The coffee shops of Mayfair

Venture Capital into Ad technology reaches $580mn in 2008

I have got some research done for a speech at today's Ad:Tech conference to look at Global Investment into the online ad / technolgogy Category: I knew it was large but not trending to one billion dollars a year!  What's even more interesting is that this is only the disclosed data, and some of the deals that I know would push the total higher still.

Interesting to see that Europe accounted for $258mn of this which is 45% of the total. This is remarkable because European VC typically only accounts for around 20% of the USA on an industry-wide basis.  This just shows the strength of the European market for Advertising models.

Rather predictably, Ad-Networks was the largest sub sector by volume and value: partially explained by the sector being a little "mature " for VCs now and the best plays will have obvious scale.

Our recent investment round into European local advertising player Qype was announced too late to qualify as first half investment.  But Qype has a very innovative business model and is far more than just a UGC review site. There's been a lot of blog chat about Qype and I want to put forward our view in a forthcoming post.

I was also particularly interested to see five investments into companies who are measuring advertising effectiveness.  The great thing about the web is that it allows brands to quantitatively judge the success of campaigns.  We at Advent believe there is an exciting opportunity emerging for Advertisers to find out which half of their ad-budgets are being wasted.  We are very interested to see European companies tracking, measuring, analyzing, and quantifying online advertising effectiveness.

We're also excited to see companies who are helping brands develop new forms of advertising, especially online short form content, but more about that in further announcements...

Here is the powerpoint.

Ad Tech Paul Fisher

View SlideShare presentation or Upload your own. (tags: industry advertising)

Below is a list of the businesses and the amounts. If I have time (something my post rate will show I don't have lots of)  I'll add a little more "colour" to the list.

Ad Exchange   
AdJug             
AdGent 007      
ContextWeb     
TargetSpot      
   
Ad measurement                       
Digital Revolution Technology      
Vizu                                              
VoloMedia                                   
XPlusOne                                      
Integrated Media Measurement    

Ad network                
AdScale                            
Adconion
Mochi Media   
IGA   
Broadband Enterprises    
Demand media        
DirectoryM                  
Giant Realm               
Gigya                         
Graspr                         
Jivox                         
RockYou                    
SaysMe                         
Tremor Media           
Undertone Networks      

Ad technology         
Invidi Technologies   
Ads Clicks                  
Videoplaza                 
Keybroker                  
Coull                         
OpenAds                   
AdMeld                      
Click Forensics             
iBloks                         
Invision                      
Jobster                      
Kiptronic                      
MediaBank                   
MediaBoost                  
V Links                         

Agency                           
Uniteam Communication   
Bruce Dunlop & Associates   
i-level                               

Local Ads           
Local Labs           
Local Marketers  
WebVisible         

Mobile ads            
AD.IQ                  
Blyk                       
Acuity Mobile       
Ad Infuse               
mSnap                   
Ringleader Digital   
Smaato                  

Out of home advertising   
Ocean                              
Hanger Network                 
JobDig                               
SeeSaw Networks              

(Advent Ventures conducted the research using data from RealDeals and proprietary research.)

CPC, CPA, lead generation does not work

Idea
This is the idea that the old CPA and lead gen models are inadequate measures of performance and therefore their pricing needs to change.

Problem (s)

The problem here is knowing when a user clicks on an ad, and then buys a product, if it is as direct result of that ad.

What lies behind these issues is that click-through does not correlate to purchase.

It is worth a brief diversion to say a bit about why click-through does not correlate to purchase:

1) Clickers
Research shows that some users are just “clickers” and will click on anything. Clickers make performance marketing less accurate. Clickers are not stupid, they are your wife.  And they skew results.

2) Non clickers
Non-clickers make performance marketing less accurate:

“respondents said they were twice as likely to notice a web ad, not click on it, but visit the advertised site later (61 percent) as they were to click on an banner ad to reach a site (30 percent).”

