantee not one of them has ever spent any time in an ad agency (on the media team) or in marketing at a brand. I’d imagine over 90% of all VC’s or M&A folks come from finance, engineering, or similar backgrounds.
This is a problem (there is always a solution to any problem) when it comes to monetizing the web. We like to think that just because Facebook delivered over 12 billion pageviews in January 2008 (ComScore), they are able to monetize all 12 billion. Unfortunately, that is not and most often never the case. Case in point: Yahoo sells out the homepage of their site, but I know first hand that they have quite a bit of inventory that goes unsold on other areas of their network. Trying to buy a Yahoo! home page though is quite expensive and is sold out for weeks at a time.
There are a few important reasons (amongst many others) why any company who sells advertising on their website may have unsold inventory (startup, emerging company, or world renown):
1. Ad sales team is not effective. Tough to find, attract, and maintain a top-notch sales team in any industry.
2. Depending on the size of a company, a sales team can only cover so much geographical territory. For every territory not covered, money is being left on the table.
3. The ad marketplace (agencies and/or brands) may not want to purchase the inventory available for a host of different reasons.
4. The business environment is not conducive to ad spending at this time.
Most startups that I’ve had the chance to work with like to deploy a direct sales strategy first and sell all of the high-level integrations (longer sales cycle but more expensive buys) and then outsource standard inventory (IAB) to ad networks, rep companies, and participate on advertising exchanges.
With so many advertising supported (either fully or partially) startups in the market, the networks and exchanges are growing at an increasing rate. My guess is that the amount of inventory available to advertising networks is outpacing the additional advertising dollars available so the % of monetization of inventory is decreasing on a month-to-month basis. If there is a downturn in the economy, this will surely affect the sell thru and the % of monetization will decline rapidly.
Most of the purse strings of advertising budgets are held by ad agencies. Yes, ultimately, brands sign-off on any plans, but agencies are doing a lot of the work to make strategic and tactical recommendations as to where to spend the brands money.
There are many types of agencies who spend their money digitally:
1. Interactive (only) shop
2. Performance marketing (direct) shop that has a digital capacity
3. Fully integrated agency (digital, print, OOH, television, etc)
4. Others..
The way that each of these agencies looks at the digital environment may be very different from one another. A fully integrated agency may not be looking at performance driven marketing (CPA type stuff) whilst an Interactive shop may not want to amplify what the brand is doing offline into the online world. These are just examples and may or may not hold true for any and all of the agencies.
The bulk of the premium inventory on many websites are being sold to Interactive and Integrated agencies as they are the most creative and high-impact. Beyond this, agencies may purchase inventory from ad networks to add reach (or hit certain goals) and in some (increasing) cases, ad exchanges, though compared to the larger pie, small [today].
Just because you have 12 billion page views, should you be worth $XXCPM * 12 billion/1000 * XX months? (or whatever the valuation equation is?) I’d also like to see some marketing gurus head into the finance world, that way, we can add some context to the valuations occurring today. The majority of sites will not monetize 100% of their traffic 100% of the time. Please remember to keep this in mind.
One other thing to keep in mind:
1. Not all agencies pay the same rate
2. Rates are different depending upon the category vertical, time of year, etc.
3. Most major buying firms are paying well below rate card
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