Direct ad sales and startups

I have recently met a number of startups with interesting consumer applications or services.  As expected, many of these startups have a vision to rely on advertising to pay the bills.  And like many startups, a number of these companies have plans to add a direct ad sales staff over time.  That makes a ton of sense, but what I believe is that many entrepreneurs underestimate the direct capital and management costs necessary to build such a team.  In many ways, building a direct ad sales team is similar to building an enterprise sales team.  These thoughts may seem quite basic to you but here they are nevertheless.  First, don’t ramp up your sales team too quickly until you have a product to sell.  That means if you don’t have scale or enough eyeballs you are better off using Google Adsense.  If you don’t heed this advice you may quickly burn yourself out of business.  Secondly, I know that many startups may not know what kind of ad units to sell but be careful of not having a standard product list or rate sheet when you go out to the market.  Yes, I know you have to be creative if you have a new service and listen to your customers, but at the same time don’t base your business on selling one-off ad units for each advertiser because this can be a huge drain on your technical resources over time.  Next, make sure you never forget that what is right for your users is right for your business.  Many times I have seen companies that are trying to meet the advertiser’s inventory requirement make the ads much too prominent and sacrifice usability in the long run.  While this may drive some initial short-term results, it may come to bite you in the ass in the future. 

The bottom line is that Google Adsense works well for a reason-it has scale-it has tons of eyeballs, it has a huge customer list of advertisers, and is therefore more likely to get you great pricing and ad targeting.  Yes, I don’t disagree that over time you want your own sales team and don’t want to solely rely on one partner for your revenue, but just go into this with your eyes wide open and don’t ramp up before its time.  The direct costs, management costs, and hidden strains on your infrastructure may be more than you can handle if you ramp up too quickly.  Start slowly, figure out what it is that advertisers love about your service or product, figure out what kind of units deliver the best results, and then ramp.  Here is an earlier post on ramping up an enterprise sales team as there are many similarities to direct ad sales and direct enterprise sales.

The economic headwinds are getting stonger

I was waiting for this day to happen.  Each day I go online and also glance at the newspaper, and there is nothing but bad news.  And yes, it is true that some of the best technology companies were built when the economy was at its worst.  And I always like to think that it takes a little longer for some of these negative effects to trickle down to smaller companies and startups.  Just the other day, I got the call from one of my portfolio companies which had won a huge deal last month.  We were waiting for the purchase order and the dreaded call came: "You still have the deal but our CFO needs us to cost justify every dollar we spend on IT – the deal will have to wait until next quarter."  That definitely put a kink in our plans and also caused us to adjust our Q1 forecast.  Fortunately, many of us had been through this before and management had prepared alternative plans based on various growth rates at our last board meeting.  We had a base case model which we were running our expenses on, an upside model which we had hoped we would achieve, and a lower growth scenario which we would have to implement if bookings did not materialize.  I know that this is one data point but all I can say is that if you have not done so already, prepare a few different models to make sure you can make appropriate changes to your business to conserve cash.  I won’t say that we are in a recession but if we get more data points on spending freezes, layoffs, and the like, it is only prudent to be prepared.  And yes, as I stated above, while some of the best technology companies were built when the economy was at its worst, they would not be here today if they weren’t standing when the markets rebounded.  That means that you have to rationalize your business and put more resources behind what is working and not spread yourself too thin.  That means if you are raising another round of funding try to raise more capital rather than less – focus on having about 18 months of fresh dollars to see through the other side.  Finally, stay strong and keep your head up because if you follow the above advice you will have a much stronger business when the markets rebound.