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Advertising Network – Risk and Capital Management

I wrote a long post on Stackthatmoney so I thought I’d post it here.

The premise of the post was why I don’t believe that Ryan Eagle from EWA intentionally went Bankrupt and stole everyones money.

Running an ad network in the Performance & CPA world is a very high risk proposition. Getting paid slow and paying out publishers quickly is a reciepe for disaster if you don’t know what you’re doing.

Pretty sure EWA was flat broke. Ryan put his reputation on the line for EWA. He even borrowed 2 million for receivables from a friend of mine (who got screwed over) to try and keep it alive.

This business on the network side is a double edge sword it’s easy to get going but cuts deep and hard if you’re not EXTREMELY careful.

Case in point:
There’s 2 things we need to think about and look at

1. Risk Management, how much risk you have if the merchant doesn’t pay.
2. Cash Flow, how much float capital is required to pay affiliates weekly and carry the terms with the merchant.

Now lets walk through a scenario (using cash based accounting):

Advertiser is on monthly net 30 terms which means you run traffic to them for 30 days and then invoice. Then you get paid 30 days after that.
Affiliate gets paid weekly net 4 which is what we pay. This means Monday thru Sunday paid the following Thursday.

Volume being run is 100 leads a day at where we’re getting $40 from the merchant and paying out $36 to the publisher.

Risk: Because they’re on monthly net 30 the max outlay will be 60 days. This is 30 days for the traffic run and then 30 days of waiting for the invoice to get paid. (P.S. advertisers rarely pay on time, so doesn’t usually work out this well). So for our example we’d have 100 leads/day x $40 x 60 days = $240k in risk. Risk meaning if the merchant decides to not pay for WHATEVER reason we stand to be out top line revenue of $240k. But this isn’t totally the whole story. We’re really only risking what we have to pay to the affiliate which is 100 leads/day * $36 * 60 days = $216k

Sounds painful if they don’t pay right? And it happens often if you’re not super careful. That’s a 100 leads a day on 1 credit report deal.

Float: This is the amount of money required to carry this 1 account at this level. You might be saying well it’s roughly the same. This is only sort of true because being on weekly net 4 terms means that the affiliate gets only weekly. This has no effect on Risk because we have to pay the affiliate regardless of everything else. Weekly net 4 = 7 day + 4 days = 11 days that will reduce float d (11 days * $36 * 100 leads/day) = $39,600. Which gives us a grand total for float of $216 – $39,600 = $176,400 in float capital needed to carry this business.

Yeah but he was balling out of control he was making $400/day on those 100 leads at a $4 margin. Yes that seems all fine and dandy as long as everyone pays their bills. We’ll do a little math and take a look at what is at risk here. And how long it takes to mitigate that risk.

$400/day is only realized on a turn of money. What this means is profit is realized on traffic->invoicing->cashing checks. Every turn of money reduces the risk of initial capital loss by what ever % of margin that they’re running at. so for our example.

Ryan would have to run for 11 months = 10 months of running plus 1 month for the net 30 terms to get paid out. At this point he’d be break even on the campaign if they stiffed him. That’s almost a year to recoup capital.

You might be saying sweet that math is all fine and dandy but what happened.

I don’t know the exact story but let me illustrate how easy it is to blow through a few million carrying the wrong people.

Monthly net 30 terms from a merchant like creditreport.com + weekly pays to unknown and untested affiliates (remember we pay everyone weekly, this means super high risk for bad traffic where a merchant doesn’t pay for anything. Even the good traffic.)

Did Ryan seem like a saver or a spender? As a network owner things like non-payments actually happen a lot if you’re not super careful. I took around 3.5-4 million dollars in non-payment hits from merchants. They BK’d and ghosted out of the industry. You might say why would you give high risk people that sort of credit? You kind of have to if you’re going to be competitive in the space. How many people want to run bestbuy.com offers? Not many. Most people want direct response good performing campaigns. These aren’t always the most stable of companies. Networks have to keep good cash reserves built around good risk models and profiles or you can end up insolvent in the blink of a eye.

Another thing that can often take hold in this space in all positions is the big ugly green headed monster called GREED.

When numbers are flying up in the system, everything looks amazing. You’re buying house and cars in your mind. You’re annualizing profits and how rich you’re going to be as this continues. Only to find it all come crashing down. Things I’ve had non-payment for:

Merchants getting funds frozen by the FTC
Merchants having their merchant processing accounts steal from them (holding funds and never giving them back)
Merchants just disappearing
Merchants disputing traffic and leads that were good
Merchants …. and the list goes on

I’ll leave you with this. Know who runs the company you work with. Know what financial models they operate under. Know how much cash they keep in reserves or what access they have to credit lines if for some reason they take a hit. All these things matter to insure you’re money and your business is secure.

