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Introducing The Fall 2009 Founder Speakers Series in NYC

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WSJ article on Fall 2009 Founder Series in NYC

What Happened to the Ad Network Apocalypse?

Last September, Henry Blodget asked me and several other VCs on an panel -- titled "Dot Bomb 2.0" -- how many of the estimated 300 to 400 ad networks were "toast." (My personal view is that only 15 to 20 really matter.) Comments like "rampant consolidation" and "decimation" were used to describe the impending, inevitable shakeout that was sure to come.

Almost a year later, no apocalyptic shakeout has hit yet. So what happened?

Venture and private-equity investments in ad networks have been robust for the past several years. More than 60 ad networks -- vertical ad networks, video, brand, performance, wireless, gaming, behavioral, contextual, etc. -- have raised $1.5 billion in the past five years, and the top 25 firms have received almost $1.2 billion of that total, according to VentureSource. Significantly, more than 75% of the money has been raised in just the past three years. These funding numbers do not include the more than $250 million that was invested in other companies that have already exited (Adify, Blue Lithium, Quigo, Tacoda, Third Screen Media, etc.).

A handful of ad networks have indeed either shut down or been acquired for nominal amounts (Adzilla, Ad Infuse, AdEngage, Jellycloud, mSnap, NebuAd). A few others, like Peer39 (disclaimer: I sit on Peer39's board) and Ringleader Digital, have switched from building ad networks to selling technology instead. And a few are even thriving. Most, however, are merely surviving in this down economy.

Many of the less differentiated, standard graphical networks have not shut down, because they are easy to run with very little expense these days. Most of the lesser-known ones (and even some of the bigger players) are essentially glorified brokers that acquire their inventory on the exchanges. They hire a trafficker, a salesperson or two, sign a 5-cent-CPM contract with an ad server and find someone who knows how to bid the exchanges to stay in business. They don't need to invest significant resources in acquiring high-quality inventory or professionally managing relationships with publishers. These networks can generate a profit, enough to survive and to eke out a decent living.

Fundamentally, I would argue that the ad-network model still makes a lot of sense today and can be quite resilient. In particular, those ad networks that develop proprietary technologies and offer truly differentiated solutions are the ones most likely to be successful.

The basic reasons why so many ad networks are surviving:

• Online usage continues to increase and, according to a recent Forrester survey, has reached an average of 12 hours per week. That provides advertisers and agencies with strong incentives to move more of their ad spending online.

• The number of online sites and publishers continues to increase rapidly, which makes it increasingly difficult for advertisers and agencies to decide which sites to work with. Ad networks can help sort through this bewildering number of sites and target those that are most relevant and appropriate for their clients.

• Online viewership/time spent continues to fragment, so advertisers and agencies can't just work with the largest portals -- even those sites are losing their primacy with the surge in popularity of other sites such as Facebook and Twitter -- and top vertical sites to achieve its campaign goals. With agencies today struggling with tighter margins and needing to do more with less, many find it easier to work with a few ad networks than a number of individual sites.

• Most online publishers still find it difficult and lack the expertise to find, qualify, hire and manage ad-sales executives, which is a reason why many smaller and midsize online publishers turn to ad networks to help handle this activity.

• Through sophisticated analytics and advanced targeting/optimizations, some ad networks can deliver attractive audience demographics at scale. This aligns with the intended goal of most advertisers' media plans. As long as the content is proven to be "brand safe," the exact category of the content often is secondary to demographic profile for many advertisers.

• Price -- ad networks can offer advertisers more cost-efficient pricing than direct publishers can afford to charge. While large publishers justly sell their premium brands at high rates driven by scarcity of inventory, networks can aggregate smaller, less popular sites (with very similar audience characteristics) that do not command the same price premium but can deliver scale. Many agencies/advertisers will continue to prioritize reach and price efficiency equal to or greater than premium-content adjacency.

I believe that, in the next few years, many ad networks will survive but relatively few will flourish and become great businesses with compelling economics. The former group will remain undifferentiated (in terms of technology, focus or services) and compete primarily on price, leading to the continued commoditization of pricing and tighter margins. The latter group will target attractive segments in which they can achieve critical mass and build true barriers of entry through proprietary technologies, value-added services, advanced analytics and reporting, scale operations, etc. This is hard to do but financially rewarding if you are one of the few who can do it, which is why I personally continue to be fond of the ad-network business model (disclaimer: I sit on the board of Tremor Media, the premium-video ad network).

Ironically, the fact that it is easy for most ad networks to generate some level of revenue will likely persuade many of their investors to continue to fund these companies. Better to fund a company that has some revenue but is unlikely to achieve venture-like returns than to admit defeat and to pull the plug. Unfortunate, but true. It will be interesting to watch.    

Continue reading at AdAge >

Fortune Brainstorm Tech (Day 1) - Robert Iger

   

Image by Getty Images via Daylife

Richard Siklos' Interview with Robert Iger, Disney

• Statistics: people pay $5/hour to watch a movie; $0.75/hour to read a book; $0.50/hour to watch cable or satellite television; $0.25/hour to surf the Internet
  • Iger believes that there are plenty of opportunities for content companies to convince consumers to pay more for quality content
• Content companies are still at the beginning of exploring how to better monetize of online content: micro-payments, advertising, pay, subscription, etc.
• "Dumb things are getting smart"
• Disney: Try to reach consumers as broadly as possible
• Lesson from record industry: make it easier for consumers to access content than it is to pirate it
• Disney has CPMs online that are higher than those for broadcast and cable; unfortunately, volume of online inventory is smaller that that for broadcast and cable
• Behavioral tracking: concerns about privacy come more from older consumers, younger demographic is more tolerant of exhibiting personal data

    

What Sunk Veoh And Joost? Too Much Cash, Too Soon

In the past few months, two of the highest-profile and most heavily-funded online-video startups -- Veoh and Joost -- have given up trying to compete with Hulu and YouTube and have now drastically switched their business models in hopes of surviving.