DoubleClick Touchpoints survey, 2006

3) Click before purchase

The last click before a purchase is not the reason why that purchase was made.  Intuitively this makes sense: I am personally more likely to click on an ad for Dixons than I am for ABC Online electrics ltd. This is a result of 20 years of brand-building from Dixons.
The question then becomes: why should I pay a lead-gen fee or CPA to an affiliate if they have not done the work? This is the most potentially disruptive one to all those elegant business models that we are backing.

Solutions

How are people solving the above problems?

1) Clickers & non clickers

Agencies are trying to solve the problems posed by clickers but it’s not easy. One of the most compelling is that from Double Click who offer ”view-throughs”.  With View-throughs, lead generation / CPA is paid even if the browser buys within 30 days of viewing.  The problem is still far from solved.

2) Paying rewards based on effectiveness

If advertisers and their agencies are able to come up with one generic and widely accepted measure of effectiveness, then results can be paid.  This is a fascinating area and I have covered here  .

3) Media mix optimization
Due to the quantitative holes in performance marketing, some advertisers are seeking to attribute value to “total exposure” rather than pay for specific clicks: paying for exposure across the media mix.
NBC is trying out a metric called “total audience measure”, which tallies TV and online impressions: “you have to understand, every medium has a different effectiveness level”. Beth Comstock, president of NBC Universal Integrated Media

Opportunities for growth companies

The big issue for many start-ups with a revenue-model based on CPA or lead gen is the question of whether the last click before a purchase is the real reason for that purchase being made. I personally believe that the current system is the least-worst mechanism that we have and therefore PRICING WILL STAY THE SAME:  The downward pressure on CPAs that would come from recognition of additional brand building will be netted-off by the overall shift in spending from mass to performance marketing.

It doesn't concern me too much that the last click before a purchase is not the reason why that purchase was made.  Why?  Because a great web app will act as a "noise reduction agent" to cut through the advertising clutter. This is one of the compelling things about Moveme.com (Advent Portfolio company): there is a clear development towards reducing the noise and concentrating on signal strength from publishers.

Affiliate Networks themselves are seeing some questions from advertisers about the true effectiveness of affiliate network campaigns . I have previous posted on this.

All web properties; from small blogs, through growing media-networks (like glam.com) to massively trafficked ad-driven models like Dailymotion will have to continue building bigger and more comprehensive databases of their users: profiles, demographics, likes, dislikes.  Advertiser demand for this data will only grow.

I am also convinced that we’ve not seen enough from companies targeting specific influencers in key communities.  I’m excited about businesses helping advertisers go after influencers in specific niches or providing horizontal tools to go after influencers in multiple verticals.

Finally, the enormous shift away from mass marketing and into analyzing performance marketing and targeting will create fascinating opportunities for growth:
•    Managing customer data-bases
•    Analysing customer data
•    Automating the measurement and performance of advertising dollars on-line and offline

Display ads and CPM are broken

This is the idea that the CPM model is an inadequate measures of performance and therefore their pricing needs to change.

Problem (s)

1) CPM.  We still don't know that when a user sees a display-ad if she is more likely to buy that product. We can run focus groups, we can measure clicks, we can run surveys.  But we don't have any directly correlated and measurability.   This is one of the reasons why I am sure we will see a proportional drop-off in display ads (recession or no recession).

2) Forget consumers, advertise to influencers. 
It is not really display that influences buyers at all.  It is key community influencers. 

Solutions

How are people solving the above problems?

1) Targeting 
When you’re concerned about the veracity of your performance metrics, the obvious way to get around them is to advertise only to be people who you know want to buy.

A range of methods exist:
•    Targeting certain online behavior like Blue Lithium.
•    Targeting specific geographies like Yahoo Smart Ads
•    Targeting specific interest groups
•    Targeting certain communities only at certain times “timing”. E.g. look at Freeads.co.uk weekdays 11.30 – 2pm; it will be dominated by McDonalds ads.

