Venture capitalists are taking an increasingly skeptical view of Web startups seeking to build businesses with online advertising, demanding more sophistication in business plans to turn large online audiences into revenue dollars.
It takes a lot of impressions to become a public company, says Mike Kwatinetz
The hesitation is only partly due to the economic downturn, which is pinching advertising growth in a online market that will nevertheless over time see attractive expansion.
Instead, the present financial crisis seems to be a catalyst to reservations that have been building for some time. The line between what kind of company gets funded and what doesn’t is simply deepening.
Today there are too many companies seeking funding that decide without much thought they will reply on advertising to pay the bills, says Doug Pepper, general partner at Interwest Partners.
“I don’t think that is going to be enough anymore,” says Pepper, who appeared this week at the Dow Jones VentureWire Technology Showcase in Redwood City. “We’re being a lot more selective.”
Fueling the growing skepticism is the realization that competition for advertising dollars has grown and prices vary a great deal. Some site owners with specialized, targeted audiences – perhaps a bicycle racing club – might be able to charge a premium for an ad. But other sites can’t.
At 15 cents per CPM (cost per thousand ad views or impressions) a site needs 1 billion visitors to make $150,000, says Mike Kwatinetz, general partner at Azure Capital Partners. “You need a lot of impressions to become a public company.”
Companies are better off trying to find unique ways to make money. For instance, one startup provides consumers with a free service to turn off the mailing of junk mail. But in doing so, it offers customers to opportunity to sign up for other mailings, for which it can get paid by publishers, says Kwantinetz.
Another startup, BillShrink of Redwood City lets people compare the cost and coverage of cell-phone plans and credit cards on its Web site. It hopes to get paid by the credit-card companies and mobile-service providers when consumers sign up.
