Outbrain raises $200 million ahead of its IPO

Outbrain, an adtech company that provides clickbait ads below news articles, has raised $200 million in funding — Outbrain didn’t disclose the valuation of the company for this deal. The Baupost Group is investing in the company — it’s a Boston-based hedge fund. Outbrain filed for an initial public offering just last week. Today’s funding round should be the last traditional private investment round before going public.

If you’re not familiar with Outbrain, you may have seen its content recommendation widgets on popular news websites, such as CNN, Le Monde and The Washington Post. They mostly feature sponsored links that lead to third-party websites.

“We are excited to announce this investment from The Baupost Group, who share our vision and commitment for our business, our team and our future prospects” co-CEO David Kostman said in a statement.

Outbrain is often compared with its rival Taboola. While both startups planned to merge at some point, they had to cancel their merger. Taboola already went public after merging with a SPAC — a special purpose acquisition company. Taboola shares started trading last week.

In its IPO filing, Outbrain reported $767 million in revenue for 2020 and $228 million in revenue for the first quarter of 2021 alone. In 2020, Outbrain managed to generate $4.4 million in net income. During Q1 2021, the company reported $10.7 million in net income.

“We proudly lead the recommendation space we created. We have bold plans for the future to continue delivering critical innovation to our premium media partners worldwide and expanding our powerful open web global advertising platform” Outbrain co-CEO Yaron Galai said in a statement.

The advertising market has recovered from the global health pandemic and there has been plenty of initial public offerings during the first half of 2021. Everything seems to be lining up for Taboola and Outbrain, which means it’s time to reach the next level and become public companies.

Update: Outbrain has published an amended Form S-1 with some details about the deal. The Baupost Group has agreed to invest $200 million in “senior subordinated secured notes”.

Those secured notes will likely become convertible notes following the initial public offering — “we intend to exchange the Notes for the Convertible Notes upon the consummation of this offering,” the company writes in its prospectus. There are some complicated terms associated with that transaction.

If the IPO is somewhat disappointing (“a pre-money equity value of less than or equal to $2 billion”), there’s a minimum value that protects The Baupost Group’s investment. That value also depends on the date of the IPO. If the IPO occurs before August 15, the convertible notes will be valued at $236 million. If it occurs between August 15 and December 31, The Baupost Group’s investment will be worth $240 million.

If the IPO goes well, The Baupost Group will be able to convert its convertible notes into common stock. Here’s what it says in the IPO prospectus: “The initial conversion rate for the Convertible Notes per $1,000 principal amount of Convertible Notes will be a number of shares of common stock equivalent to a conversion price of 125% of the initial public offering price of our common stock.”

Finally, if The Baupost Group chooses to keep its convertible notes for a while before converting them into normal shares and selling its position, the hedge fund will earn interests — 2.95% per year, or a bit more if the 5-year U.S. Treasury Rate is above 0.8%. Having a medium-term investor like The Baupost Group could stabilize Outbrain’s shares once they become tradable on the public market.