2) Influencing the influencers

Good customers cannot be identified soley by their purchases (see Leveraging user generated content from forrester ).

Some advertisers are beginning to believe that it doesn’t matter if you’re CPMs are wrong, so long as you’re targeting the right people. 

“Now it’s about activating people of influence. They will then promote your brand continually because it protects and extends their personal reputation. People activate based on uniqueness of information, trust and credibility of source. CNET claims to be zeroing in on the 50% of advertising that does work.”

Neil Ashe, CEO CNET . See also "Understanding Influence and Making it Work for You,".

CNET claims to get higher CPM not because their audience are High Net Worth Individuals (like FT.com & Economist does) but because their audience is chock full of influencers.

Forrester have gone one step further by claiming that metrics will focus on the acquisition of  evangelists rather than purchasers.  They predict that a completely new metric will emerge called the cost per acquired advocate (CPPA).

3) WOM agencies

A few specialist word of mouth agencies are emerging specifically to target the influencers.  They are telling brands to allocate their cash to specific users and attempting to knock the bottom out of the CPM market.

Conclusions

There seems to be lots of suspicion today over online performance metrics. A number of developments are trying to solve this including media mix optimization and new targeting techniques.

The concept of effectiveness is core to bridging the online offline shift but arriving at a single measure of effectiveness is a big challenge for the industry.

The commonality for all advertisers is that they want all want a reduction in risk. They want to get better bang for their buck.  They know the web is changing things but it’s still too early to know how and exactly what they should do.

The affiliate network is dead: long live performance marketing

The idea
This is the idea that affiliate networks are struggling to justify their margin on each click or referral.

The problem
Theoretically affiliate networks allow advertisers to get to niche consumer needs by leveraging the long-tail of smaller specialist web publishers. In practice this is bunkum.  The 80-20 rule persists and this threatens affiliate network’s market position.

For example.  A large UK retailer uses one of the largest UK networks and is able to “see through” the affiliate network to understand which publishers send it the most traffic.  The results show that 80% of the traffic that this retailer gets is from 20% of the publishers. Consequently there is a big trend in the market for merchants to approach the publishers directly to strike deals, cut out the middle man and split the margin.

This completely flies in the face of the affiliate network model.   Affiliate networks traditionally argue that the value for merchants lies with a large number of smaller traffic referrers: Merchants cannot cost-effectively build links to this vast array of referrers and therefore pay a margin to a network to do this connecting for them.

If merchants can answer yes to the following, the future looks bleak for affiliate networks:
1)    Does most of your traffic come from a small number of high volume referrers?
2)    Can the technology (click monitoring) be created in-house or bought (e.g via direct track) cost effectively?
3)    Is the “missing 20%” low quality traffic.

The solution

Firstly, I have checked this out with a few networks and the message is that it is very unlikely that 80% of their merchants will go direct anytime some.  Nevertheless it is an issue and the networks have a few things up their sleeve:

Networks are offering a wider-array of value-add services & better software to their merchants and affiliates in order to retain them.  This is stuff like stats, bad affiliate alerts, online content tools such as reviews.

Affiliates are evolving to overall “performance marketing” networks.  This will mean they will be offering the whole range of CPA, CPC, CPM, Lead Gen, email marketing, cash-back (like quidco) etc.
We have recently seen a few acquisitions which are not about scale but about breadth (e.g. Buy.at acquisition of xyz).  I also expect to see more acquisitions of analytics and marketing tools.

Opportunities for growth companies.

Affiliates themselves continue to be growing revenues across the board, both organically and by acquisition.  As they evolve into performance marketing networks, I am interested to understand which part of these businesses will end up being most valuable:
•    The databases they own on consumer behavior
•    The margin they take on advertising clicks
•    The optimization and analytical tools they offer to advertisers.

I wonder if any CEOs of affiliate networks or their investors know this?

There are also some interesting lessons for the web-publishers / affiliates.  The message coming from the networks is that the simple “google traffic sites” know for their CPC focus are less and less effective.  I think there will continue to be a flight to quality where traffic from rich, valuing-adding publishes like moveme.com will accrue value.

