Venture Capitalists’ Dollars Flow Into Ad Tech

Venture capitalists are hot for advertising technology and digital media startups, but not because they’re sexy. It’s because they help marketing perform better and let marketers do more with less, a very old-school value.

High-tech law firm Fenwick & West’s Silicon Valley Venture Capital Survey – Third Quarter 2012 analyzed the terms of venture financings for 117 companies headquartered in Silicon Valley that reported raising money in Q3. It found that 61 percent of companies this quarter raised it at a higher price per share than in their previous round of financing, with 64 percent of the Series B rounds going to software and internet or digital media companies.

“There could be two reasons why Series B rounds were very strong,” said Barry Kramer, a corporate partner in Fenwick & West. “It could have been because people were very enthusiastic about early-round financing, or it could have been because the Series B rounds were in an industry people were interested in. Prices went up a good amount partly because those industries were very hot.”

The Fenwick & West Venture Capital Barometer charts the magnitude of price change in funding rounds, quarter by quarter. For Q3 2012, pricing of rounds for internet/digital media companies was up 153 percent, surpassed only by cleantech, up 158 percent.

“This was due, in part, to having three companies, two of which were in the internet/digital media sector, that had financings up over 750 percent, which affected the average,” Kramer said. The median for internet/digital media companies in Q3 was 39 percent.

The median amount raised in this quarter’s financing rounds was $3.7 million per Dow Jones VentureSource, the lowest quarterly median amount since 1997. Overall, the median amount raised is on track to be $2.5 million for 2012.

Kramer said that could be due to the fact that companies can do more with less money, thanks to the internet. As well, he said, it’s simply harder to raise money.

q312-barometer-fenwick-westGraphic courtesy of Fenwick & West

Looking at this month’s crop of investments in ad tech companies, most money infusions were way above that median:

  • Four-year-old Medialets raised $10 million from Greenspring Associates, also reporting that its buy-side business through Q3 2012 had more than tripled year-over-year.
  • Social media content platform Percolate raised a $9 million Series A round led by GGV Capital.
  • Origami Logic took in a first round of $9.3 million led by Accel Partners (reported by Venture Beat).
  • OutboundEngine, a platform for SMBs to automate email and social media marketing, closed a $1.6 million Series A investment led by Floodgate, Austin Ventures, Silverton Partners and Capital Factory.
  • Socialbakers secured $6 million in a Series B round from Index Ventures.

Socialbakers aims to be the Nielsen of social media, providing analysis of the impact of social media campaigns. In two years, it’s grown from a tiny startup in Prague to having clients, including McDonalds, Nestle and Vodafone, in 175 countries.

“We invest in companies that are aspiring to be global leaders, businesses that are disruptive in a large market. The market size potential is important to us,” said Jan Hammer, a partner at Index Ventures. “We’re leveraging companies based on new technology, companies that can process very large data sets, that can organize, measure and analyze, and produce the answer to the marketer.”

In companies like Socialbakers, Hammer is looking for global reach, scale, a large network of publishers or clients, and the ability to harness massive computing power to glean insight from huge data sets.

“Socialbakers brings clarity, a measurement yardstick and benchmarking ability to the marketer who is cluttered by various products and under pressure to post, respond and listen to what people are saying,” Hammer said. “It’s not about a consultant holding hands with somebody in their office. It’s all about automating public and private data sets.”

Joshua Baer, CEO of OtherInBox and founder of the Capital Factory startup incubator, said that he liked OutboundEngine’s automated marketing platform because, “People are lazy and marketers are lazy.” Rather than simply making it easier for marketers to do the things they know they should do, he said, “OutboundEngine just does it for them.”

Baer is one of the most active angel investors, and he finds a lot of startups focused on advertising technology and email, plus lots of investors who love them. He said, “Advertising technology solutions are attractive to early-stage investors because they often start small and scale to be very big. You can start with something that makes money immediately and have a clear, direct revenue model. Once you find something that works, you can put more into it, and it can scale very big.”

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