Monster Money in Measurement
VCJ
Heartened by big prices paid for AdMob and Omniture, VCs continue to pour money into analytics startups
When demonstrating his company's analytics application, one of Arte Merritt's goals is to show that mobile Web users' behavior rarely reflects the preconceived notions of publishers who cater to them.
He proved that point in a demo a few months ago when his software tracked a smartphone user wandering New York's Hell's Kitchen neighborhood in search of back waxing services.
"That's interesting: You're out and about walking, and you think, ‘Oh, I have to get my back waxed,'" says Merritt, whose company, Motally, analyzes activity on publishers' mobile websites.
While he's not expecting back-waxing salons to become big customers, Merritt says the mobile analytics services is gaining traction with large Internet publishers who are looking for better data on users' locations, handset models, favored links and unusual behavior patterns. Investors are paying attention, too. San Francisco-based Motally raised $1.25 million in Series A funding last June from BlueRun Ventures and angel investor Ron Conway.
Motally is one of at least 20 startups in the analytics space that have raised venture funding in the past year (see table). Collectively, the companies have raised more than $100 million over that period, with VCs placing particular emphasis on applications that measure mobile, social media and online video usage.
Better ad targeting is a key driver. A few years ago, marketers were content to base online advertising campaigns on data mined from such sources as search engine queries, news site traffic and Internet purchases. Now, with surging adoption of social media and smartphones, advertisers are seeking tools that leverage more detailed datasets on consumer habits and tastes.
"In the end, it's basically getting as close as you can to reading the customer's desires without asking them," says Jim Smith, a partner at Mohr Davidow Ventures (MDV), which has invested in several startups in the analytics space. MDV's bets include Carrier IQ, a developer of embedded tracking for the wireless industry, ParAcccel, which sells analytics database services, andVisible Measures, which analyzes online video audiences.
For VCs, it's also about ROI. Several analytics-focused startups funded a few years ago have provided some of the most lucrative exits of recent years. The biggest include AdMob, acquired by Google for $750 million in stock last year, and Omniture, which went public and then agreed last September to be acquired by Adobe Systems for around $1.8 billion.
From Many to One
Among the current crop of startups, a recurrent theme revolves around the ability to target individuals rather than broad demographic groups. The concept isn't entirely new. Companies like Tacoda (acquired by AOL in 2007 for $275 million) and Right Media (acquired by Yahoo in 2007 for $680 million) started shortly after the bursting of the dot-com bubble with technologies to target advertising campaigns based on individual Web surfing habits. And keyword advertising has been around for more than a decade.
What's different this time, however, is the data available to mine. Programs track not just who watches a video clip, but how it evolves from a niche audience pick to a viral phenomenon. With the rise of Facebook, marketers and publishers know not just a potential customer's likes and dislikes, but also those of his or her friends, family and co-workers. Additionally, the diminishing cost of storage and processing power means companies can spend less to crunch more data.
"It all stems back to all the data that exists now that didn't exist even five years ago," says Lucinda Stewart, managing director at OVP Venture Partners, which led a $9 million Series C round in December for Aggregate Knowledge, a developer of analytics tools that enable publishers and retailers to personalize display ads in real-time. The company counts Business Week,Cablevision and the Washington Post among its customers.
It's a competitive space, with plenty of content to crunch. Konrad Feldman, CEO of Quantcast, an Aggregate Knowledge rival, estimates that his company directly measures more than 200 billion "media consumption events" (such as a download of a news article) every month. That information is combined with datasets from other tracking systems and run through myriad proprietary algorithms to produce predictions on audience members' likely interests.
In Quantcast's case, says Feldman—whose previous company developed software to track down money launderers—the goal is a system that enables publishers to sell appropriate ads for audience members who don't fit their site's typical demographic profile. For example, it could help serve up an ad targeting men on a couture fashion site or teenagers reading a venture capital trade publication.
Demand for automated ad-distribution methods is all the more pressing as the amount of available content expands and audiences gravitate to small niches that suit their particular interests. "The need to provide appropriate content to consumers becomes more and more important in a fragmented world," Feldman says. "As media has become more fragmented, it's become harder for media buyers to buy efficiently."
Getting Social
Other VCs are backing startups focused on a particular type of digital media. For example, Visible Measures, which measures the behavior of online video audiences, raised $10 million in Series C funding last March from General Catalyst Partners, MDV and Northgate Capital, bringing its total funding to date to more than $29 million. Rival TubeMogul, meanwhile, raised $3 million from Trinity Ventures last April to develop its online video analytics tools.
Another startup, ReTel Technologies is adding surveillance camera feeds to the analytics mix. The Chicago-based company raised $1 million in December from backers including The Founders Fund, Hyde Park Angels, Maples Management and SoftTech VC.