If your site is proactively sought-out by consumers as a valuable resource to influence their buying patterns, then the quality of your traffic will get top-dollar from the networks (just look at the valuation of MoneySupermarket).  This is the type of affiliate that I’d love to invest in.

How do we measure effectiveness of online advertising?

This is the idea that if agencies could agree on a single way of measuring “effectivness”, irrespective of whether the ad is online or offline, the industry would get back to normal.

The problem
Performance marketing has confused advertisers. Online they can track leads generated, impressions created and track clicks that lead to purchases.  So they go back to their agencies and demand that they justify their offline adspend, their latest TV commercial, their employment of coke snorting “creatives” who keep telling them that their ideas are going to help sell more cameras.

Of course the agencies are struggling with this justification. No-one’s saying that drumming gorillas on the telly don’t sell more chocolate, but it’d be great to quantitatively measure exactly how much more.

Of course this is not a new problem:
“I know that half of my advertising money is wasted … I just don’t know which half”
John Wannamaker
But given the measurability of online, advertisers are more likely to now claim the wasted half is the un measurable half.

Solution

“every discussion we have now with most traditional advertisers is about how we get more effectiveness: how do we get more out of the digital realm… “there is this sense that they’ve got to have a different mix formula” involving some combination of TV and online advertising.
Beth Comstock CNBC

Offline advertising has a whole discipline devoted to measuring effectiveness.  Research companies offer testing models, different gathering methodologies, response measures and analytical approaches.

Theoretically it is possible. Sure you could come up with a standard set of methods, weight web advertising in (as well as web, TV, direct mail, email marketing, posters etc etc) and arrive at a single measure.

But it’d just never gonna happen.

Online effectiveness is massively measurable. Offline is not.

My view is that when faced with this predicament, advertisers will in the future “over weight” online at the expense of offline.

Conclusion
Advertisers are not currently “over weight” on web.  In fact quite the contrary, particularly so in certain sectors like FMGC.  Why not?
1)    The web is still relatively new form of ad inventory (our research has shown brand managers and agencies are surprisingly backward when it comes to the web)
2)    We have still not worked out how to use the web to communicate the more emotional mass market ideas that offline is well known to do.  This will change: we are still only at the beginning of how the web can be leveraged for new advertising techniques.

Opportunities
•    Given I am so bullish on the long term “over weighting” of web inventory I am clearly long on web publishers, short on offline is about the mark.
•    I am convinced there will be growth in agencies who can continue to help brands create compelling web promotions.  I am not currently convinced there is sufficient scale to justify VC investment.
•    Planners will become the most important people within agencies.  If they understand the new inventory and can use the online tools the client will do as they say. 

Advertisers still value old-fashioned reach more than targeted advertising

The idea
"Advertisers used to want reach but now it’s targeting".  The story goes something like this:
In the world of television dominated inventory, advertisers paid highest prices for ad space that brought reach. This is changing. Now with the advent of the web, the story goes, they now place top value on specific audiences based on demographics, profile, timing, engagement etc.

This is rubbish.

Whilst targeting is a nice idea, our research shows it is NOT VALUED today by advertisers. It might one day but it will take a long time. 

Evidence

You want proof?  The best example we had from research was the interview with the agency who tells its publishers to stop talking about their niches because they are still too small to make much economic sense. I quote;
“Publishers shouldn’t worry about targeting right now.  I mean, if you offer advertisers too much targeting that you’ll do all that work just to generate 30 impressions. You’d get far more cash by just offering them the cash”

There is, of course, a terrific irony here that it is the agencies who try to differentiate themselves on their sophisticated ad servers for segmenting and tracking audiences.

What does this mean for entrepreneurs & management teams?

If you are running a niche site, and you believe that one day an advertiser brand will pay more for 11 targeted eyeballs than 1000 un-targeted ones then you need to work out when. 

