A friend of GigaOM, blogger Scott Lawton, passed on to us a great post that reveals why it is sometimes better to sell your business than raise more venture capital. The example used to illustrate this point is Alan Warms’ decision to sell his shop, BuzzTracker, to Yahoo! for about $5 million, rather than raise a comparable round of funding as the Huffington Post did.

For Web entrepreneurs, it’s helpful to understand the economics of a blog or related media business. In August 2006, BuzzTracker’s Alan Warms (posting on Fred Wilson’s “A VC” blog as “al from chicago”) ran some numbers to suggest that The Huffington Post’s decision to raise $5 million was a risky bet…So, you can see why Alan bootstrapped the company and was happy to join Yahoo rather than fight for page views in a standalone company.

Why? As Warms himself illustrated in August, the target acquisition price likely to be set by a second- or third-round VC investor will, in turn, require performance benchmarks that may be too hard to achieve — especially the page views. As Alan laid it out last year:

pre-money valuation: $10 million
VC investment: $5 million
post-money valuation: $15 million

target valuation: $100 million (at exit)
required cash flow: $10 million/year (i.e. sell for 10x)
margin: 50% for a profitable media business
required revenue: $20 million/year

RPM: $15 (very? optimistic)
required page views: 1,333 million page views/year
required page views: 111 million page views/month
required page views: 3.7 million page views/day

So, instead of raising $5 million, and then trying to reach these goals, Warms took the bird-in-hand, and cashed out. Read the full post here. It also includes some additional context from Scott:

even a $20M/yr business is on the low end for VC investment…[who peg] general interest sites (including news) at $1 RPM…which would require 3-15x more traffic than in Alan’s quick estimate.

Be sure to read Scott’s references to comments and posts from other writers, including VCs, on this subject. Thank you, Scott!