Google Advertising Dominance Dims Startups’ IPO Prospects: TechOlga Kharif
The online advertising industry is booming. That means little to the hundreds of ad-technology startups that are being shunned by the public markets.
Even as online ad sales are seen surging almost 60 percent to $163 billion in 2016, video-ad provider YuMe Inc. lowered its initial public offering price this week because of slack demand for the stock. Other newcomers Tremor Video Inc. and Millennial Media Inc. have tumbled since their public market debuts, while Adap.tv opted for a sale to AOL Inc. instead of an IPO.
The challenge for all emerging Web advertising companies is that Google Inc. controls more than 40 percent of the industry, mostly through its search engine, and has made acquisitions in display, video and mobile. Investors are skeptical of betting on mostly unprofitable upstarts in a highly fragmented market, where Google has the power to control pricing and crush competitors, said Michael Binger, a portfolio manager at Gradient Investments LLC and Google shareholder.
“There’s always that pervasive threat,” said Binger, whose Minneapolis-based firm manages $360 million. “I’m more interested in stable, profitable, growing companies that are taking share.”
The IPO struggles are sending ripples through Silicon Valley, where venture investors have poured $7.4 billion into over 1,000 ad-technology startups in the past decade, according to a report from PricewaterhouseCoopers LLP and the National Venture Capital Association. Luma Partners LLC, a media and technology investment bank, estimates the amount invested is closer to $13 billion.
Venture firms need IPOs and acquisitions to generate returns and raise additional capital to back the next wave of entrepreneurs. Yet companies like Exponential Interactive Inc., the parent of diplay-ad provider Tribal Fusion, are holding off on going public as long as the market appears unreceptive.
“We are waiting for the market to change,” said Dilip Dasilva, chief executive officer of Emeryville, California-based Exponential, in an interview. “We’ll keep a close eye on how these companies are doing.”
YuMe sold shares on Aug. 6 for $9, below its projected range of $12 to $14. The stock was unchanged yesterday in its first day of trading. Tremor, a YuMe competitor, has tumbled 19 percent since going public in June, and mobile-ad provider Millennial has dropped 37 percent in its 17 months on the market.
They’re all trading at a discount to Google, which is valued at 5.2 times revenue over the past 12 months. YuMe trades for 2.3 times revenue, Millennial for 3.2 and Tremor for 3.5.
The recent performance of ad-tech startups is “definitely going to weigh on the minds of IPO investors,” said Tom Taulli, founder of Los Angeles-based IPOPlaybook.com.
All the while, digital advertising is surging. Spending worldwide, which crossed $100 billion last year, is projected to reach $118.4 billion this year and jump to $163 billion in three years, according to researcher EMarketer Inc. Growth of 15.1 percent in 2013 is more than 4 times the expected increase of 3.5 percent for the overall ad market, according to ZenithOptimedia.
The rush to the Web has spurred mergers and acquisitions in the traditional advertising market, culminating last month in the announced tie-up of Publicis Groupe SA and Omnicom Group Inc., which have a combined market value of about $33 billion. The joint entity’s size may provide more heft in negotiating ad rates online, where Google dominates and Facebook Inc. is rapidly growing.
Digital-ad startups without that leverage are weighing the potential branding and economic benefits of going public with the risk of seeing their stock tank. Adap.tv, a video-ad provider that had been in talks with bankers about an IPO, agreed yesterday to sell itself to AOL for $405 million.
Companies that have hired bankers or filed to go public confidentially under the Jumpstart Our Business Startups (JOBS) Act include ad-targeting software developer Rocket Fuel Inc. and brand marketer Collective Media Inc., according to a person with familiar their plans. French web-ad company Criteo SA has picked JPMorgan Chase & Co. to help it go public in the U.S. this year, people with knowledge of the plans said in April.
Jessica Cheney, a spokeswoman for Rocket Fuel, declined to comment, as did Alexandra Pelissero, a spokeswoman for Criteo, and Collective Chief Marketing Officer Ed Dandridge.
While each company tries to differentiate itself by claiming better relationships with publishers, novel technology or leadership of a fast-growing segment, investors are more concerned with financial results.
YuMe, Tremor, Millennial and Marin Software Inc., another recent IPO, each lost money in the most recent quarter, as Google reported net income of $3.2 billion.
“Ad-tech is a challenged space,” said Navin Chaddha, a managing director at Mayfield Fund in Menlo Park, California, which has investments in online advertising. Some that went public “could be features or offerings of bigger companies,” he said.
Frank Addante, CEO of Mayfield-backed Rubicon Project, isn’t talking publicly about an IPO, even though his Los Angeles-based company is profitable and topped $100 million in revenue three years ago. Rubicon, whose technology automates the buying and selling of ads for marketers and publishers, reached 95 percent of U.S. Internet users in June, compared with 93 percent for Google, according to ComScore Inc.
Still, Addante has been holding out on going public until he can blow away money managers, not just impress them.
“Investors in general appreciate companies that are at scale, profitable, have high growth rates and are technology companies,” Addante said. “If you’re not making profit, you’re still in the find-out stage of your business.”
BrightRoll Inc., another video-ad startup, has doubled revenue in each of the past five years and been profitable for three, CEO Tod Sacerdoti said in an interview. Sacerdoti wouldn’t comment on his IPO plans, though he said he’s in no hurry.
Others are probably being pressured by their venture backers to take the leap, said Brian Wieser, an analyst at Pivotal Research Group LLC in New York. Venture funds expect to show significant wins after seven years and exit their portfolio companies within a decade.
“Venture investors have limited time horizons,” Wieser said. “You need to liquidate your positions within the life of a fund and that forces certain choices.”