Do you target kids with cheap ads or more expensive adults? Nanigans has just raised a $5.85 million “Series A.1″ from Avalon Ventures to build SaaS technology that predicts which audiences earn advertisers more money. With revenue up 6x in 18 months, Nanigans hopes to keep up with Facebook’s progress by pouring its funding into R&D. It’s already discovered a surprising trick to supercharging ROI.
In advertising, there are three numbers that really matter. Cost per acquisition (CPA) – how much you pay for a customer; lifetime value (LTV) – how much you earn off that customer; and return on investment (ROI) – how much higher your LTV is than your CPA. Most advertisers don’t have the technology or data to accurately predict LTV, so they aim to get the lowest CPA so a smaller LTV will still produce ROI.
But Nanigans has found that doesn’t actually work so well, and it’s building the technology to prove it. Founded in 2010, the company had previously raised just $3 million in a mid-2011 Series A to build its licensable self-serve tool for buying better Facebook ads in exchange for monthly or yearly fees, or a percentage of spend. The tool lets businesses buy, intelligently target, and A/B test huge Facebook ad campaigns much more efficiently than Facebook’s basic tools. Nanigans’ focus on technology and delivering lifetime value over smaller immediate returns has been a hit with social game and e-commerce game companies.
Now it believes it’s No. 1 or at least in the top 3 Facebook adtech companies in terms of revenue, which grew 6X since its last funding round. It now boasts customers, including eBay, Fab.com, Rue La La, Zynga, GSN, Wooga, Kixeye and Kabam. It’s now running hundreds of millions of dollars of Facebook ad spend per year, and has grown from 15 employees to more than 100 in just a year with offices in San Francisco, New York, Boston and London.
The Nanigans secret sauce is its predictive modeling engine, which can both deduce and track how much a customer spends. This lets it determine that while it might cost an e-commerce company 3x as much to acquire a 25-year old Australian female, she’ll earn them 5x as much as a 15-year old Australian male. An advertiser may have to invest more up front, but in the long-term they’ll be richer for it.
Nanigans CEO Ric Calvillo (caricatured above) tells me “Online performance advertising is broken for the most part, and ripe for disruption. Most campaigns for online conversion are not well-optimized. Most marketers optimize for the lowest cost something — cost per click, cost per thousand impressions, cost per action — but when you optimize for the cheapest cohorts you’re almost by definition not optimizing for ROI.”
What Nanigans has found is that especially in gaming and e-commerce, “age is a huge factor. If you chart age and cost and revenue, younger age groups are cheaper on a CPA basis, but they generate far less revenue proportionally. About a year ago we realized this. The older, more expensive audiences always have higher ROI.” The theory for why is that everyone is in a mad rush to get young, hip users. The wave of the future, right? Wrong. These kids just don’t have disposable income to spend anytime soon.
So why don’t other adtech companies and agencies know this? Because their clients are afraid to reveal their confidential revenue numbers. Calvillo tells me “software needs revenue on every user to be able to do the predictions. If you’re using a third-party service you probably don’t want to share your revenue details. That’s why our SaaS platform enables this optimization.” Since companies license Nanigans and use it privately in-house, they don’t have to share their revenue stats with anyone. “We can get customers to trust us and optimize for ROI,” Calvillo concludes.
Making this predictive modeling tech even more powerful is the big plan for Nanigans’ new Series A.1 (bridge between A and B) funding from previous investor Avalon Ventures. It will hire more PhD data scientists to aid with research and development of the predictive modeling algorithms. Facebook is also rapidly releasing new ad formats, targeting schemes, mobile, and Facebook Exchange retargeting. Nanigans needs a big R&D budget to build intuitive user interfaces on top of Facebook’s Ads APIs. Otherwise it risks getting beat by competitors like Salesforce’s Buddy Media, or clients going straight to Facebook’s native tools. Nanigans also plans to concentrate on more verticals, including retail, travel and other online conversion businesses, plus do some global expansion with a new office in Singapore.
With Calvillo on the phone and Facebook’s earnings coming up next week, I figured I’d ask his opinion on the state of Facebook ads. Nanigans now sees over a third of ad spend on its platform targeting mobile users. Calvillo and I agree that mobile should account for about 30 percent of Facebook’s total ad revenue in Q1, up from 23 percent in Q4 2012. He says a lot of mobile ad spend is coming from Facebook’s new app install ads as well as from brands, but that there hasn’t been as much spend from e-commerce or direct response advertisers just yet. This leaves Facebook a lot of upside left to capture. Calvillo also notes that he thinks Facebook Exchange is going well, but the departure of its product director Antonio Garcia-Martinez was a big loss for the social network.
As for the future of ads, there’s been a lot of hype about offline purchase data providers partnering with Facebook. I personally believe that with time, this data will reveal the heavy impact of online ads on offline purchases, and make web properties and apps that see a lot of eyeballs worth a lot more in the long term. Calvillo disagrees though, saying “Attributing an in-store conversion to an individual ad is a pretty difficult, complicated thing to do. If the majority of online conversion ad spend is not well optimized, it’s too early to be adding offline complexities.
In the meantime, Nanigans will keep chugging away at making online ads earn their owners more money. I’ve been covering Nanigans for almost three years now, and its progress and revenue growth is impressive. By facilitating so much social ad spend, the company is pumping the lifeblood of innovation into Facebook. Nanigans has strong growth, high-profile clients, gobs of business, and just a lean $8.85 million in the bank, so my question is whether an old ad giant would acquire Nanigans to get some fresh blood itself.