I’ve been told that investors are more willing to back transaction-based rather than ad-funded business models. Is this true and, if so, should I re-think my ad-funded model?
My advice would be to focus on building a sustainably profitable business first, and think about exit options and value second. You should understand whether you can do this on advertising revenue alone.
There are plenty of successful companies that do – from the free to air TV stations to Google, Seek and Carsales.
In my view it then makes sense to consider whether in addition to advertising there are other categories in which you can generate revenue, such as subscriptions, transactions or data. It makes sense to create diversity where possible.
But the most important thing is for you to be clear on how to be sustainably profitable. Everything else is secondary.
Having said this, it is probably correct that today’s investment appetite appears stronger for businesses that do not depend solely on advertising revenue.
This is because many likely acquirers already have advertising-dependent businesses and, secondly, the future profitability of advertising is unclear.
If your strategy is to exit in the near term, and you are able to change tack to focus on other revenue streams and remain profitable, that may be the way to maximise your value.
These are big ‘ifs’ though. It’s tough enough for most start-ups to deliver against a plan. Changing strategy is risky and fraught with danger.
It’s also worth bearing in mind that market sentiment – and investor/buyer logic – change over time, and that trying to second guess them is brave!
There will always be a market for valuable, profitable companies, whether they are ad funded or not.