Advertising Wants to be Measurable — An Investment Thesis

One of the investment themes I’ve been focused on in the past 3 years has been Performance-Based Marketing. When I started investing the US advertising market was $300 billion with only 10% of it ($30 billion) of it being online and measurable. One recession later and the US advertising market is about $245 billion — but still only 10–12% is online and measurable.

By now we all know that the largest part of the online spend has been SEM (search engine marketing) where people buy CPC (cost per click) links to display alongside the “organic” search results in the search engine. My firm, GRP Partners, invested in the company that innovated this entire category — Overture (formerly known as GoTo.com). At at time where nearly all advertising was purchased on a CPM (cost per thousand) basis and not very measurable this was a huge innovation that should be credited to Bill Gross, the founder of IdeaLab. But of course Google eventually became the massive winner in this category.

I sometimes refer to this field as “intent-based advertising” because the reason it has been so successful is that the person who typed in the search term has expressed an “intent” to find information on that category. So if a person types in “baby stroller” there is a high probability that he or she is in the market. And if you have hundreds of millions of search queries and only 0.5% click on the search ads (versus the organic results) you still have a very large market.

I believe that many social networks confused this idea. They thought, “hey, text links perform well when displayed alongside results. And we know that this person happens to be a 33 year old female so we know there is a high probability that she’ll be in the market for a baby stroller. Let’s display targeted text-link ads alongside her activities.” Two problems seem to have emerged from this: 1) A person in a social network is not displaying an intent to buy as they are during search and 2) that same person is in their social network to connect with friends, play games or share information. Not necessarily in the shopping mindset.

In my mind “the stream” changes that equation. When we look at Twitter we’re following friends or people from whom we want to know more information. I believe it is the new form of RSS — the place people go to find out what is happening in the latest news. I covered that topic in my Twitter is RSS post. Twitter is better than RSS — it’s “curated RSS.” The stream is limited in length and therefore people share links. I have argued that the real power of Twitter is link sharing. When we tune into any stream: Twitter, Facebook, MySpace, etc., we’re engaged in reading and discussing the ideas of those that we respect, like or are interested in. Thus, we click!

And it turns out that we click a lot. The CTR (click through rates) are off the charts. Which is one of the reasons I invested in Ad.ly — a company that is a market leader in “in-stream advertising.” The theory is simple: our attention is moving from search to stream. Search will remain big but stream is an increasing method of discovering information and therefore driving web traffic. If Ad.ly can serve up ads that are relevant, clearly market as ads, frequency capped and with controlled quality we believe that this will become a huge market.

Early evidence is good. We have run very successful campaigns by brands such as Sony, NBC, Microsoft, Universal, Clicker and others. The CTR’s are performing very well: 1–3.5% with some results significantly higher. Our publisher distribution network reaches in the tens of millions of unique users and is comprised of “head end” stars as well as many “mid tier” and “long tail” publishers. We have an analytics platform that helps advertisers discover information about the demographics of the follower base and the effectiveness of their campaigns.

If you want to read more of my views on this topic I’ve covered it here and here. But today’s post is meant to be more broadly on the topic of what I’m looking for in advertising: measurement, measurement, measurement.

This led to my investment in RingRevenue, a company that allows you to track phone calls the way people track clicks. For starters — the team is exactly what I look for when I’m looking to fund entrepreneurs. They had previously all worked together at a very successful company in the “telecoms meets Internet” space, CallWave, which IPO’d 5 years ago or so. This was their next act so they brought domain knowledge. The configuration of the team was: 1 CEO, 1 Product Lead and a tech team of 6 people. Perfect. They already had a completed product and a distribution deal with the largest affiliate network company, Commission Junction. They are detail oriented, cost focused, quality obsessed and chasing a big market opportunity.

The affiliate networking market alone is about a $2 billion industry now. It allows advertisers to run campaigns that are only paid out when somebody actually buys something (e.g. further down the sales funnel from CPC advertising where you pay for a click but still need to convert on your own). Think of the Amazon affiliate program where you’re paid if you help Amazon sell books (I think on average Amazon pays about 7% of sales). This form of advertising is know at CPA (cost per action).

