Editor’s note: Ajay Chopra is a general partner at Trinity Ventures, with investments in several digital media and m-commerce companies including TubeMogul (IPO), Fitstar, Zirx, Dynamic Signal, Blend and Deliv. He is on the board of RadiumOne. Prior to joining Trinity Ventures, he co-founded Pinnacle Systems.
There are major changes afoot in advertising technology at the moment, but not everyone has realized how transformational these changes are. Indeed, analysts have talked about four types of business models in the ad-tech ecosystem, but have not discussed the underlying innovation that is driving the more leveraged of these models.
So what should investors be looking for in ad-tech companies as they navigate the ad-tech landscape?
Ad-tech companies that are focusing on brand dollars have a massive opportunity to access non-digital marketing spend, which is primarily TV advertising today. Google dominates performance-based advertising, which is essentially ads designed to create an action (such as click through to a site in case of search, or click through to a landing page in case of display advertising).
Brand advertising, on the other hand, is about delivering a catchy or compelling message that is memorable and creates a positive impression of a brand in a viewer’s mind (think Super Bowl ads). This is a trickier proposition to deliver online and on mobile, but it is also a highly lucrative part of the advertising ecosystem and a huge growth opportunity.
In addition, TV ad buying is still manual and arcane and would benefit from the transparency and accountability of online ad-buying methodologies. Ad-tech companies that are focused on moving TV ad dollars and TV ad buying to the digital world are just in the early innings of their growth cycle.
Ad-tech companies that bring transparency to the ad buying eco system will have an advantage.
Ad exchanges have improved liquidity in the ad buying process. However marketers are leery of buying on exchanges if they have to do a blind buy via intermediaries such as ad networks. Solutions that provide complete visibility as to the sites that are being purchased and also “viewability” guarantees so that the ad is actually viewable (and not buried “below the fold” of the viewable page) will be seen as trusted partners for marketers and brands. Companies such as Integral Ad Sciences have built technology to help advertisers get visibility and build trust in the ecosystem.
Platform Approach for Sales Leverage and Revenue Predictability
Ad tech companies that show sales costs growing at a substantially slower rate than gross margin growth are good bets. This implies that each additional gross margin dollar is being generated by fewer incremental sales dollars. Tasty metrics like these can come from many sources including recurring revenue from existing clients, a more efficient selling process, or acquiring more profitable clients. In particular, companies that have “self serve” oriented software products exhibit higher gross margins and lower sales costs.
Google and AppNexus have exchanges on which these software platforms can execute real time bidding for ad placements, while Facebook and Twitter are opening up with APIs to allow these software platforms to buy ad placements on their properties. We think Pinterest will follow suit soon. An important part of this sales leverage is driven by platform sales to large brands. A partnership with large brands not only locks the advertiser’s spend but also has the benefit of a predictable revenue stream.
“First-Party Data” Advantage
Ad tech companies are using big data techniques to target their advertising more precisely so ads are more effective for advertisers and less annoying for viewers at the same time. The most valuable data in this process is the so-called “first-party data”. This is the data that the brand has generated as it engages with its customers via various channels including its web sites, mobile apps, email, social media and campaigns. It differs from “third-party data” that is a collection of anonymized data from independent data providers and generally has lower efficacy and no inherent advantage vs competition in bidding for an ad impression.
If an ad tech company is working closely with brands to leverage the brands’ first party data, then the company has an inherent advantage that may not be available to many of its competitors.
A close working relationship with a brand on “first-party data” also implies that the brand intends to work with the ad tech company on a consistent basis rather than a one-off engagement. Criteo has done a great job leveraging first party data for re-targeting purposes. RadiumOne has gone a step further by allowing brands to “cultivate” first-party data using its mobile SDKs and web widgets for more precise segmentation and targeting.
Mobile Brand Advertising
A majority of mobile advertising today is performance focused (a large part of Facebook’s mobile ad revenue is reportedly from app downloads). Even though mobile is a small part of ad spend for most brands today, it is growing at a quick clip. Ad tech Companies that have built their technology stack to take advantage of the move of brand dollars to mobile will have a second wind in their sails.
Some years ago, ad tech companies were building their own infrastructures. In a world where a business the size of Netflix can run on public cloud infrastructure such as Amazon Web Services, innovative ad tech companies are leveraging the economies and scalability of these platforms in their own vertical and the advantage here is immense.
As a business scales quickly and sometimes unpredictably, having an elastic backend that is stress-tested, redundant and globally available is invaluable.
Overall, the ad-tech sector has been difficult for public investors to understand. Several companies that have listed have underperformed. But advertising is the prime driver of the online and mobile ecosystem, and it is going through a massive reinvention with the advent of new technologies, better business models and more transparency.
Smart entrepreneurs are reinventing the old way of doing business and investors would be well advised (and rewarded) to take the time to understand the differentiation between old guard and new age companies.Featured Image: nmedia/Shutterstock