There are many reasons why things went wrong: technical missteps, lack of premium content, tough terms from content owners such as CBS and Viacom, etc. But that's not the whole story. Joost and Veoh had an even bigger problem, one that will likely claim dozens of other media and advertising startups that have been founded over the past three years: too much venture money, too soon.

In the last few years, the top 25 most heavily-funded video startups (excluding Hulu, which has raised over $130 million) have collectively raised over $1.2 billion in venture capital, or an average of $48 million each (see chart). The top 10 companies in the group, names like Spot Runner, Move Networks, Visible World and DailyMotion, have raised $720 million, with an average of $73 million. More significantly, nearly three-quarters of this money was raised within the first two years of the initial funding. That's an impressive pile of dough, even for VCs.

Raising lots of money is not a problem, per se. Raising too much money too early and before hitting key milestones (e.g. getting paying customers, showing attractive margins) can be. This is particularly important for online video startups, which, due to their costs, need to be run with tighter margins from the start.

This year and next, these companies' venture backers and boards will have to make wrenching choices: continue to fund these companies with the hope that the economy will turn around or a generous buyer shows up, shut the companies down, or sell on the cheap. This will turn into a buyer's market for the next several quarters.

Dangerous path

    The simplest lesson to take away here is don't raise too much money too quickly. Unfortunately, that's easier said than done. Too much money, often, though not always, leads to poor habits like over-hiring, overspending and a lack of discipline, which itself leads to mistakes such as sticking with bad ideas too long and throwing money at a problem rather than solving it the right way.

Continue reading at AdAge >

Note:  I'd like to thank Michael Learmonth and Bartek Ringwelski for their help in thinking through some of these ideas.

Cable Cowboy: John Malone and the Rise of the Modern Cable Business

D7: Interview With John Malone, Liberty Media Chairman

Cover via Amazon

Prior to joining Canaan Partners, I worked in Comcast's venture capital group in Philadelphia for five years.  To become acquainted with the cable industry, I read Mark Robichaux's  Cable Cowboy: John Malone and the Rise of the Modern Cable Business.  In my opinion, it's one of the best books detailing the rise of cable industry and a fascinating look at one of its pioneers, John Malone. A must-read for those interested in better understanding the cable industry and its strengths/weaknesses.

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Some Great Articles

For those interested in media ...

Recent Articles from Michael Hirschorn in The Atlantic

Bezos and Immelt at Wired

This past Monday I attended Wired's Disruptive by Design conference in New York City. Usually by this time of the year, I'm pretty tired of conferences and I was debating not attending this one.  Fortunately, I decided to attend and I'm glad that I did.  The interviews were terrific with some great insights shared.

For me, the two highlights were interviews with Jeff Bezos and Jeff Immelt.  Some good writeups on those two sessions: 

Wired's "Jeff Bezos: Why the Kindle Is So Expensive"

NYT's "Tips on Innovation and Entrepreneurship from Jeff Bezos"

Wired's "GE's Immelt: We Actually Hire People"

One particular quote from Immelt that I found fascinating:

“My job at GE is to look 20 years ahead,” he said. “And every time I go to China, I get a headache.”

“The rest of the world just moves without us,” he said. “People aren’t going to wait for us, they don’t wait for us anymore.”

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Things A VC Will Never Say

Very funny set of slides.  Sadly, often very true.

VC Non Admissions

Search: May You Live In Interesting Times

Cover via Amazon

I've been reading Rebecca Lieb's excellent The Truth About Search Engine Optimization recently and that has started me thinking more about what's happening in the search space these days.  For the past few years, Google has dominated the general search space as both Yahoo and Microsoft have struggled to catch up.  A few weeks ago, I attended All Things Digital where Steve Ballmer introduced Microsoft's new Bing search service. I doubt that Bing is a game-changer but I do think it represents Microsoft's first credible effort in challenging Google.  Remember, Microsoft doesn't need to overtake Google, but just needs to target specific lucrative categories, such as travel, health, shopping, and local.  If it can make a dent in those categories, then that would represent meaningful progress for Microsoft.  The emergence of other new search startups like Wolfram Alpha, Cuil, etc. promises to further contribute to this space.

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Leaps of Faith

Image via CrunchBase

Enlightening article from Fred Wilson on his decision to invest in Zemanta:

Leap of Faith

Two points that I think one should consider when thinking about taking the leap of faith: (1) the upside and (2) the timing.  On the first, taking the leap of faith on an investment is fine, but one should understand what the upside might be.  Risk is a natural part of venture capital/entrepreneurship, but make sure that the upside is commensurate with the risk or "leap of faith" being taken.  On the second, make sure that the "leap of faith" can lead to something that can materialize in the foreseeable future (i.e., 3-5 years).  Being too early can be just as hard as being too late.