The problem is that the average value of products that sell on affiliate networks is sub $100. Publishers would love to sell higher value campaigns because this would lead to larger commissions. But higher value product sales often require a phone call. These purchases are more complex in nature. If you’re about to outlay thousands of dollars for education, health equipment, digital cameras or anything else of value you often want to talk with somebody to understand detailed specs and the terms & conditions. It turns out the advertisers want you to call, too. They know that a call will lead to a higher conversion rate and a better chance to cross-sell products leading to higher average order values.

So the “lead generation” market has emerged where people sell CPL (or cost per lead). Many of these businesses want to get you to leave your information in an online form so that they can pass your lead to a third-party that will call you back and try to sell you products.

Our thesis at RingRevenue was that you should try to capture people at the “point of interest” when they showed intent rather than capturing a form to generate a call later. It should lead to higher conversion rates and happier customers. But the affiliate publishers were reluctant to publish phone numbers because once you picked up the phone they didn’t have any easy way of proving that they drove the lead and therefore they feared being cut out of the commission structure.

Enter RingRevenue. They dynamically assign out phone numbers to publishers for given campaigns. When you dial the call is passed through a RingRevenue exchange on the way to the advertiser’s call center so that we can track call length and quality. We can help advertisers buy based on narrower factors than just “anybody who saw the ad.” You can buy based on demographic information in real time. You can pay differently based on different call quality criteria.

And what we love is that everybody is happy. The person calling obviously wants to speak to somebody, the publisher drives a lead and can get compensated, the advertiser has a warm call and the affiliate network can earn a network commission. We’re the underlying platform that enables the calls to be tracked like clicks while weeding out fraud.

The longer term is even more promising. We can technology enable offline advertising. People running campaigns on billboards, newspapers, tv, radio, yellow pages — whatever — can run more measurable campaigns.

What else is out there?

• I’m spending time looking into the changing way that people are buying online display ads. There is clearly a lot of inefficiency in this process. There are a lot of people that believe that this process will move to ad exchanges. Google has made a lot of noise in this space and will apparently sell all of its display inventory this way, through the Double Click Ad Exchange. Yahoo! bought RightMedia and Microsoft bought AdECN a few years ago. Both seem poised to push more inventory through ad exchanges. So if this shift happens it really will lead to a disruption in billions of dollars of online spend. There will be new opportunities in this value chain.
• Internet consumption is obviously growing massively on mobile devices. This no doubt led to the acquisition of AdMob by Google and Quattro by Apple. But we’re only in the first inning of mobile advertising. We’re looking at innovative companies that will enable new forms of mobile advertising. I hope to announce one investment in this space in the next few months.
• Social networks continue to drive conversion of marketers. I’ve already covered my case for in-stream advertising. But more broadly I believe that you’ll see a lot more tools for helping marketers more effectively run, monitor and manage social media campaigns. I’m spending a lot of time looking at investments in this category and have already completed one investment in the space. It’s still in stealth but plans to make announcements soon.
• Branded advertising has not proven successful online. There are a lot of reasons for this including reach, immediacy and impact of the TV medium versus the Internet. But this will obviously change over time. I know of at least one very clever entrepreneur in New York looking at this space. I just checked his LinkedIn profile and it’s not updated so I’m guessing he’s still in stealth mode so I can’t talk about what he’s doing. I’ll save it for a future post.
• And the obvious category, especially for a VC based out of LA, is video. Online video advertising is still a very nascent market with people experimenting with pre-roll / mid-roll, ad overlays, brand integration, etc. There are also people like Clicker and OVGuide who are trying to capture the “video portal” space where they can command referral revenues in the way that Yahoo! initially captured the Internet portal revenues by aggregating eyeballs. We continue to evaluate this space and look for investments. Our largest bet to date has been more in the infrastructure space of delivering mobile video (Mobiclip) rather than enabling advertising.

Measurable advertising isn’t my only investment area but it is a major theme. So it is with this investment thesis in hand that I head to LeadsCon this week (Tues & Wed) in Las Vegas. Lots of great people there. I hope to see ya there.