Bankrolling The Future
Venture spending on ad firms springs back. Will the results be better this time?
When ad technology company Right Media recently planned its first "analyst day," it invited 20 select advisors from Wall Street's top investment banks and research firms to its brand new digs, a sprawling 42,000-square-foot office on Manhattan's Park Avenue.
It turned out, though, that the new headquarters wasn't quite big enough to accommodate the 50 analysts who showed up, hoping to hear presentations about Right Media's platform, which allows publishers to auction online ad inventory. A few gatecrashers even had to be turned away at the door.
For Right Media, the unexpected crowd was the latest sign the company was being taken seriously by the financial community.
After quietly launching its ad auction system in 2005, Right Media shot to prominence last fall when Yahoo took a 20 percent stake in the company - leading a $45 million financing round - which has helped Right Media boost staff by 50 percent and revenue by 81 percent since September.
Yahoo's investment also signaled to Wall Street that the company was more than a clever experiment for selling banner ads.
"That was our coming-out party," says Right Media CEO Michael Walrath, sitting in his whiteboard-walled office. "People who hadn't been paying attention said, 'Wow, that's a lot of money from a big Internet player and customer.'"
Right Media is just one of many ad start-ups benefiting from a resurgence of investor enthusiasm not seen since the dot-com bubble burst.
With the broadband-fueled digital media explosion in full swing, it falls to these newly prized ad technology companies to turn the torrent of Web pages, clips, searches, and podcasts into new revenue streams. What's more, they aim to do so by delivering on the Web's promise of increased efficiency through increased automation and improved targeting and measurement.
Companies such as Spot Runner and Spotzer are even looking beyond the Web to transform traditional television ad-buying with cheap online tools.
Jumping in to finance the latest wave of digital upstarts aren't just the usual venture capital players but Madison Avenue itself. With marketers moving ad budgets online and Internet "frenemies" such as Google beginning to extend their reach offline, the big agency holding companies face getting caught between these tectonic shifts.
Their response: If you can't beat 'em, join 'em. Interpublic Group, WPP, Publicis Groupe, and others are launching their own digital investment arms and bankrolling start-ups as hedge strategies against their own obsolescence.
"There's a lot of innovation in the media and advertising space and it isn't coming from the incumbents," acknowledges Tim Hanlon, senior vice president of new ventures and partnerships at Denuo, Publicis' "futures practice" consulting unit.
Not lost on the incumbents is the expected expansion of the online ad market. A recent Piper Jaffray report forecasts Web advertising will more than double to $42 billion by 2011, accounting for 11.4 percent of total ad budgets, up from 6.6 percent in 2006. Additionally, last year, venture funding alone in online advertising and marketing businesses hit $411 million, up from $164 million two years ago, according to data from Dow Jones VentureOne and Ernst & Young. And there's no sign of a slowdown so far in 2007.
As objects of newfound favor, however, the Internet ad upstarts are also part of the digital fervor that's prompting fears of a new bubble. Rising valuations, a glut of "me too" business plans, and an excess of available capital are raising red flags in the online ad category as much as any other. And if anyone doubts there's a bubble underway, consider this: Kevin Federline, a.k.a. K-Fed, launched his own branded search engine in March.
Madison Ave's Garages
With video emerging as the star of Web 2.0, it's not surprising that ad businesses tied to it would benefit from a halo effect. Venture backers have poured money into nascent video ad networks even as the picture for video advertising models remains fuzzy. If it's now accepted wisdom that traditional 30-second spots aren't a happy marriage with two-minute clips, then a new ad paradigm hasn't yet been established for Internet video.
That hasn't stopped investors such as General Catalyst Partners from taking stakes in high-flying Web video companies such as Brightcove, Maven Networks, and ViTrue. These video companies come in different flavors and increasingly fuse different functions, reflecting the media mash-up of today's Internet. "One trend we're seeing is a combination of video ad networks and ad technologies," says General Catalyst partner Neil Sequeira.
Brightcove, for instance, which pulled down a whopping $59.5 million in a third round of funding led by AllianceBernstein LP in January, powers broadband video sites for clients including MTV Networks, Sony BMG and The New York Times Co. It also runs its own video ad network that lets marketers place ads across groups of broadband channels.
ViTrue, which raised $2.2 million in first-round financing last year, has a platform that harnesses user-generated video for online ad campaigns at a fraction of typical production costs. VH-1, Pringles, and TBS have created campaigns using the company's technology.
Sequeira says his firm is now also talking to ScanScout, one of a handful of highly-touted start-ups that aim to replicate Google's contextual ad model for video. By recognizing words spoken in videos, ScanScout's technology lets marketers have ads appear in or alongside clips when certain keywords are spoken. So an auto ad might pop up when the people in the video are discussing cars. It's the type of Web 2.0 targeting technology likely to draw big venture dollars.
As online video and the Web claim a growing share of ad budgets, Madison Avenue isn't just standing by. The agency behemoths are joining the crowd looking for a piece of the digital action. Just as they maintain an uneasy alliance with Google, so too the holding companies are partnering with digital innovators to avoid creeping irrelevance.
