Economics of Ad-Based Online Businesses

Jeremy Lieuw on the Lightspeed Ventures blog had an interesting post a week ago positing a thesis about the realities of growing a site's annual ad revenue to $50M. The key take-aways as summarized here by Tim O'Reilly:

  • At the $1 RPM (CPM/CPA/CPC) level achieved by most general sites, you need 4 billion page views/month.
  • At the $5 RPM level achieved by demographically targeted sites, you need 800 million/month.
  • At the $20 RPM level achieved by highly targeted sites, you need 200 million/month.
These numbers are pretty telling. Building an ad-based online business is hard in particular when you're counting on an exit for the investment of time and capital to pay-off. An interesting side-note to the original post is its focus on top-line revenue as the core metric used to establish the value of an online ad-based business. In the short run, it might not make much difference to a VC whether one uses revenue, income, or EBIDTA to value a business but it signals, what I think is a dubious perspective. I question the value of this perspective to entrepreneurs because while revenue is necessary it alone is insufficient to create a growing, sustainable business. What is both necessary AND sufficient to fuel the growth of an online ad-based business is a talented team, a great idea, and, last but not least, cashflow and profits as early as possible. Focusing on top-line causes one to lose site of where the value and leverage needed to invest in and grow our business really comes from which is, in every industry of every kind, the same thing: cashflow.

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