] HipMojo.com » Why Most VC-Backed, Ad-Supported Companies Are Doomed to Fail

Why Most VC-Backed, Ad-Supported Companies Are Doomed to Fail

Most of the web projects out there are ad-supported, or intend to be ad-supported.

While a lot of companies are bootstrapped, most are financed by angel investors or venture capitalists.

Yet, many angel investors or VCs lack operational media experience in general and advertising sales experience in particular. I’ve always noticed that most VCs come from technology backgrounds. Increasingly, many have worked in media companies. But very few have ad sales experience. Sales people get respect, reluctantly. At my old job, as VP of Ad Sales, I was hated by my erstwhile colleagues. When I left, they showed their disdain by lying and manipulating the new parent company into trying to take me and WatchMojo.com out. I defended myself and won, and today I actually have a healthy working relationship with my former partners’ parent company. It’s wild. I feel vindicated.

Anyway, I don’t care to rehash those memories, it’s what I call the Dark Ages of my career, frankly. The point is: during those years, I learned a lot about ad sales, working on the front line and in the trenches. My client list and ad agency relationships were second to none.  If it wasn’t for that, I’d hate myself for ever working with those people.

This isn’t me tooting my own horn, I am trying to make the point that if I was successful, it’s because I went in with no experience and made no assumptions. I asked questions, read a lot, and acted on my gut. Yes, I feel like I am a natural salesperson but I had never closed a box, let alone a deal, before taking the job.

Over the course of 5 years, I went from lone advertising account executive to a manager, I then integrated our sales team into the company that bought us… and over time I became - via this blog - someone that others turn to to get a sense of where the ad market is headed.

In this capacity, I’ve also become an adviser to many startups, and occasionally, an investor that wants to test a hypothesis or conduct due diligence on a company they are vetting.

I must say: I am baffled with how much many VCs are neither realistic nor knowledgeable with the bulk of their advertising assumptions. Not only are the assumptions off, but they seem to fail to realize the psychology and dynamics that go into play with how ad sales work. The competitive nature and subjective method to the madness is generally unaccounted for. Or, alternatively, the challenges and complexities of building sales streams are wildly underestimated.

The bigger problem is many VCs or angels think they know it all.  They should at least realize that they are not well-versed in ad sales, ask questions, then - being smart and accomplished in their own right - come to their own conclusions.  I think it’s because salespeople get respect reluctantly.  Hence my initial reference to my old job and the dynamics with my partners.

I really do not mean to be judgmental or holier than thou, and I realize I did ad sales for years etc. in the trenches / on the front lines… but it’s a bit scary that so much money goes into ad-supported (intended) companies based on false assumptions.

At the risk of tooting my own horn, what I also am starting to see is the advantage I have over other entrepreneurs in being realistic about our ad sales expectations and what it takes to be successful. I guess that is why I am conservative and we’ve been able to build the company over the past years. We don’t take anything for granted, we don’t simplify the challenges and we surely don’t count the chicken before they hatch.

I guess as I write this and think out loud, I realize, maybe what many VCs should do is spend some time on the front lines, ie. not only talking to the founders of companies but also the guys expected to lead the sales charge. Then, maybe VCs should spend some time with advertisers and marketers to understand what they think.

And speaking of company founders, I think while technology and marketing are incredible talents to possess, it might be a better investment to do some sales before venturing on your own.

I’ve actually sent in a couple of emails to VCs for their thoughts and will either update accordingly or publish a follow up.

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Posted By: Ashkan Karbasfrooshan | Feb 20th

15 Responses to “Why Most VC-Backed, Ad-Supported Companies Are Doomed to Fail”

  1. John Furrier Says:
    February 20th, 2008 at 4:55 pm

    Ashkan
    Nice post. I agree with you that sales is important. At PodTech we had millions in direct sales with clients just starting to venture into social advertising. Yet it was difficult because everyone wants the next YouTube when in reality the diamonds are sometimes right on your path that your customers blaze with you. All the best ad models were either first movers on an existing standards (yahoo) and require scale and the others vectored in from another angle (Google and Overture - yes Realnames but Microsoft shut them down in 01).

    Look for the best ad supported businesses to be different then what is out there today.

  2. Marc’s Voice » Blog Archive » End of Feb. blogging '08 Says:
    February 20th, 2008 at 5:51 pm

    […] Here’s something I can support: Why most VC backed, ad supported companies are doomed to fail […]

  3. Startup Companies Making Money From Free | One By One Media Says:
    February 20th, 2008 at 6:23 pm

    […] attempt at monetizing their application.  Then I read today over at HipMojo the article about why companies that are basing themselves on ad revenue will fail.  It helped me formulate my own opinion about how companies in the tech world are struggling […]

  4. Ted Rheingold Says:
    February 20th, 2008 at 7:55 pm

    Word!

    I believe the reason for this is that since advertising is easy, say compared to nanotechnology, that entrepreneurs and VCs alike fool themselves into thinking if they can imagine the case, then they can make it be. But as easy as advertising is, it’s deceptively tricky to first timers.

