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.)

Thefunded.com: Empty vessels make the most noise

There's a bit of a hoo-haa right now about the impact of thefunded.com. See here.

I would claim I am in a pretty unique position to comment on this story.  For 5 years I worked with a series of start ups with, amongst others things, the job of raising VC for them (Glasses Direct, Reevoo, Rawflow, Zeus, OmniPerception).  I negotiated with numerous VCs and sat in hundreds of pitches. Literally.

I have seen the good the bad and the ugly of VCs.  Nowadays, on the other side of the fence I see the good, bad and ugly of entrepreneurs.

Adeo Ressi (CEO of thefunded) claims to have two main aims: To make the funding process easier “entrepreneurs should pitch to 10 firms at once, closing in 2 months, having reasonable economic terms.  none are true now” (I think this is factually incorrect). Secondly he aims to get a wider breadth of firms funded. 

Lofty ideals indeed.   Let’s analyze the two things he’s doing:
1)    Giving presentations advising entrepreneurs on how to raise funding
2)    Running thefunded.com

Giving Presentations

Giving useful advice to entrepreneurs is great.  Especially if it is sage advice from people who’ve done it before. Even better if its fresh from the current market.

•    Lots of what Adeo presents is fundraising 101.  It is a useful footnote to the great stuff from the likes of Guy Kawasaki .

•    Some of what Adeo presents is good: Stuff like “its OK to walk away from a VC offer you don’t like, run fundraising discussions in parallel not in series, try and get multiple offers” etc.

•    Some of what Adeo presents is plain wrong.  For example the stuff about VCs deliberately trashing companies they want to invest in, or a rule on only ever pitching to general partners.

•    Some of what Adeo presents is dangerous. For example “always go for a 20% option pool” or “ never give two board seats”. All companies are different and this “advice” is woeful.

So my advice to entrepreneurs when listening to Adeo’s current presentation on the conference circuit is to listen with interest, don’t take it as gospel, and get some advice from someone who really knows what they are doing.

TheFunded.com

This is a vibrant community that aims to help entrepreneurs raise money.  That’s a great aim.  I also like the way its bringing more transparency & visibility to the VC industry which despite all the efforts from VCs  (most notably Saul Klein) remains a tough world to get your head round. 

My central problem with thefunded is that it doesn’t actually help entrepreneurs that much.  At best it’s something to use after you have made a long list of people to go and talk to.  At worst it’s a stack of incredibly subjective views that are plain wrong.

Why isn't much use? Accuracy. The wisdom of crowds needs a crowd.  The US VC market isn't massive. By comparison, Europe is small.

I will save the long essay till another day, so here are some bullets:

•    Some VCs can be very difficult in meetings.  This ranges from mild arrogance through to yawning, falling asleep or being proactively obnoxious.  Some VCs need to pull their socks up and thefunded.com helps with this.

•    However, some VCs see aggressive questioning as part of their selection criteria. Its not my style but I know some VCs, who have helped their entrepreneurs make a lot of money, who aren’t the easiest of people to deal with.

•    Just because a VC is rude in first meeting, doesn't mean they won't add lots of value when on your board. Being a VC requires a range of skill sets: analyzing strategy, negotiating contracts, making intros, running acquisitions, leveraging brand. The funded.com doesn’t give much insight into this.

•    One meeting wonders.  The problem with thefunded.com is that it gives poor execs who crash after one meeting a disproportionately louder voice than those who have had 2 years of experience. For example, I doubt that the Skype guys have written on the site? 

•    VCs say “no” more than “yes”.  Some people simply don’t like to be told “no”.  To quote venturebeat; “VCs say “no” to a lot more entrepreneurs who request backing than they say “yes” to, which suggests the ratio of critical reviewers to positive reviews will be quite high.”

•    There’s a theory in VC land that the noisiest entrepreneurs who complain most about investors “not getting it” are only those who didn’t get funded.  I wonder if there’s a link there….?

So this post has been inspired by a question from Mike Butcher on twitter musing if thefunded would kill the European VC scene.

My response is that there is not a cat in hell’s chance.

It’s a useful tool in that it gives a bit more visibility to a sometimes impenetrable industry.  It’s also nice to see a bit more power with the execs.

