The Interactive Advertising Bureau recently released these statistics:

The Interactive Advertising Bureau (IAB) and PricewaterhouseCoopers (PwC) today announced that Internet advertising revenues for 2006 are estimated at $16.8 billion, a 34 percent increase over the previous revenue record of $12.5 billion in 2005. The 2006 Q4 revenues totaled just under $4.8 billion, making it the highest quarter reported. Fourth-quarter revenues for 2006 represent a 32 percent increase over the same period in 2005, and a 15 percent increase over Q3 of 2006, estimated at slightly under $4.2 billion.

And yet, Jeremy Liew posted the following analyses on his VC firm’s blog (which is fantastic btw). Basically he reviews three strategies for getting to 50 million and shows the commensurate pageviews you would need based on your likely revenue per 1000 page views. In other words, it’s just simple math that most people don’t take the time to do:

To get to $50m in revenue [at $1 RPM] you would need 50 billion pageviews in a year, or just over 4 billion per month. According to Comscore, Bebo had the 10th most Pageviews in the US in January 1007, with 3.4bn, so you would need to be bigger than that.

To get to $50m in revenue [at $5 RPM] you would need 10 billion pageviews in a year, or just over 800 million per month. According to Comscore, Microsoft had the 22nd most Pageviews in the US in January 2007, with 792 million, so you would need to be bigger than that.

To get to $50m in revenue [at $20 RPM] you would need 2.5 billion pageviews in a year, or just over 200 million per month. According to Comscore, Adelphia.com had the 125th most Pageviews in the US in January 2007, with 198 million, so you would need to be bigger than that.

And at this point, Tim O’Reilly concludes that:

That’s a high bar. This may be why more entrepreneurs are going for low-investment sites that don’t need an exit but provide “lifestyle businesses” for their owners.

Aside from my personal insecurity wrt what usually gets lumped together with describing something as a “lifestyle business” (not working hard, not having big impact, not making lots of money, etc.) I’m not sure I disagree with Tim’s conclusion.

It’s amazing to me how many startups I talk to plan on making money via advertising, tell me about all the big numbers they’re going to post, and haven’t done this basic math. They are clearly not on path for success, but sometimes I wonder why I’m the only one thinking this. One friend of mine has a theory (which isn’t too hard to believe) that the startups and their investors have agreed to suspend disbelief on this issue because the overwhelming illogic of their investments (time and money) would depress them. Kind of like a gambler’s mentality where they’re really hoping for the big score (being bought by some big company) even though they know the odds are slim to none. Everyone involved colludes to believe that the fundamentals of their plan are sound, because the real plan – flipping – is too low percentage a shot to make the official plan.

And then I end up talking to the developers that work at many of these startups who don’t even know what percentage of the company their shares/options represent. One particularly savvy developer told me that he was one of the few who actually knew his percentage as opposed to the meaningless number of shares. And yes, he had done the math realizing that in the incredibly unlikely event that his company was sold for 100 million dollars (said in the Dr. Evil voice) that he would have put in all that time for an after tax “windfall” of 150k. Now, I’m not saying that every startup is like this, or that every employee at a startup is either unaware of their situation or on track to being screwed. I’m also not saying that 150k is anything to sneeze at. That said, there does seem to be a disconnect between the dreams and likely realities of many people involved in starting their own high tech businesses.

Next of course people say to me… are you going to hire a lot of people? Don’t you want to scale up? Don’t you want to be a billion dollar business? A 100 million dollar business? Go public? I string together a series of polite “no”s for them, and then when the inevitably puzzled look crosses their face I always say: “the most important number to me is profit per employee. If you assume that the employees all share in some percentage of the profit. Then the higher profit per employee you have, the higher pool you have from which to share. And, most importantly, the fewer employees you have, the easier it is to make that number really high.

By my rough back of the napkin calculations, Microsoft generates about 180k profit per employee. Disney generates 20k. Craigslist (whose numbers aren’t public) generates somewhere between 600k and 800k by our best guesses. Is Craigslist a “lifestyle business”? Think of it this way… let’s say you would like to retire and live a fabulously wealthy retirement (i’m talking FU money or what I like to call “private plane leasing” money). You don’t own the plane but you can NetJets any time you want. How much money do you need? This is a personal preference for sure. But would claim that having a 50k per month budget for the rest of your life would be a pretty decent place to be and meet the definition of fabulously wealthy for almost all people. If you think you could get 5% returns on your money you would need 12 million dollars in the bank to generate that income. The only employee of a VC funded startup that is purchased by a bigger company that get even close to that kind of money are maybe the founders. The list grows if you manage to take the company public, but that also severely lowers the chances of it happening. But over at Craigslist, they have the ability to deliver that kind of money to their employees each year. Even if they’re only delivering two-thirds or half that money it’s pretty fantastic. I don’t know their actual numbers, and I certainly don’t know how they distribute the cash their generating in terms of employee compensation. And of course, Craigslist success is as unique as Google’s in the scheme of things. That said, I do think it’s possible to achieve success as a “lifestyle business”, generate lots of cash for your employees, and have the whole endeavor be a much higher percentage shot than flipping a company or taking it public.

And as for the good news/bad news of internet advertising growing but it being hard to generate large somes of money, I claim that the growth means there’s plenty of opportunity. And the bulk of the success going to the big guys means that little guys (like us) need to innovate and differentiate. That’s where our focus is. Luckily, as long as we stay a small and tight-knit group we don’t need 50 million in revenue to have a healthy business and pretty great compensation numbers as well.