    If we asked for a show of hands of how many people that started an advertising-fueled internet business model had qualified prior experience buying, selling or publishing advertisements I think we’d see very few hands. When I started Dogster/Catster I got tons of advice on how easy it would be to bring in advertisers. Yes it was easy … four years after a lot of hard work. Heck most people think you go to the advertiser to get them to advertise and are clueless towards the ad agencies roles in the industry.

    Many people think being an ad publisher is as easy as saying you have slightly differet/better/larger audiences. Ad agencies don’t want to have their contract terminated. They don’t want to look stupid.

    From my experience most *good* VCs can smell when an ad model is not going to be realistic. But they are also in the business of growing a company, not their revenue. Their models require them to find companies that are not only need one more push, they need the ones that are going to get 2-3 more rocket boosters to hit terminal velocity and take over the universe. So seeing revenue is not as important as seeing usage growth. Let the series C investors worry about getting to profitability ;>

  5. Dan Says:
    February 20th, 2008 at 11:59 pm

    100% agreed.

    You should do a series on a) How the ad sales world really works (for dummies, or engineers) and b) what questions smart investors should be asking.

  6. Satya Patel Says:
    February 21st, 2008 at 12:28 am

    The title of your post and your general point are spot on without limiting the universe of ad-supported companies to those that are “VC-Backed”. Entrepreneurs and VCs alike tend to underestimate the challenges associated with building ad-supported business at scale. Getting the attention of advertisers and agencies, creating a differentiated position, and packaging and proving the value of inventory are all challenging and time-consuming endeavors. And it only gets more complicated if you target both brand advertisers and direct markets. Having sold directly to both publishers and advertisers, I’d like to think that I share your perspective. This is why I’ve largely avoided investing in ad-supported businesses, instead focusing on the enabling technologies. That said, I do believe that there are many ad-supported businesses that will thrive, especially if they are able to attract talent from the growing pool of individuals who have experience selling online ads and building the right relationships.

  7. Between the Lines mobile edition Says:
    February 21st, 2008 at 5:15 am

    […] HipMojo.com: Why most VC backed ad supported companies are doomed […]

  8. Tara (PassPack) Says:
    February 21st, 2008 at 6:38 am

    Hello. I’m a startup founder as well. While PassPack does not, nor expects to, generate ad revenues I think the topic of having a sales background is relevant to all founders.

    We started with just two founders - both tech (programming and design). So far we’ve learned tons but pure “sales” hasn’t made it to the forefront yet.

    What would you suggest as a starting point for getting started? Any great blogs or healthy advice?

    Thanks,
    Tara

  9. There is No Relationship Between Time Spent Online and Advertising Dollars | Bronte Media Says:
    February 21st, 2008 at 10:27 am

    […] great posts on why VCs and entrepreneurs make so many bad assumptions around online advertising. The original from HipMojo’s Ashkan Karbasfrooshan and a follow up from […]

  10. James Chance Says:
    February 21st, 2008 at 11:14 am

    There are companies out there that handle ad sales for startups - Indie Click (www.indieclick.com) and Rebel Digital (www.rebeldig.com) are two that seem to be leaders in the ad-supported environment. The people behind Rebel seem quite experienced in ad sales.

  11. Robbin Block Says:
    February 21st, 2008 at 11:57 am

    Yes, good salespeople who understand the ad biz are essential. However, what many startups that I work with fail to realize is that you need something to sell first — that is eyeballs, users and subscribers — before advertisers will bite. And that’s a result of the overall business model, marketing plan and go-to-market strategy. Sales efforts are much more effective built on this solid foundation, and these are essential components of any business. If I were a VC, that’s what I’d look for first, in addition to other sources of revenue, i.e., IP licensing, ecomm, etc.

  12. Steve Miller Says:
    February 21st, 2008 at 4:32 pm

    Ashkan,

    I would so much like to debate this with you but the fact is I couldn’t agree with you more! My 20-year background in advertising sales spans television, online, digital signage and other emerging ad mediums and in every sector I continually run across this very same issue. Case and point I can now run down a checklist of those businesses that no longer exist. Thanks for your post and for thinking out loud. Please keep up the good work.

  13. P-Air Says:
    February 24th, 2008 at 9:08 pm

    Great post. I’ve been doing some investigations into an ad model for some VCs and find your comments to be dead on. Understanding the nuance of the ad sales process, the constituencies involved, and their respective interests is tricky stuff that ad sales folks understand cold, but not many others. The entrepreneurs who tout ad models w/o having a solid background in ad sales are frequently deluding themselves.

  14. Frank Chindamo, Fun Little Movies Says:
    March 3rd, 2008 at 3:05 pm

    Ashkan,
    I agree! Now contact us please, we could use your skills!

    :)

  15. Nadia Hasan Says:
    March 12th, 2008 at 12:38 pm

    Great article; well-written and there’s quite a lot of “hoop-la” out there.

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