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Mini-Roundtable: VCs Take on Internet Advertising

Internet advertising is an investment sector that needs no marketing help whatsoever.

Excuse the double negative, but it seems that not a week goes by that I don’t see one or more Internet advertising startups raise capital.

This month, Peacock Equity Fund has backed two: Greystripe and The Rubicon Project. Just last week, Zoove, a provider of technology that allows media companies to reach consumers via mobile devices, raised $13 million in Series C funding from investors.

I scanned the deals for the past month, and I found at least six other Internet-advertising related companies that have raise funding, including Tremor Media, iSocket, RichRelevance, iLoop Mobile, Media Math and Traffiq. Each of these companies is focused on a different aspect of online advertising, whether it’s video, sales or or creating a platform for mobile ad delivery.

I’m due to talk with Peacock Equity Managing Director Tom Byrne soon, but for the time being, I wanted to hear about what some other venture investors had to say about the market, so I pinged four VCs for their comments in what I’m calling a mini-roundtable on Internet advertising.

Q: What makes a successful online advertising startup?

Ken Elefant, Founding Partner, Opus Capital:

A big part of success is the strength of the founding management team, particularly in a market that is changing so quickly.  An example from our portfolio is Jivox, the online video advertising service for small businesses.  Jivox founder Diaz Nesamoney has a proven track record of bringing a product to market quickly, taking customer feedback, and evolving the offering so that it has maximum impact for customers and partners. (We should know. We also backed Diaz in his last two startups, Informatica and Celequest.)

In every successful company I’ve been involved with, the startup has developed alliances with large distribution partners to propagate the product to a wider audience.  Jivox has licensed its technology platform to many newspaper and broadcast media groups, including CBS and Media News Group, so these companies can sell online video ads to their advertisers.  It’s win-win for everybody: the media group gets an additional source of ad revenue, the customers get locally targeted video ads on a budget, and Jivox gets more customers.

Amy Errett, Partner, Maveron:

Successful companies fill a gap in the market where a major trend is about to occur.  With online advertising, one of the big opportunities is brand advertising, because advertisers have focused the bulk of their online efforts to date promoting products rather than their brand.  Brand advertising has historically been the focus of more traditional media outlets like TV, print and radio.  VideoEgg, a rich media ad network in our portfolio, is positioned to take advantage of this trend with its online ad platform that guarantees brand engagement.

Successful online ad companies also make the purchase easy.  Again, using VideoEgg as an example, they’ve developed an engagement-only compensation structure, where they get paid only when the consumer actually engages with the ad.  This lowers the risk for advertisers and helps to accelerate sales.

Rajil Kapoor, Managing Director, Mayfield Fund:

I believe the next generation of ad startups needs to go beyond arbitrage of revenue between a buyer and seller.  I think those days are numbered as the players on both sides are getting more efficient and knowledgeable and squeezing the margins for players in the middle.

The new ad startups need to take a side (the advertiser or publisher) and help them maximize their revenue vs. being a black box in the middle. Rubicon Project does this effectively on the publisher side, helping them manage and maximize revenue for all non-guaranteed inventory.

Jeff Crowe, General Partner, Norwest Venture Partners:

Two of the key ingredients that make up a successful online advertising startup are differentiated technology and a killer sales team. In a competitive market environment, the sales team is vital to the company’s overall success. The domain expertise of the founders and engineers, and whether or not they have a proven track record, is also an important factor to consider. This is something we considered before investing in such online advertising startups as TURN and Brand.net.

Successful online ad startups must make advanced use of technology and data to target advertisers, publishers and agencies in ways that were not previously available, and they need to have exceptional targeting strategies in place with functionality that has never been experienced before.