"The world is changing much faster than the holding companies are prepared to change," says Denuo's Hanlon. The unit was started by Publicis last year as a "flank strategy" for the agency's future. Hanlon adds that most of the industry's innovation is coming from entrepreneurs in garages "who may not have the appreciation or nostalgia for how media and advertising has been done historically."
Hanlon is secretive when it comes to what's going on inside Publicis' own garage - Denuo - but notes that the unit has advisory relationships with companies including Brightcove, ViTrue, and ad management platform BlackArrow, among others. Hanlon wouldn't discuss whether Denuo had also taken equity stakes in any of these start-ups.
Interpublic Group has taken a similar step in launching its Futures Marketing Group to invest in emerging media and help drive new business for Interpublic. The unit also absorbed the company's Emerging Media Lab in Los Angeles.
"We're looking at architecting new business models in the media marketing landscape," explains Bant Breen, a rising digital star at Interpublic who leads the futures arm. To that end, the company plans to unveil its first internally incubated start-up this month, though Breen wouldn't provide details prior to launch.
Perhaps most notable are the minority equity stakes Interpublic took last year in college social-networking site Facebook and do-it-yourself media-buying service Spot Runner. The Spot Runner investment, in particular, seems like a counterintuitive bet against Madison Avenue's longstanding stranglehold on buying TV time.
Indeed, investors in the $40 million round of funding that Spot Runner closed last fall included not only Interpublic, but other traditional players such as WPP and CBS Corp., in addition to venture capital firms. Spot Runner lets small businesses launch TV campaigns for less than $500 by choosing from a library of pre-produced ads on its site and indicating where they'd like them to run.
Since launching last year, the company has grown to more than 150 employees and attracted thousands of advertisers, according to Spot Runner CEO Nick Grouf. "We make more creatives in a week than the large agencies do in a year," boasts Grouf, who previously started personalization software company Firefly Network and Internet service provider PeoplePC.
That's fine with IPG's Breen. He maintains that Spot Runner complements rather than conflicts with Interpublic's efforts on behalf of big media buyers. "We don't have many mom-and-pop shop clients, so we're not really looking to break into those market segments," says Breen. But for national clients with franchisees, such as Coldwell Banker, Interpublic can tap Spot Runner to allow agents to create local TV spots in conjunction with a broader campaign.
Teaming with emerging outfits like Spot Runner is far more appealing to the big agencies than allowing Internet titans such as Google to continue to transform buying ads in TV, radio and print via the Web. While Google wants to work with Madison Avenue's biggest clients to help them devise better ways of using search and delivering more targeted ads, agencies also fear the search giant might ultimately displace them.
It's not just old media that needs to keep up by making strategic bets on new ad technologies. The Internet portals that were start-ups themselves during the dot-com boom are now a new class of investors themselves in this latest upsurge. Yahoo's 20 percent stake in Right Media highlights the need for these now "mainstream" media brands to look outside for innovation.
Yahoo plans to wring more dollars from its vast inventory of Web pages by selling remnant space through Right Media's online ad exchange, which now comprises 6,000 buyers and 13,000 sellers.
For Right Media CEO Walrath, the Yahoo cash infusion was as much about gaining validation in the marketplace as capital to fund the business. "We almost certainly could've gotten a better valuation if we had gone with pure venture investors," says Walrath. He and other entrepreneurs say they're raising money not so much because they have to, but because they can.
Since Web companies are much cheaper to start now than during the first boom due to factors like low-cost storage and open source software, they don't require as much early-stage capital. When asked how Spot Runner is putting its pile of money to work, CEO Grouf replies, "A lot of it is sitting in our bank account."
Like many of the ad tech entrepreneurs, Walrath and Grouf lived through the dot-com era and don't want to repeat the same excesses. For Walrath, that means refraining from installing a full-length basketball court at Right Media, as DoubleClick had done during his tenure there in the late 1990s.
Even so, concerns are mounting that another bubble is already upon us. Venture capital and tech blogs were recently abuzz with the latest evidence: a $10 million funding round in social-networking site Geni in March that would reportedly give it a post-investment valuation of $100 million only weeks after launching. Founded by former executives from companies such as PayPal and eBay, the site lets people create family trees by inviting relatives to share ancestral information.
Dave Morgan, who started online ad network Real Media in 1995 and then founded behavioral targeting company Tacoda, of which he's chairman, sees similarities to the dot-com boom - with a couple of key differences. "Today you've got fewer deals and more venture funds. There's more competition for the good opportunities, which pushes up the pricing," says Morgan, whose company raised a $12 million round last year led by Union Square Ventures.
He also notes that this time around, the public isn't getting swept up in the investment frenzy because there's no real IPO market to speak of. The exit strategy for most venture-backed start-ups is an acquisition, contributing to a record $60 billion in media and information industries M&A deals last year, according to The Jordan, Edmiston Group.
"There really are no young, public ad companies in the last few years," says Morgan. "The reason is the venture guys stopped investing for a few years."
With 50 Wall Street analysts already banging down its door, could Right Media end the IPO drought? Strolling the expansive floor of the company's offices with extra room for growth, Walrath insists that going public isn't a priority. Even so, he says, "it's good to go out and develop those relationships early."