This is now close to the gospel that online advertising and B2B SaaS are among the most profitable (legal) business models of the last century. They have more similarities than differences.
Both online advertising and B2B SaaS benefit from a modest marginal cost of production (which is the main driver of their margins). Once the platform and audience are ready, additional advertising will not cost much, just as selling an additional license does not require a new version of the software. Both rely on a strong B2B sales movement, selling licenses to enterprises or selling advertising to small and medium-sized businesses. Both have strong go-to-market and customer success functions, ensuring all-too-critical sales and service activities run smoothly. Both attract and motivate customer service managers with lucrative variable compensation packages.
These companies care as much about sales excellence as they do about product excellence. The product must be great, but without sales, the company doesn’t generate those valuations.
If your startup naturally falls into online advertising or B2B SaaS, congratulations. The margins are significant. Valuations are high. But you’re not the only one with this idea, it’s extremely competitive and every other B2B SaaS company or online advertiser is trying to eat your lunch. And we are talking about mighty giants.
While not as lucrative, another model used by companies around the world is “spread capture,” which may be applicable to your startup depending on how you answer the questions below.
Before we get to that, what is “spread capture”?
Spread capture is the idea of gaining (usually) a small amount of revenue from a more significant capital flow. Financial services companies around the world mainly use this model. You buy an ETF (exchange-traded fund) from your broker, who charges a fee of 0.5% per year for the product. However, it only costs them 0.45%. The difference is infinitesimal – 0.05% (or 5 basis points), but it adds up if they manage to attract billions of dollars (and they often do).
Remember that volatility is the enemy of valuation and the goal is “up and to the right.”
Let’s do the math: 0.05% of $1 billion is half a million dollars in simple EBITDA. If the spread increases to 0.2% and attracts $5 billion, the profit will reach $10 million.
Some very profitable companies follow this model. Think of your favorite stablecoin that offers cashback on US Treasuries and USD. The stablecoin has over $50 billion invested in assets held in US Treasuries, with a yield of ~5%. The stablecoin pays out to its holders, but it’s nowhere near 5%. Let’s say it pays out 3% by combining rewards. He will keep 2% of the $50 billion, or as much as $1 billion.
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