Primer for Investing in the Programmatic Marketing Industry

Gone are the Mad Men days of advertising -- today's online advertising industry bears a lot more resemblance to the hedge fund industry than it does to the industry of years past.

From a qualitative perspective, both hedge funds and the online advertising industry are looking more and more alike 

• both are getting more competitive.
• both are using technology as a differentiator
• both require increasingly creative uses of large amounts of data
• both make their investors lots of money (when they’re successful).

While the online advertising market is expected to reach over $500B in 2013, there’s a whole new field  — one that’s seen 3 recent IPOs — that should vie for investors’ attention. It’s called programmatic advertising and it’s where the similarities between advertising and hedge funds are most acute.

Like high frequency trading, which uses complex algorithms to make split-second arbitrage trades, programmatic advertising is driven by the same machines. Large marketplaces and technology providers act like clearing houses for ads on large websites.

The leading players in programmatic advertising

Historically, purchasers of advertisements on websites made large buys of ad space that targeted specific pages or a group of users. Now, with programmatic ad buying, before a website displays an ad, it farms it out to the highest bidder — an algorithm makes a decision to target a specific user in real time.

There have been 3 recent IPOs in the space and more are on the way.  Here’s a quick tear sheet view on 3 key players in the programmatic advertising industry

Criteo CRTO

You ever hit a website, view a product, and notice that everywhere you go, ads for that product seem to follow you? If so, you've probably been retargeted with an ad. The idea is that someone who views a product is more likely to buy that product, so advertisers target them with ads for those products they've recently viewed on the advertisers' sites. Founded in 2005, Criteo's predictive algorithms help optimize campaigns from an advertiser’s perspective as well as maximizing advertising inventory for publishers. The company raised $251M at IPO. did over $250M in revenue for the 6 months ending June 30, 2013, and has generated $6.5B in post-click sales for its advertisers.

Rocket Fuel FUEL

This recent IPO uses artificial intelligence to help businesses get the most bang for their advertising bucks. FUEL bills itself as an expert in predictive marketing and data-driven targeting. Rocket Fuel massively ramped its revenues from 2011 to 2012 +139% from $44.6M in 2012 to $106.6M. The company reported 3Q revenues of $62.5M, up 132% Y/Y and ahead of consensus estimates of $53.6M.

Tremor Video (TRMR)

Tremor allows brand advertisers to target potential customers over multiple devices through their ad videos. Complete with an analytics package, TRMR customers can track the performance of their videos. Bringing down other stocks in the sector, TRMR shares plunged almost 50% last week when the firm issued weak 4th quarter guidance as investors are concerned about longer term profitability. At this level, cash represents more than 40% of the entire market cap.

Programmatic marketing is still in its infancy. Advertisers are expected to spend an estimated $12B of programmatic ads this year and real-time bidding should account for over 50% of all display ad spending by 2017 (it’s somewhere between 7% and 15% now). These 3 recent IPOs are just the tip of the iceberg as other advertising technology companies are preparing to go public and the next generation of ad tech companies are being funded now (and the reason why my firm, OurCrowd, is investing in Crosswise, a startup that's a potential game changer, helping players in the programmatic ad space map the identity of users across multiple devices).