Venture Investors Jumping Aboard As Mobile Ad Networks Get On Track

June 11, 2009

By Timothy Hay
6/11/2009

While businesses of all kinds are trimming their advertising budgets to stay afloat in the recession, venture investors continue to make big bets on mobile advertising networks, which serve ads to handheld phones.

The mobile advertising industry has been growing slowly, hindered in part by broader economic conditions. But while many see an economic downturn as the worst possible time to be "experimental" with money, venture capitalists clearly feel differently.

"This will be a very, very large space," said Jon Auerbach, a partner at Charles River Ventures. "Start-ups are poised to succeed. There has been some hype involved, and some air coming out of the balloon. All advertising has been hit in this economy. But there is one very measurable trend: People are buying more smart phones."

The mobile tech industry has dramatically shifted in the last year, mainly because of the release of Apple Inc.'s iPhone and other smart phones. For the first time, a mobile phone that features a browser and software applications is not merely an abstract idea, but a reality. 

And this, observers say, is what will push the mobile advertising business over some of the hurdles in its path.

To be sure, the hurdles are significant. They include slashed ad budgets at big companies, the lack of comprehensive metrics, and a complicated marketplace involving different wireless protocols, networks, carriers, devices and data plans.

"One barrier to growth [of mobile advertising] is the complexity," said Mark Lowenstein, managing director of wireless-focused consulting firm Mobile Ecosystem. "There are so many operators, so many devices. If I'm an advertiser, who do I work through?" 

But such concerns and questions are being shifted to the back burner these days, say investors and analysts who expect the next few years to be a time of exponential growth. Internet market research company eMarketer forecasts that total spending on mobile advertising will go from $648 million in 2008 to $3.3 billion by 2013.

"This is the most profound information cycle we've ever seen, the move to mobile," said Bob Davis, a general partner at Highland Capital Partners. "Dollars continue to shift to a mobile world."

Spate Of Recent Fundings
Some of Highland's dollars certainly have. The firm has participated in three funding rounds for one of the most highly-regarded start-up mobile advertising networks, Quattro Wireless Inc.

In March, Quattro raised a $10 million third round from Highland and Globespan Capital Partners, bringing the Waltham, Mass.-based company's total VC fund-raising to nearly $30 million since 2007.

Quattro joins two other mobile ad networks in raising double-digit millions in the first quarter of 2009, which was one of the bleakest economic periods in recent memory and a quarter in which overall venture investing plummeted.  

SMS-based ad network 4INFO Inc. raised $20 million from new and returning backers in January. Peacock Equity, a joint venture between GE Capital Corp. and NBC Universal Inc., led the round, joined by Gannett Inc., U.S. Venture Partners, Draper Fisher Jurvetson, Sand Hill Capital and Selby Ventures. San Mateo, Calif.-based 4INFO has raised a total of nearly $50 million from VCs.

Also in January, Draper Fisher Jurvetson and Northgate Capital provided Admob Inc. with a $12.5 million round, pushing the company's total VC backing to more than $46 million.

 Admob -- which serves advertising to some 7,000 mobile Web sites operated by major film studios, car makers and other top content publishers - has also been backed by Sequoia Capital and Accel Partners.  

Like Quattro, AdMob is more than merely a middle man between advertisers and mobile-phone users. The company also offers detailed monthly reports on how phone users interact with advertisements -- a valuable tool for acquiring and keeping customers who are cautious with their ad budgets.

"As advertisers learn to use [AdMob's analytics service], the spend increases," said Jason Spero, Admob's general manager for North America. "Three out of four advertisers come back, as repeat advertisers. That's a conservative estimate."  

Quattro -- which is also in the business of building mobile Web pages for its customers -- also provides analytics on how their ads perform. Like AdMob, Quattro serves ads to mobile Web pages and to actual smart phone applications.

The analytics offered by both companies relate only to the ads the companies serve. Mobile is still a new medium, and there is no single company providing industry-standard metrics for it the way Nielsen Co. does for television, or comScore Inc. and others do for the Web.  

Lots Of Room To Grow
Some -- like Lowenstein of Mobile Ecosystem -- say the lack of comprehensive metrics may throw a wrench in the evolution of the smart phone as an advertising platform.

Partly as a result, companies with multimillion-dollar ad budgets are still devoting only a tiny fraction of those budgets to mobile ad campaigns. This has caused the industry to grow more slowly than many predicted, and caused at least one start-up -- San Francisco-based Kadoink Inc. -- to lay off its staff and sell off its assets. 

But many industry watchers say that even if advertisers can only earmark a small fraction of their budgets for mobile campaigns, those fractions will add up quickly.

"It's a big market," said Carl Howe, research director at Boston-based tech and communications research firm Yankee Group. "And you don't have to get very much of it to be successful."

There is room for three to five start-up mobile ad networks to become profitable, powerful businesses, analysts and investors agree.  

"Quattro will grow 300 percent this year," said Davis, of Highland.

While bigger and more established tech companies like Google Inc. and Yahoo Inc. are dabbling in mobile advertising, they are stretched thin over a variety of different new initiatives, new products and economic worries, said Rich Wong, a partner at AdMob-backer Accel Partners.  

Companies like AdMob, Quattro, 4INFO and Boston-based Millennial Media -- all of which are focused on delivering mobile ads -- can continue to thrive even when pitted against such powerful rivals, Wong said.

Easier Payment Systems On The Way

Apple this week released its new iPhone, and one of its features -- a micro-payments system similar to the one found on iTunes -- could push the mobile advertising business into a whole new era.

When EBay Inc. acquired PayPal Inc. -- which stores a user's credit card information in a secure server, and allows the user to pay for goods with the simple click of a button -- millions of consumers began to feel comfortable buying goods over the ether.

Such a day might be right around the corner for mobile, said Wong of Accel Partners. If mobile users similarly become comfortable using one click to pay for a wide range of goods and applications, it could cause a major spike in mobile commerce -- including commerce that comes about through advertising - and start-up ad networks could see their slow evolution kicked into high gear.

 "In the next year or two, the stars have to align," for the industry to power up, said Lowenstein of Mobile Ecosystem. "There need to be more subscribers on mobile data plans, and there need to be more industry-standard data available to advertisers."  

Companies like AdMob, Quattro, 4INFO and Millennial "are trying to build a market for a very nascent enterprise," Lowenstein said.

  "More power to them," he added, "because they are doing it."