But it scares me that entrepreneurs will read the funded .com and either believe it to be truly representative or treat it as proper advice.  This is very far away from the wisdom of crowds.

Right.  I’m off to try and persuade some investee CEOs to stop focusing on executing the business plan and instead write reviews of VCs on thefunded.com (ahem)

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. 

The advert is becoming the product

The idea

This is the idea that we are at an inflexion point in the development of new forms of advertisement.  These new “advertising objects” are hybrid models: a mixture of a number of existing methods and media: part website, part TV commercial, part live event, part community.

“Online advertising may be sexy – but its hardly penetrated the big advertisers.  It takes a long time for people to shift inertia and legacy systems.  The white sheet of paper brigade has an enormous advantage”. Martin Sorrel, WPP, May 2007

The opportunity

The advertising industry today is today characterized by both incredible sophistication and complete naiveté:

•    Advertisers are incredibly sophisticated about creating brands & ideas that resonate with the subtleties of consumer psychology.   
•    There is naiveté and (in places utter confusion) about how the still new medium of the web, can be used to help consumers buy products in the short, medium and longer term.

So strategically we’re state of the art Bang & OIufsen, but tactically we’ve only just discovered the LP.

How is advertising so sophisticated?

Brands are moving further and further beyond plain old vanilla adverts. Russel has a great blog post on this and here are some more examples :
Events: Innocent have the fruitstock event to identify with all that’s middle-class and wholesome. O2 & Virgin have their festivals.
Social campaign: Dove have a pseudo-pressure group “campaign for real beauty” to get us all to realize that Kate Moss isn’t the pinnacle of beauty (thanks for that).
Sports events. Nike manage to persuade thousands of runners to become giant advertising hoarding for them in twice-yearly races (for extortionate entrance fees).
Charities. Amex Red and Starbucks with Perk up Your Life are piggybacking the current consumer trend for social responsibility with compelling charities.

Advertisers are only just starting to “get” the web

There are masses of examples of terrible ad ideas on the web.  My favorite example is the Pepsi worldwide multi-million on-can promotion with a Youtube-esque site during the world cup encouraging customers to upload their own versions of the Pepsi TV.  Just 23 were submitted, 14 of which were from the same family in Romania.

NikePlus is the single best example. This is a website which synchs to your pedometer and ipod so that when you come in from a run you will automatically get linked into a social network of other runners.  Customers have gone mad for it.  People are joining simply so they compete against other people in the social network (for more on getting a social network to work right see here). The convenient thing about competing in the network is that more running shoes and ipods are also bought.

So it’s one big advert for Nike.  And a very good one at that. Its not a TV ad, its not a social network, its not an event.  Yet it has elements of them all. It’s a completely new advertising object.

Widgets are of course the other big web and advertising crossover.  Want to get your brand embedded half a million myspace pages?  Sure, just write a nice widget and the kids will ship it out for you.  Just think of what that inventory would cost you….

Web2.0 = advertising2.0

Some commentators go so far as to say that Nikeplus is a case of the advert becoming the product itself.  As a venture capitalist I am fascinated by this concept.  When we look at backing a web-app or publisher we always look for some virality inherent in the web property. I’ve never looked at web2.0 as a series of advertising objects and the future of advertising, but I’m beginning to think it might be.

Opportunities for venture backed businesses?

When we first started looking at this area it was hard to see how VCs could make money from new advertising objects.  They are currently being made by small innovative young agencies.  Going forward all the signs are there that they’ll be being made by large innovative agencies.  Agencies are people businesses with no scale nor operating leverage: not traditionally great hunting ground for venture capital-esque growth.

Having seen the way that the ad is becoming the product, the growth of widgets and the vitality of many web2.0 companies, I’ve realized that we’ve already been investing in advertising2.0.

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.

Why most Web2 businesses are doomed

The contention is that:
1.    Most web2 business models rely on advertising
2.    The advertising market is barmy at the moment; agencies, buyers & brand managers don’t quite know what to do.
3.    Hundreds of web2.0 companies are essentially making a wide range of very different bets on the type of web property will command top dollar from advertisers.
4.    Not many will get it right.

I first said something along these lines at the Essential Web conference a few months ago, and I have been getting a hard time from some quarters so want to explain. 

