Yesterday I was asked by a reporter what I thought of online advertising. I remain bullish and you are seeing more and more dollars being pulled out of unmeasurable and expensive venues like TV and print but I do admit the following, for many companies with outsized expectations, it will hard to make the numbers add up to justify irrational valuations or projections.
We saw the exact same thing happen in 2001: companies had business models that required unreasonable amounts of investment, etc. When the giddiness dissipated, things changed very quickly.
For example, men’s lifestyle site TheMan.com was paying AOL hundreds of thousands of dollars per month for distribution. Once the market madness evaporated… all of a sudden, TheMan.com could not pay that fee.
That was the jab. What was the knock-out blow? VC Fred Wilson chimes in:
If a company has lots of users and no real revenues, but keeps its burn rate low and can continue to ramp its user base cost effectively, I think the economic downturn isn’t necessarily bad news for them. After all, if you have no revenue, you have no revenue to lose when your customers stop placing orders. That last bit was sort of tongue in cheek. I don’t want to downplay the importance of revenue and business models. But in my mind, the single most important thing is not revenue in a time like this. The most important thing is cost structure.
TheMan.com had raised $17M in funding and a cost structure that was out of whack.
However, having pricing power and leverage is equally important. If you are in a market with few competitors or retreating competitors, the truth is you can actually start to charge clients.
There are way too many me-too clone companies these days. The idea and rationale for funding these was that someone would come along and buy one of these companies. But because many were funded at obscene valuations, guess what: flipping them isn’t obvious because investors require a return that buyers are not comfortable in forking over… especially if the would-be buyer can pick up the phone and call 5-10 other companies that are fundamentally similar.
Don’t believe the people who say it’s all doom and gloom in a downturn or slowdown. I was part of the team that managed to build an empire during the last downturn and I am even more bullish about the conditions on the front lines this time around.
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