Mayfield Fund News: March 2008

In this issue:
•  In the News
•  Mayfield View: Managing Directors Yogen Dalal, Allen Morgan, and Raj Kapoor
   on trends in internet advertising.
•  Guest interview: Veteran advertising guru Rishad Tobaccowala on the lessons
    learned from Advertising 1.0.

In the News

» Exits: Demand Media picks up Pluck
» People: Navin Chaddha named #10 on Forbes 2008 Midas List
» Investments: Mayfield leads $19 m round in Adchemy
» Investments: the Rubicon project raises $21 million led by Mayfield
» Investments: Mayfield leads round in Consim Info/Bharat Matrimony
» Investments: Startup widget company Gigya nabs $9.5 Series B round led by Mayfield
» Investments: Slide closes $50 million financing round
» Investments: Alfresco closes Series C round

Mayfield View:
Managing Directors Yogen Dalal, Allen Morgan, and Raj Kapoor, who guide Mayfield’s advertising investments, discuss the next wave of Internet advertising and the value chain that guides the firm’s investments.

When Mayfield began investing in the advertising sector in the Internet’s early days, it focused on firms that built banner ads, creating brand awareness by drawing consumer “eyeballs” to your site, and the all-important click.

Trouble was, there was a lot of guesswork back then and little science that targeted any desired audience or tracked how and why a user clicked. For many advertisers, retail and advertising pioneer John Wanamaker perhaps put the predicament best: “I know half my advertising doesn’t work. The problem is I don’t know which half.”

Still, Mayfield’s early bet in this emerging field paid off. By 1999, the firm sold Adknowledge (Focalink), one of the first Internet banner ad networks, to Engage, a CMGI company, for $193 million in stock.

Nearly a decade later, a lot has changed in this market, which, led by sales of display and search advertising, is expected to reach $25.5 billion in 2007, up 27 percent from 2006, according to market researcher IDC.

As an industry, however, advertising has progressed from static ad serving and banners to complex consumer behavioral analysis, real-time ad tracking and vast groups of new ad networks. These new networks serve specific demographics on platforms ranging from Internet radio to time shifted television to video on websites.

Net users have also become more sophisticated than ever in their consumption of media. And today, even services are paid for through advertising, a fact that has left industry giants like Microsoft more than a little unsettled.

As advertising has shifted from television to the Net, the industry has increasingly grown and consolidated, trends exemplified by Microsoft’s latest bid to acquire Yahoo and Google’s purchase of ad-serving giant DoubleClick, the first company to bring together a critical mass of online ad buyers and sellers. If Microsoft’s proposed deal goes forth, the combined companies will hold a 17 percent share of the U.S. advertising market, compared to Google’s 23.7 percent.

That estimated market share leaves plenty of room for startups to disrupt and deliver compelling solutions that fit within what we’re calling a new value chain, which includes ad publishers, ad networks, advertisers and consumers.

 “At Mayfield we’ve identified the value chain and are betting on success throughout that model,” says Mayfield Managing Partner Yogen Dalal.  “More content than ever is supported by advertising and the advertisers are demanding a direct relationship with the consumer. Both advertisers and publishers want to target, optimize, analyze, and be held accountable for the cost of acquiring a customer.  The industry is getting more efficient and widespread at the same time”

To better understand this new world of Advertising 2.0 we’ve outlined some key themes:

1. It’s multiplatform. Advertisers must consider the role of every medium -- from video blogs to the widgets used as a distribution method to ad networks like AdSense -- and understand how to target those users. Not surprisingly, a recent Forrester Research survey found 64 percent of marketers wanted to advertise on blogs, 57 percent through RSS, and 52 percent on mobile devices, including phones and PDAs. In this multiplatform world there’s a wealth of opportunity for startups like Black Arrow, which places advertisements targeting viewers of time-shifted television, and Gigya.com, which helps advertisers and content providers boost viral distribution of their widgets and track results.
   
   

2. It’s performance-based. Startups that track ad performance now go deeper, handling much more complicated sets of data to provide meaningful analysis to customers. Working with clients, Adchemy, for example, uses its proprietary technology and closed feedback loop to test many ads to determine the best mix that will generate leads in the real estate and financial industry. The company gets paid only when those leads generate sales. “It used to be that people were happy to get eyeballs on ads, but now the industry has shifted to performance and accountability,” says Mayfield Managing Director Raj Kapoor. “Black magic is no longer a part of this industry.”
   
   
3. It’s complex. As a startup you need to understand the value chain and figure out where your business fits within this complex network. Are you part of the infrastructure or the ad network? Are you designed to cover both publishers and advertisers? Startup Rubicon Project finds its niche in playing the role of middleman between advertisers and ad networks. The company uses its system to help other companies decide which demographic group a publisher should target through existing ad networks, which now number more than 300 and are growing fast.
   
   
4. It’s highly-targeted and personal. Ad networks and services are intended to reach specific markets – everything from women in their 40s with a passion for baking to the parents of kids who wear preppy clothes. For companies targeting Spanish-speaking customers, startup Consorte Media offers real-time lead generation and display advertising geared toward that growing audience.
   