Firstly I will talk about exits for these web properties and then about their business models:

Exits
Since joining Advent I have been asking a lot of people their view on who corporates will be acquiring and IPOs be valuing highly in 3 – 5 years.

Right now it is obvious that the hot area for investment and realizations is users and communities (Last.fm* on an exit P/R of 56 proves that. Plus Fred proves it on the back off a fag packet here ).

These valuations are predicated on our old friend “first mover advantage”: Could News International develop their own job-site?  They could, but why not just buy someone already doing it? It saves the time, risk, outlay and focus (like this). Admittedly there is also a fair degree of panic on the part of some media companies that they don’t have a large or strong enough online audience.

Will web properties still be madly buying like this in 3 years?  I don’t think so.

By that point, it is all about monetization.  This is not to say they’ll be straight EBITDA valuations but exits (both M&A and IPOs) will be based on studies of the methods and metrics of monetization.

Models
And so to start ups.  When I look at some of the advertising-based monetization models from some start ups I meet, I get very nervous. For example, will you really be able to hit the $40 CPM 2 years after launch on remnant inventory? Will you really be able to gross £135 for every warmish lead you give to that high street solicitor?

Other than this granular view, there is also a more strategic view. Consider this:

1)    There is a MASSIVE increase in ad space coming online (from start-ups, through the new dominants (like Facebook) through to the old school giants like FT.com).
2)    There is only a MILD up-tick in online ad spending.

At a basic level the law of supply and demand says that price will go down.
(There is a further possibility of consumer spending falling off a cliff, but with the current market poised where it is, who can call this one?)

The end for ad-based web models?

Not at all. I’m as bullish as ever on making investment into ad-driven web models.

I just think that most of the businesses setting up to today have got it wrong.

What I’m really excited about seeing is how the ad market is becoming more sophisticated and how some start-ups are taking advantage of these new models.  All of this is based on some research we’ve been doing in-house and over loads of coffees and breakfasts (I am a stone heavier since April).

We have found a number of key ideas that seem to be moving the world of online and offline marketing.  Brace yourselves for a stack of posts over the coming weeks with my conclusions...

Entrepreneurs against the abolition of taper relief

I don't want to use this blog for politics (believe me, if you get me started, I'm not likely to stop).

However.

If you want to see the entrepreneurial climate in the UK continue to thrive, please sign up to this this Facebook group.

What's it all about?

In the recent pre-budget report, the labour government has decided to scrap business-asset taper relief. This is bonkers. Why?

If you are an entrepreneur and you sell your company you currently pay 10% on the capital gain.  The new rules will see this roughly double.

Various British governments from both parties have tried a series of initiatives to encourage entrepreneurialism, recognizing that it is a core driver of growth. Some have been failures (Uni Challenge funds, VCTs) but others have been successful, namely the taper relief (tax benefits for entrepreneurs), EIS scheme (tax benefits for angels) and EMI scheme (tax benefits for employees).

What are they thinking?  That they need do no more for British entrepreneurs?  Well sure we're doing pretty well compared to 10 years ago, but we've still got a long way to go.

Please do sign up.

The Ebay Skype write down is bad news for venture capital

Since ebay admitted that, really, they messed up with Skype, there is an amusing opportunity for the vcs who passed on investing into Skype 3 years ago due its lack of revenue model to say "I told you so".  It would not be the first time that the vc community thinks its a lot smarter than the listed markets.

But why does the Skype write down worry me? Surely, I hear people say, the vcs shouldn't care. They got in and out and made some good money.

This is quite wrong.

The point is that we will all need to sell a number companies into listed web companies.

We want their acquisitions to make them money so they come back to us for more.

The FT does a good job of comparing the terrible Skype acquisition with the wonderful myspace acquisition which has made lots of money from Newscorp.

A pity they can't all be like Newscorp.

I also think Nic is missing the point.  it's not what you can auction them up to in the short term, it what value these businesses create over the longer term.

I REALLY REALLY hope that CBS eventually turns a terrific profit line from Last.FM .  And I really hope, not that Facebook sells for $10bn but that Facebook creates real value. Real revenues and real profits for an acquiror or for retail investors at IPO.  Without real value being created, over the longer term VCs will be on shaky ground.