Walter Knapp is the CEO of ad tech company Sovrn, previously a division of Federated Media, which works with publishers to help them generate advertising revenue and understand more about their audiences.
As the CEO of an ad tech company, and with more than 20 years of experience working at tech companies both operationally and from the venture capital side, he’s all too aware of the turbulence facing the ad tech industry right now:
There hasn’t been an ad tech IPO in months. Ad tech stocks have recently been taking a battering. Huge companies like Google, Facebook, Oracle, and Adobe are building up their ad tech stacks, leaving behind smaller competitors in their wake. Marketers are wising up to how their ad tech vendors make their margins, and they are now making testing demands around areas such as ad fraud, viewability, and pricing transparency. Ad blocking is on the rise.
It’s not easy out there for ad tech CEOs. These are existential challenges, and every now and then you hear whispers of an “ad tech bubble.”
Knapp told Business Insider he thinks the reason so many of these companies are having a hard time comes down to two main faults with most of their business models.
“From my perspective, most ad tech businesses are simple arbitrage businesses,” Knapp said.
What he means by that is that they pay publishers as little as they can, but attempt to get away with selling inventory to advertisers for as much as they can.
The problem here is that it creates a “race to the bottom,” as Knapp puts it, in terms of pricing. Advertisers begin to question the value of the ad inventory they’re receiving. And publishers become fickle and begin switching their vendors.
Investors too are getting wise to this approach, Knapp says. Before, he says some investors were simply convinced by slides from the famous annual Mary Meeker presentation on the state of the web that showed the rate of growth of online advertising. But now, VCs are beginning to really question ad tech companies’ business models, according to Knapp.
“Ad tech companies are undifferentiated”
That’s where investors run into even more confusion, according to Knapp. Once they start looking at several ad tech companies, it’s difficult to work out what makes them different from one another.
“You see this in spades on the DSP (Demand-side platform) side. All of these companies, if you were to take their websites and change the names, they would be the exact same,” Knapp told us.
A lack of differentiation leads to huge sales and marketing costs, as ad tech companies spend tens of thousands of dollars on events sponsorship and thought leadership.
“The marketing department flexes their muscles and comes up with more buzzwords to make it sound like what they have is more interesting. But the best companies just make it easy, and they have a differentiated offer,” Knapp said.
How Knapp believes his company its different
So how is Knapp’s company different?
While Sovrn may be smaller than other supply-side platforms (SSPs), such as Rubicon Project or Pubmatic in terms of revenue (think tens of millions of annual revenue right now, rather than hundreds of millions), Knapp said it is highly unusual for any ad tech company to be profitable and have cash.
Knapp wouldn’t reveal exact figures, but said revenues had grown 90% year-on-year in the second quarter. He said the company is gross profitable, and it had $US10 million in cash on its balance sheet pre-funding.
More important, the company’s been around for a while: The business actually formed seven years ago under a different name, Lijit. It raised $US28 million in capital and then sold and merged the company with an ad network called Federated Media, which was founded by the co-founder of Wired Magazine, John Battelle.
Knapp said Federated Media built one of the first programmatic ad platforms — alongside the likes of AppNexus, Rubicon Project, and OpenX. In 2014, Federated Media decided to sell off what was basically its Lijit business and the bosses at Lijit restructured the company and rebranded as Sovern.
Today, the company announced that it was raising a new $US18 million round led by Foundry Group. That includes $US10 million in new equity funding, plus $US8 million from the conversion of a note assumed by Sovrn as part of the Federated spinout.
Knapp says Foundry Group was interested in Sovrn because of its experience, and its focus on having its own tech (rather than paying fees to other) and spending most of its money on engineers rather than sales and marketing. He also said that Foundry liked the fact that Sovrn deals with data to help publishers make their content better and grow their audiences, rather than just shifting advertising for them.
We also asked Foundry Group’s managing director Seth Levine why the raise was smaller than recent ad tech rounds — such as the $US54 million raised by RadiumOne in June, or TubeMogul raising $US83 million.
He responded: “Some companies raise a lot of money because they have to in order to support their business model. Others because they can and they want the press, the balance sheet, etc. At Foundry, we tend to preach a more pragmatic view to fundraising which is to build a business model that isn’t dependent on mega-round style financings but also to take advantage of a raising a reasonable and measured amount of capital when its available.”
He also gave examples of Foundry investments such as Admeld, which raised far less than competitors such as Pubmatic and Rubicon Project, before selling to Google for $US400 million in 2011, and Gnip, which raised less than competitor DataSift and sold to Twitter for $US134 million last year.
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