Discover more from Oleksii Sidorov
How the ability to dissect the fundamental business principles helps us better manage our operations
Buy—high, sell—low, how else will you grow (c) every venture-backed startup ever
The simplified mental models and a basic understanding of business principles IMO is the only way to see through the fog of day-to-day business complexity and keep track of what matters. Here's our example:
Our current product is an ad network. Yes, of course, it's "big data AI ad personalization yada yada on a blockchain," but let's already at this stage separate our vision from what we actually solve for users today.
Is it simple enough? Not yet. Advertising and user attention are delicate matters. We have to manage the crypto trends, ad conversions, publisher monetization satisfaction, banner compatibility, balance the marketplace, and… a million other things.
When there are a million things requiring your attention, the best you can do to cancel them all out is to simply ask yourself, "Where is the actual business here?" And to answer that, you just need to start asking your clients for the money.
In ad tech, ad impressions are called inventory. And that’s so for a reason. In the end, all we do is buy inventory from publishers at a lower price and sell inventory to advertisers at a higher price. That's it. Our final cash flow is based on this, and if this doesn't work, no on-chain data or personalization will ever change it.
Next, you start seeing,
Just like in commerce, our profit depends on inventory turnover volume and our margin.
Until we get the inventory, we can't sell it to advertisers. And if we get too much, the amount of stock sitting in storage will determine our efficiency.
We pay publishers effectively as vendors.
If we can guarantee repeated orders, they can give us better terms, or otherwise the risks drop on them. If a buyer wants to do recurring business, it's more profitable for us.
Ad buyers have alternatives to go and buy the same items (views) elsewhere: in media, on Twitter, or by airdropping an NFT. If they're experienced, they'll see that the price of one unit will be higher there, and that's what we should appeal to when presenting our value prop.
The items (views) also can have different quality, and they will sell at different prices. The quality and the price determine the demand at its core. The fancy formats, on-chain data, user sentiment, wallets—are just some ways to move these variables, but not the end goal (and smart marketers understand this).
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Though, unlike commerce, the inventory keeps coming to us constantly, and we are paying for it. It's more like a production line that we can't turn on or off at will. So, to avoid producing in loss, we need a constant demand from buyers. If we don’t produce enough—buyers will line up. And if you see the banners saying "your ad could be here," it's the equivalent of a dog food manufacturer tasting their own product.
Startups think they are building the future but end up with a money-making factory
That's also why our launch is so tricky. It's one thing to launch a marketplace and match supply and demand from the cold start, but it's a completely different thing when you can't stop the supply. If the marketplace can just sit idle without any activity—we will start losing money 🥲
Working with paid customers from the very beginning is both cool and scary. I’m excited to show you our first paid campaigns soon, but only after we onboard everyone, create a surplus, and I’ll be less afraid of going into loss.
Subscribe to always have your supply and demand in balance, and share with friends so they know you only look at your friendship in terms of profit and loss. You can reply and tag me on Twitter—the only platform I will engage at.