Nick Bilton postulated in a recent article that eager investors are perhaps guilty of overvaluing tech start-ups. Pinterest’s latest $225 million round of financing at a $3.8 billion valuation certainly surprised me, considering the company is not generating any revenue. As Mr Bilton rightly pointed out:
Once a start-up reaches a $1 billion valuation, they limit the number of big companies capable of acquiring them.
Acquisition potential aside, I wonder what the ceiling to digital ad spend is. It’s easy for startups to tell investors that with enough eyeballs, advertisers will come. After all, the business models of Google and Facebook – two of the Big Four in tech – are almost entirely predicated on advertising revenue. As Twitter goes on the road to pitch its stock sale to institutional investors, it is promising to increase profit margins more than fivefold, to up to 40 percent, predominantly by selling more ads. Pinterest, we can safely assume, is betting on ad revenue as the easiest route to monetisation.
How many billion dollar companies can advertisers support? Is there no limit to the amount of digital ad spend? Perhaps it is time for tech startups to look beyond ad revenue? To the entrepreneurs out there building the next great social network, or search engine, or whatever else you are building, perhaps the real innovation is not so much in the product but rather the business model. If you have a good idea, ping me at iam@therealjohntan.com
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