I don’t think Ryan did anything intentional. I think he might have been flamboyant with his money but that was all an act. It’s how he roped in noobies to the industry. “Look at this young kid balling out of control, I want to be like him.” He did the best business he could and I don’t think he wanted to ruin his name or fuck anyone. This business just got the best of him.

As with most things in life you can point the finger at someone else. Or you can point the finger at yourself because you are all you can control. If you made a bad decision running traffic to a network that went out of business how could you do things differently in the future? I always blame myself for the things that happen to me, even if other people do them. It was my choices that got me in that situation. This is how we all learn!

If you’re not from the affiliate world you may be asking yourself why would you pay people out faster then you’re getting paid?

The answer is Google and Facebook. These mediums require most people to prepay for traffic or on daily net 1 terms. So the affiliates often don’t have the capital to float the buys. If they run out of money the traffic stops. If the traffic stops the network & merchant make no money. So the wheels of commerce are oiled with money…. but you know that.

16 Comments

  1. Mike Mike

    Do you ever have leverage with the merchant to require faster pays? Seems like if they really want the leads, they’d be willing to ante up faster, especially if you’re delivering good volume/quality.

    • We definitely do and apply that leverage. Obviously there’s levers in this equation and this all goes into the risk management profile. Want more sales? shorten terms or pay more.

  2. Dr Ngo Dr Ngo

    Great post showing the behind the scenes.

    I always felt Eagle was just in way over his head, and most affiliates are that start networks. It looks easy from the outside.

    But fact is if the advertiser runs with $1m and their company’s in Cyrus, what CAN you really do?

    I’ve been in the industry many years and I’ve never been tempted to start a network. People don’t realize how good affiliates have it.

  3. Excellent post Jason. As someone that has taken a run at owning a CPA network, let me just say it’s a lot harder than it looks – and real easy to go belly up. Props to Smax for being able to successfully steer the A4D ship through all the stormy waters that have left most CPA networks at the bottom of the ocean.

  4. Brilliant post Jason!! I wouldn’t want the stress of owning a network. But I am certainly glad we have smart capable rockstars like you to do it!

  5. Good read Jason, well thought out and communicated for the average Joe…

  6. Do you have rules on Geos?
    For example what kind of credit would you extend SocialQuantum in Russia? They are a top 25 app company, but they are in Russia.

    What kind of credit would you extend ChangYou (CleanMaster) in China?

    • Depends on credit references. And I don’t mean your standard type. I usually know other people in the space. So I’ll tap into my network of friends and counter parts. Get feedback on how they’ve done in the past. In your case maybe you know someone inside inMobi or Jumptap they run with. See how they are on their invoices. Do they pay on time? Do they pay late? Based on terms how long is it going to take you to recover if they stiff you on the last invoice? What can you take as this is common occurrence.

      After you know all this do a risk/reward analysis. Start small to medium depending. Get cash in the hopper and start spending that cash to extend more credit.

  7. > I took around 3.5-4 million dollars in non-payment hits from merchants.

    Every have any luck collecting from people who didn’t disappear?

    • Hey Shawn,

      I did not have any luck. We tried but most of the companies had gone bankrupt at that point.

      In this space you need to do your due diligence on the front end. It’s a fairly small space and peoples reputations mean a lot. I don’t look at companies, I look at the people who run the companies and what their history is.

      Over the last 2-3 years things have been much much better. Just have to have a strong strategy for risk management and credit checking. The standard give us 3 client referrals is silly. Everyone just gives people that they know will vouch for them.

  8. I realize I play in a different vertical then some of those offers but I always pay net 7 OR prepay. ( I actually like prepay makes the pub/network respect you AND it keeps your humble hustle on. You don’t buy stupid shit. This is done along trust tho)

    Good read for sure.

  9. Boy ol Boy you hit the nail on the head, after over 10 yrs in this industry alot of young people just don’t understand the risk that’s involved until it’s too late.

    One thing for sure – The louder you are the more people will pay attention to you Good & Bad attention..

  10. Excellent post Jason, The network game is a super challenge, If the advertiser is off shore in a different country and you don’t have a presence there, How are the things in that case if the advertiser is delaying the payments ? Do you work on the legal stuff with offshore advertisers too on non payments. Do you prefer not working with offshore advertisers in those cases , specially the one’s from asian countries.

  11. traffiking traffiking

    Great Post! I remember when Ryan was on all the forums promoting an “exclusive” popular dating offer that none of the other networks would touch. We now know how that turned out.

    Greed gets them every time. a4d withstands the test through thick or thin like a true establishment.

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