This is now It’s almost gospel to say that Internet advertising and B2B SaaS are among the most profitable (legitimate) business models of the last century. They have more similarities than differences.
Both Internet advertising and B2B SaaS benefit from a low marginal cost of production (which is the main driver of their margins). Once the platform and audience are in place, an additional ad doesn’t cost much, just as selling an additional license doesn’t require a new software build. Both depend on a strong B2B sales movement: selling licenses to companies or selling ads to SMEs. Both have important marketing and customer success roles, ensuring that the critical sales and service movement is well managed. Both attract and incentivize account executives with lucrative variable compensation packages.
These companies are as much about sales excellence as they are about the product. The product must be excellent, but without sales, the business does not generate those exorbitant valuations.
If your startup falls naturally into Internet advertising or B2B SaaS, congratulations. The margins are significant. The ratings are high. However, you’re not the only one with this idea: it’s hugely competitive and every other B2B SaaS company or internet advertiser is trying to have lunch. And we are talking about formidable giants.
While not as profitable, a different model that companies use around the world is “capturing the spread,” which can apply to your startup, depending on how you answer the following questions.
Before we get to that point, what is “spread capture”?
Capturing the spread is the idea of earning (usually) a small amount of income with a more significant flow of capital. This model is primarily used by financial services companies around the world. You buy an ETF (exchange-traded fund) from your broker, who charges you 0.5% annually for the product. However, it only costs them 0.45%. The difference is infinitely small: 0.05% (or 5 basis points), but it adds up if they can attract billions of dollars (and they often can).
Remember, volatility is the enemy of valuation and the goal is “up and to the right.”
Let’s do the math: 0.05% on a billion dollars is half a million dollars of direct 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 about your favorite stablecoin, one that redeems US Treasuries and USD. Over $50 billion in assets are invested in the stablecoin, held in US Treasuries with a yield of ~5%. The stablecoin pays out its holders, but it’s nowhere near 5%. Let’s say you pay 3% through a combination of rewards. He keeps 2% of the $50 billion: a whopping $1 billion.