• by Dave Morgan , Featured Contributor, August 19, 2010

The online ad market is hot again. The industry is full of very good companies with strong revenues, good managers, good growth and lots of optimism for "exits" just around the corner.

Yes, it's that time again when a lot of folks are hoping to trade their years of sweat and investment into big multiples of cash or stock. I am very excited for those who will make it and find their "pot of gold." However, many won't. Unfortunately, I am afraid that many folks who today think that they are at the "end of the rainbow" are in for a wake-up call: they still have a long, long way to go. Here is my thinking:

No shortage of very good companies, few with real differentiation. What I find incredible about the online ad industry today is how many very good companies there are out there. Hundreds and hundreds of online ad companies have very good products, millions in revenue, sizeable customer bases and strong growth. Few, however, have real differentiation and real market leadership such that they are "must-buy" companies for potential acquirers. They are almost all "nice to haves," not "must-haves."

Many more sellers than buyers. There is a very limited pool of companies that are actively paying substantial cash for online ad companies, not nearly as many as existed online a few years ago. Where you could once depend on active bidding wars among Google, Yahoo, Microsoft and AOL for online ad companies, none of the latter three have the appetites that they used to have. And as media banking maven Nancy Peretsman of Allen & Company always says, companies are sold "when buyers want to buy, not when sellers want to sell."

IPO market won't deliver game-changing magic. Many hope that a reopening IPO market will create a new breed of hungry acquirers that will begin scooping up dozens and dozens of small online ad companies as they try to grow their businesses. Things may have worked that way in the late 1990s. Unfortunately, I don't know that they work that way anymore. Hopefully, we will see folks like Demand Media and Glam -- and eventually, Facebook and Zynga -- become public companies. However, I suspect that they will all have to spend their first year or two coping with public investors and won't be able to roll up all of the wannabe acquisitions.

Best to focus on capital, costs and cash. Since you can't really control your exit, my advice is to focus on what you can control: capital, costs and cash production. No matter how attractive your company is, you have to run it like you won't be able to sell it for at least 10 years. You want to maximize your capital. You want to control your costs so that they don't control you. You want to focus on producing cash. Certainly, you may decide to trade short-term cash generation for long-term growth, but if an exit is a long, long ways away, you might not make the trade-off so quickly.

What do you think? Are all of these really strong online ad companies just about at the "end of the rainbow"? Or, do most still have a tough, long road ahead?