It is now close to gospel that internet advertising and B2B SaaS are among the last century’s most profitable (legitimate) business models. They have more similarities than differences.
Both internet advertising and B2B SaaS benefit from a meager marginal cost of production (which is the core driver of their margins). Once the platform and audience are in place, an additional advertisement doesn’t cost much, just as selling an additional license doesn’t require a new software build. Both rely on a strong B2B sales motion — selling licenses to enterprises or selling ads to SMBs. Both have sizable go-to-market and customer success functions, ensuring the all-too-critical sales and service motion is well run. Both attract and incentivize account executives with lucrative variable compensation packages.
These businesses are as much about sales excellence as they are about product. The product needs to be great, but without sales, the business doesn’t generate those nosebleed valuations.
If your startup naturally falls into internet advertising or B2B SaaS, congratulations. The margins are significant. The valuations 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 eat lunch. And these are formidable giants we’re talking about.
While not as profitable, a different model businesses use worldwide is “capturing spread,” which may apply to your startup, depending on how you answer the following questions.
Before we get there, what is “capturing spread”?
Capturing spread is the idea of making (usually) a small amount of revenue on a more significant flow of capital. Financial services firms across the world primarily use this model. You buy an ETF (exchange-traded fund) from your broker, who charges you 0.5% per year for the product. However, it only costs them 0.45%. The difference is infinitesimally small — 0.05% (or 5 bps), but it adds up if they can attract billions of dollars (and they often can).
Remember, volatility is the enemy of valuation, and “up and to the right” is the goal.
Let’s run the math: 0.05% on $1 billion is half a million dollars of straight EBITDA. If the spread increases to 0.2% and attracts $5 billion, the profit hits $10 million.
Some very profitable businesses follow this model. Think of your favorite stablecoin, one that U.S. Treasuries and USD cash back. Over $50 billion in assets are invested in the stablecoin, held in U.S. Treasuries yielding ~5%. The stablecoin pays out to its holders but nowhere close to 5%. Let’s say it pays out 3% through a mix of rewards. It gets to keep 2% of the $50 billion — a whopping $1 billion.