And Foundry Group, two of whose four partners play in a rock band together, invested $600,000 last fall inNext Big Sound, a company that develops analytics tools for online music consumption.
Perhaps more than anything else, however, VCs are focusing on startups that mesh social media and marketing. Besides measuring numbers, investors are looking for businesses that can draw conclusions and create actionable plans from this data, including sentiment, says Jason Mendelson, a Foundry Group managing director and member of the band Soul Patch.
So far results have been so-so.
"Social media has become a great distribution network for all sorts of things, whether it is content, services or advertising," Mendelson says. "What has been slower to develop are ways to demonstratively prove ROI on social media activities."
Several startups have raised money in the past year to focus on the intersection of analytics and social networking. They include 33Across, which raised $2.8 million from First Round Capital and individuals; Media6Degrees, which closed a $9.8 million Series B round last April from U.S. Venture Partners andVenrock; and Sometrics, which raised $4.5 million in September fromGreycroft Partners and Steamboat Ventures.
The fledgling social analytics space got its biggest boost about three years ago, says Ian Swanson, co-founder and CEO of Los Angeles-based Sometrics. That's when Facebook opened its platform to outside developers, a move followed by others, such as Twitter and MySpace. Sometrics' founders, seeing a need for more detailed tracking across those networks, developed two products: an analysis platform for social developers and an advertising network based on that data.
Others are mining the so-called social graph to provide publishers and advertisers with insights about their audiences. New York-based 33Across and Media6Degrees both develop software to analyze data attributes of social connections, such as how frequently people communicate. Marketers then use the findings to target messages based on the "inferred preferences" of people who are connected online.
Finish Line
Mobile is the other big component of the analytics pie and an area in which VCs are investing actively. At least three companies focused on the mobile analytics space—Carrier IQ, Medialets and Motally—have raised funding rounds in the past year.
Business models vary broadly. Medialets, which runs an analytics and advertising platform for iPhone and Android smartphones, raised $4 million in May from backers including Draper Fisher Jurvetson and Foundry Group. The New York-based company develops a free tool that mobile application creators can use to track user behavior. It earns money selling services that deliver advertising to mobile devices when users are online.
Carrier IQ, which closed an $11 million round early last year, develops applications that reside on mobile devices themselves, some 77 million of them at last count. It receives raw data from phones and feeds it into analytic applications for mobile carriers. Backers of the company, launched in 2005, include Accel Partners, Charles River Ventures, Intel Capital, MDV, Nauta Capital and Sumitomo Corp.
At Motally, Merritt says, the key consumers of analytics applications are publishers, who to date have had an incomplete view of their mobile users. One reason for that incomplete view, he says, is that established tools for measuring Internet traffic don't work as well in the mobile world, because there are often longer delays for downloads, leading users to click on links before pages finish loading. Additionally, users may move around, making it look like there are multiple IP addresses or multiple users, when it's just one person.
Location data are also difficult to track, Merritt says. "We had a customer who was convinced they were a 100% U.S. site," he notes. "Then we installed our tracking software, and it turned out that 80% of their traffic was international."
Analytics startups with the ability to track traffic patterns globally are particularly attractive to VCs, says Jonathan Ebinger, a partner at BlueRun Ventures. "We're analytics junkies as a firm here," he says, noting that a large share of companies in the firm's portfolio have a heavy emphasis on data analysis.
Exit multiples are a big reason why. Looking at the biggest M&A deals of the past several years, a sizeable number have involved companies with deep ties to analytics.
The largest transaction, Adobe's $1.8 billion purchase of Omniture, came three years after the company went public. (Previously, Omniture had raised $55 million in venture funding from backers including Battery Ventures, Hummer Winblad Venture Partners and Scale Venture Partners.) Another big public company acquisition came last July, when IBM announced a definitive agreement to buy analytics and information forecaster SPSS for $1.2 billion in cash.
Private venture-backed companies haven't been left out, either. Mobile ad network and analytics companyQuattro Wireless, which had raised $28 million from Globespan Capital Partners and Highland Capital Partners, was snapped by Apple for a reported $275 million just last month. And the same month that Google bought AdMob, it also paid an undisclosed amount for online ad network Teracent, which had raised about $7 million from New Enterprise Associates.
Despite the recent flurry of activity, Sometrics' Swanson says he's confident acquirers still have plenty of dry powder for more deals. It's cheaper and easier to buy a startup than develop the technology in-house, he says.
"When you're looking at an ad or traditional analytics company that's been around for five or 10 years," he says, "it's difficult for a big ship like that to make a sharp turn."