   

Mayfield believes that start-up CEOs who understand their place in the advertising value chain will be able to exploit this vibrant new advertising market in new and exciting ways. Indeed, this new wave brings great investment opportunities that we all look forward to exploring.

Guest Interview:
Rishad Tobaccowala, former chief innovation officer at Publicis Groupe Media and CEO of Denuo

Rishad Tobaccowala is a longtime media strategist advising clients from GM to Coca Cola on how to spend their advertising millions. The former chief innovation officer at Chicago-based Publicis Groupe’s Publicis Groupe Media, Tobaccowala now runs consulting startup Denuo. Publicis launched Denuo two years ago to help marketers navigate the advertising world.

A board member of Revenue Science and Snap, Time Magazine has dubbed Tobaccowala a key "Marketing Innovator."

Yet for someone who has dedicated his life to advocating change, Tobaccowala is a creature of habit: he has worked for the same boss for 15 years and has lived in the Hyde Park neighborhood of Chicago for the last 25 years.

We spoke with Tobaccowala about how the Internet and other platforms are revolutionizing advertising, and lessons learned since the industry’s first wave.

Mayfield: Could you define the key differences between Advertising 1.0 and 2.0?

Rishad Tobaccowala: Advertising 1.0 was basically traditional advertising for a digital platform. The big players were companies like Yahoo and AOL and the discussion was similar to traditional advertising and marketing through things like the Women’s Channel, the Finance Channel and Yahoo. It was about taking traditional audiences and, as they migrated from traditional media to online media, reaching them in the same channels. Research companies like the Doubleclicks of the world allowed you to measure the audiences and provided the ad-serving technology.

The big difference now is that consumer behavior is different. Because of broadband there is a rise in video, music and photo usage. Because of search people go to search engines as a starting point when hunting rather than typing in URL's. Because of personal expression media like blogs and social networks, where people spend their time and get their information is changing dramatically. This is creating much more fragmentation and making audiences more elusive. Fragmenting poses the huge challenge of re-aggregating – finding the right people in the right places. Marketers used to control time and space. Now they don’t. The question now is when you are going to see my ad? What new technologies have done is made it much more interesting. I can target my ad to a person at a particular time and space.

Mayfield: So how important is technology in making companies stand out today?

RT: You can separate yourself through message and design, but if you don’t have the technology you’re not even in the game. There are four big sets of technology people are looking for: technology that allows them to cost-effectively distribute ads, serve ads, build networks and track performance. You need to tell me the stuff works with visible measures. Ads also need to be cost-effective to create so I can build a bunch.  Finally, we need to consider platforms – platforms like the Bloomberg terminals -- that allow me to say: “OK, here’s what I know about my audiences and ad creation and measurements,” instead of: “How do I deploy this effectively?”

Mayfield: How do companies today balance the need to reach the masses and the individual online?

RT: One to some is where we are moving to. The one-to-one economics don’t work. If I want to find 25,000 people who are interested in a Cadillac I can go to Edmonds.com or to Google or MSN and say: “I want to buy 25,000 people who want a Cadillac or a luxury car,” and they’ll provide these people. I can also find these people through ad networks where they have voiced interest in a car.

Mayfield: How do marketers succeed in these fragmented markets?

RT: I call it SOFA. Offerings must be Scalable, Outcome-driven, Friction-free, and Accountable (SOFA). The one-at-a-time stuff in marketing is too costly. They need a sales force that makes it easy to buy. What you’re seeing are companies and technologies that get close to SOFA. They want large audiences and they want to buy results. But marketers often find their approach isn’t scaling or is really expensive. If you want to buy video on the homepage of the portals like Yahoo for a day to aggregate audiences it ends up costing more than a Superbowl ad. 

Part of the whole 1.0 and 2.0 thing is about how we aggregate audiences, making sure ads are open, relevant and simple. You use the relevant technology that supports behavioral targeting and ensure that you talk to the right person at the right time.

Mayfield: How are you helping clients understand the new landscape?

RT: Our clients want to understand what is going on. They’re very confused and have often been sold a bag of goods. They’re looking for unbiased navigators and guides who can simplify what is going on and filter what they need to focus on and point them to partners they need to go with in this new world.

Mayfield: Any lessons learned to pass on to investors and CEOs?

RT: There’s no way that companies can do this without technology. You can’t create advertising on the fly without it. We are now talking about buying audiences and it’s very much like you are buying stocks and shares in equity markets.

Also, advertising is too complicated.  If you make advertising too complicated you’re claiming that people are more intelligent than they are. Ads do not need to be sophisticated; they need to work.

You need elegance and you need design. Apple knows how to do that. Apple didn’t advertise online until recently. They’re big believers in TV, radio, and events and that’s good marketing. Online, Apple has the store and iTunes and it runs the PC-versus-Mac ads on the Wall Street Journal website. That’s brilliant marketing.