Why BuzzTracker sold for $5 million instead of raising $5 million

For Web entrepreneurs, it's helpful to understand the economics of a blog or related media business. Last August, BuzzTracker's Alan Warms (posting on Fred Wilson's "A VC" blog as "al from chicago") ran some numbers to suggest that The Huffington Post's decision to raise $5 million was a risky bet. Here they are in table form, plus some notes:

Read his entire comment (August 9, 2006) for additional details, plus 2 earlier comments: July 23 and July 29.

*Unless I'm missing something, a 10x return requires a target acquision price (or IPO value) of $150 million, hence 1.5x the above page views.

*RPM ("Revenue Per Mille" using the Latin word for "thousand") = average revenue per thousand page views. Display ads are usually sold at a CPM rate ("cost per thousand"), and PPC (pay per click) ads are often reported using the equivalent CPM. RPM takes two important factors into account. Some pages on a site may do quite well, with multiple ads per page. Others will have few ads or only low-revenue ads ("remnant inventory").

Alan points out several challenges:

• it's difficult to get that many page views
• $15 RPM is high for politics (i.e. he was intentionally using a generous estimate)
• it's difficult to sell every page view

I'll add one more: even a $20M/yr business is on the low end for VC investment. For example, Jeremy Liew of Lightspeed Venture Partners presented a more typical goal of $50M (minimum) in an informative post from February: Three ways to build an online media business to $50m in revenue. (The post should have been called "3 scenarios that show how difficult it is to build a media site to $50 million".) Jeremy pegged general interest sites (including news) at $1 RPM, and sites with demographic targeting at $5 RPM -- which would require 3-15x more traffic than in Alan's quick estimate.

So, you can see why Alan bootstrapped the company and was happy to join Yahoo rather than fight for page views in a standalone company. And, "why more entrepreneurs are going for low-investment sites that don't need an exit but provide 'lifestyle businesses' for their owners." (source: Tim O'Reilly; see below)

Of course that's not the last word on the subject. In March, Tim O'Reilly added some context with a look at The Economics of Online Advertising

The other option, implicit in Chris Anderson's long tail hypothesis, but not mentioned by Jeremy, is that you aggregate a lot of other sites. There are different models for this: Gawker and Weblogsinc launched multiple sites, publishing blogs like they were books, with some expected to succeed and others to fail; FM Publishing (in which I am an investor) doesn't aggregate ownership, but provides marketing services to an aggregate of clients.

And, we've come across a few blogs that have raised much less than $5 million.

If you've seen similar estimates, case studies or relevant data (e.g. RPM for specific sites), please add a comment.