Investment banking firm GCA Savvian recently calculated that venture capitalists (VCs) have poured $2.5 billion into the online display space in the past three years. It’s a phenomenal bet, but maybe not when you consider the large numbers we’ve seen in the headlines of late. Just a week ago, the Interactive Advertising Bureau announced that U.S. Internet advertising revenues hit $6.4 billion in Q3 2010, representing the highest quarterly result ever for the online advertising industry and a 17 percent increase from the same period in 2009. The Wall Street Journal reported in November that the online advertising market “is expected to total roughly $20 billion world-wide this year.” Some are now predicting this market may grow to $50 billion over the next few years.
What I find remarkable is how much of the investment in our industry is being spent on overlapping stacks of “proprietary” technology. Every company seems to have its own data center, similar targeting capabilities, integrations with the same real-time bidding supply partners, and so forth. It’s a stark contrast from many other segments of the venture landscape, where lean startups are building compelling businesses on top of well-established technologies like cloud computing.
The idea of a lean media startup isn’t new in our industry. Ad networks were “lean” before it was cool. Right Media was started for less than $1 million in capital, and was profitable almost immediately. We didn’t own our data centers, but that didn’t cause us to lose media deals; our customers cared more about our brilliant ideas, strong relationships…oh, and our ground-breaking business model.
Part of the reason for this problem of overlapping technology stacks, I think, is that some venture capitalists encourage building over buying or partnering. Why? Because the idea of leveraging somebody else’s technology sounds to a VC like “smaller potential exit,” meaning the universe of potential proprietary differentiation is limited. I would argue that the differentiable universe is already more limited if the technology is licensable on the open market. So everybody tells the VC, “What’s openly available isn’t good enough,” which makes great sense until the technology leader gets enough critical mass to be credible, at which point it’s time to go look for another competitive advantage. A lot of venture-backed companies spend all their time chasing the current cycle, and then go bust because they’re never far enough ahead to get traction. Otherwise, the companies frequently get mired in complicated technology projects that take away from their core focus and slow them down when they could have easily plugged into an existing solution.
Smart companies know that they don’t have to reinvent the wheel to be successful. Facebook and Google actively open-source some of their core technologies (Cassandra, Protocol Buffers) because they understand that their core value is created by the products they build on top of these technologies. Foursquare works off the Amazon cloud, which leaves it room to focus on a stunning, socially disruptive business model. Savvy VCs reward this type of thinking. They appreciate that a company has to be different where it counts, and rely on existing technologies to support that.
Think about this: what aspiring or current homeowner among us hasn’t checked out Zillow in the past two years? Yet Zillow’s founders didn’t architect the MLS. Who cares? Zillow’s team has developed a fascinating and novel way to evaluate real estate while leveraging a long-standing database. So take a load off. Someone else can build your ad server or data center – and invest tens of millions of their own VC money to do so – while you break new ground by introducing to the market your own unique brand of innovative products and services.