If you are offering sophisticated targeting tools, you’re in a great position, just calling the timing for mass adoption is tough.

Meanwhile there are a few opportunities for entrepreneurs:

1) Aggregation networks.  There are opportunities today for entrepreneurs rolling up a series of niche publishers.  A critical mass of either owned or syndicated web properties means you can offer advertisers both reach and targeting.  This is the business model of Glam.com, FM publishing; two great businesses.

2) Alternatively an entrepreneur might believe that the value lies with the guys selling the picks and shovels, allowing other people to create aggregation networks.  This is people like Adify.

3)  Common cookie space advertising is another way of solving the problem of low value ascribed to niches.  This is essentially where an advertiser will build a criteria of people that they want to target.  They then create an openID of the characteristics that they want to target and if a publisher can exactly match this request with their audience database they can get a match.
This is still a nacent part of the market but one that really excites me.  Like a dunnhumby for multiple retailers. 

If you have or know any other businesses operating in this sector I’d love to find out more.

Will advertising really evolve from "big ideas" to individual conversations?

The idea
This is the idea that we are now immune to big branding ideas and advertising.  The theory goes that the perfect antidote is web-based and is called (dependent on who you are)

• conversational marketing
• engagement marketing
• targeted advertising

This was one of the key ideas from the research that we did.  I have a future piece on this topic. But I wanted to blog it now because with uncanny timing two of my favourite bloggers have coincidentally written about the same thing on the same day from different starting points.  (Far out and weird man).

V 

Nic Brisbourne thinks that big brand “ideas” won’t work in the age of the web because the general public can complain in blogs that drinking Pepsi won’t make them play like David Beckham.

Russell Davies (who works in the advertising industry) thinks targeted ads will never be that compelling, and there will still be a role for brand ideas from the “great communicators” in the ad industry.  His hypothesis of the “uncanny valley” is brilliant.   

These ideas make for fascinating ruminations and theoretical late night debates on what the future holds.  However, most of my readers seem to be entrepreneurs and therefore more interested in what these trends in the market can mean for them as pragmatic business creators.

I think there are some fascinating opportunities for start ups in these areas, though the jury is out on who “VC-backable” they are.  More in my forthcoming posts.

When will be able to use cpa for buying cars?

How do we solve the offline purchase problem?

The Adtech conference a couple of weeks ago was pervaded by two smells. One was the sniff of a slowly decaying traditional advertising world, the other was the smell of adolescent exuberance from a bunch of precocious but brilliant teenagers.

Because of this the conference was brilliant.

What has stuck with me is the cleavage between traditional advertising and new generation performance marketing.

The problem with traditional advertising is that performance metrics are woolly. That’s not to say it doesn’t work.  We still see TV adverts for soap powder because of course there is a correlation between offline ad spend and revenue.

What the traditional admen didn't want to address was what will happen when web offers the same reach as tv. They seemed to retort that ideas like a monkey playing the drums will save offline advertising. I am not so sure.

At one level this is an online offline debate, but on another level this is product centric.

You can sell some products, like cameras online, and so using performance metrics like cpas is easy.

But what sort of performance ads can you use if you're Cadburys or Pringles?

How can you prove an online ad makes more people buy chocolate? Its hard.

Its not just FMCG. For example, what about cars? You can have an incredibly compelling piece of advertising that makes someone more likely to buy a BMW.
But they are going to buy it in a dealer.

Why should it matter that offline ads are hard to measure?

When you can’t measure the effectivness of an ad it should worry admen. Advertisers can get measurement elsewhere. They will go elsewhere.

It also worries small publisher sites; what if you have created a niche car blog with the perfect environment to persuade people to buy cars? You can't currently get the 5% lead-gen fee. But by god that’d be nice.

As an investor I am fascinated by this broken piece of the chain. How do you solve the problem? Vouchers? More sophisticated lead gen intermediaries?

I'm looking forward to entrepreneurs telling me.