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Print - A Mad Man and a Venture Capitalist Walked Into a Bar ... - Advertising Age 06/03/11 7:57 PM
businesses that rely on advertising, but, to get a sense of the clutter, consider a few indicators:
First, on Crunchbase, the company database maintained by the blog TechCrunch, "advertising" is among
the most-popular tags. As of last Tuesday, it cataloged 1,372 companies in the ad business, from 10th
Degree to Zygella. Compare that to 417 for e-commerce, 192 for health care and 268 for green, each a
popular area of venture investment.
Then there's a chart prepared by the investment bank Luma Partners that visualizes the ad-tech
environment, plotting the colorful logos of the various companies in their appropriate categories. It looks like
a post-sushi-dinner puke. That's not a swipe against the graphic design ability of its creators, but rather a
comment on an incredibly complex and crowded scene comprising a chain that begins with the budgetary
will to develop an internet ad, through its creation, optimization and distribution, to its delivery to a
consumer's retina, to whatever commercial impact it might yield.
Luma promoted the chart with a little Xtranormal animation,
which is perhaps even more telling. Starring the website's
ubiquitous cuddly characters, the clip satirizes an ad-tech
investment pitch, pitting a jargon-spewing entrepreneur who
owns the "437th ad network" against an at first incredulous,
then later, beaten, investor. Here's the wink-nudge
conclusion:
Entrepreneur: "Are you interested in a $75 million pre-money
valuation?"
VC: "$75 million? Are you fucking kidding me?"
Entrepreneur: "You are wasting my time. I need to know if you
This chart, prepared by Luma Partners, visualizes the are with me. Fill or kill."
ad-tech environment.
VC: "OK, OK. Put us down for $20 million."
Entrepreneur: "That's my bitch." It's hard to pinpoint exactly when the feeling emerged that we might be in a
second bubble. The moment in 2005 when Facebook's valuation hit $100 million is as good a place as any
and those worries only continued through the social network's subsequent rounds of fundings, Google's
resilient stock price, the rise of Twitter with its own heady valuations and the growth of other social-media-
oriented plays.
But six years of speculation, in all senses of the word, has yielded no firm consensus. While more and more
observers, especially in the business press, are seeing bubble-like symptoms, the people actually doing the
investing are split. Whether you see a bubble depends on two main factors: whether you're from the East
Coast or the West and whether you're talking about early-stage investing or later stages.
What is abundantly clear is that the current scene shares none of the dopiness of the late 1990s. Some of
those valuations may strain credulity, but this is not a Ponzi-scheme environment. Nor is there the cultural
excess associated with high-flying dot-com flameouts.
All the excitement, too, is based on a more-sophisticated notion of "advertising." It's become standard to
pair an ad model with something sold direct to consumer, such as virtual goods. Smarter enterprises are
looking beyond paid media to focus on consumer data, which, as one investor put it to me, "has become an
advertising problem."
In November 2008, Mike Hirshland, a general partner at Polaris Ventures, published on his personal blog a
short but sharply worded entry titled "The Problem with the Ad-Supported Startup Model." The post's central
observation is that many entrepreneurs suffer from the mistaken notion that building an ad-based business
is easy work. There is, he wrote, a "perception amongst web entrepreneurs that you can just slap an
advertising model on top of a web property, sprinkle water, and have a real business, has led many to
spend much less time and energy thinking about how to make money."
Over three years after his post, I asked Mr. Hirshland whether his feelings had at all changed. In a nuanced
answer, he noted that he sees fewer ad-only models with freemium offering becoming more and more
popular.
"I think what people did realize is that in order to succeed, you need massive scale," he said. "We've seen
a number of companies grow massive scale, and I think you have a generation of folks in Silicon Valley who
are having huge impact on the advertising space. They have scale and they're really smart. Technology and
data models are really starting to have substantial impact in the advertising industry."
The scale question -- and, just to be clear, his idea of scale includes massive sites like Facebook and
Twitter and a handful of ad networks -- is central to getting Mr. Hirshland interested in a new investment. He
needs to see a clear indicator of the potential there. One of his seed investments is Formspring, which he
said went from zero to 40 millions users in four or so months.
"That's extraordinary growth. In an ad-supported business model, we're looking for things like that. And they
are few and far between."
One angel investor who looks at a lot of advertising-related deals was much more critical of what's going on
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