Wall Street Goes Nuts Over These Mad Men


April 7, 2014

Advertising-technology companies, which have taken the mystery out of Don Draper's old business and replaced it with algorithms, got a big boost last week with the initial public offering of the Rubicon Project ad exchange. The stock spiked more than 30% above its $15 opening price—and though Rubicon is based in Los Angeles, its success inspired cheers and a sigh of relief across the ad-tech sector in New York, where at least a half-dozen companies are considered candidates for an IPO.

Ad tech may be among the most arcane sectors in Silicon Alley, requiring glossaries to explain its basic terms, but it's also where New York has played a leading role since the founding of DoubleClick in 1996.

Industry growth is soaring amid a rapid shift in the ad market toward automated buying and selling. Companies that few people have heard of—but with nearly triple-digit revenue growth—are considering their cash-out options.

Eyes on AppNexus

"We think [the Rubicon IPO] is total confirmation of where the world is moving to, and confirmation of what Wall Street thinks of companies in our space," said Sloan Gaon, chief executive of PulsePoint, an ad-tech business formed two years ago out of veteran companies Datran Media and ContextWeb.

Mr. Gaon—who notes PulsePoint is profitable, with 85% revenue growth last year and projected 50% growth this year—says he doesn't know yet if he'll do an IPO, but he is laying the groundwork for one: He'll soon announce the hiring of a general counsel and a chief operating officer, both with experience helping companies go public.

He's not the only one who sees an exit on the horizon. Other New York firms believed to be ready to go public include AppNexus, Mediaocean, Collective and MediaMath. Outbrain, a content discovery platform that uses sophisticated technology to target users, is also on the list.

Most of them, like PulsePoint, belong to an ad-tech segment likened to the electronic trading platforms that long ago took over Wall Street. And similar to what happened in finance, the real-time bidding on Web audiences and automated buying and selling of ads are quickly gaining ground on the rest of the digital-advertising business, which still involves people talking to each other.

But though ad tech appears to be the future of Madison Avenue, some of the most successful New York players are taking their time about going public.

"The market is very hot right now," said Michael Rubenstein, president of AppNexus, one of New York's biggest technology companies, with nearly 600 employees, well over $100 million in revenue and total transactions on its platform last year of more than $1 billion. "But we would need to feel confident that [going public] would advance materially the aspirations of the business, that it would allow us to go and accomplish what we want to as a company, and right now we don't need to be public to do that."

Reasons to be leery

AppNexus doesn't have to, partly because it is establishing a position in the industry as a runner-up (and alternative) to Google in supplying ad-tech services, and booked $75 million in a financing round last year. But there are other reasons for ad-tech shops to be leery of an IPO.

Some analysts consider the industry highly competitive, with not a lot of differentiation among many of the companies. And despite rapid revenue growth, margins are notoriously narrow.

Even companies that have successful IPOs face challenges. The share price of Silicon Valley-based Rocket Fuel more than doubled on its first day of trading last October, but as of Friday was down 35% year to date.

"Even if you think you're producing good metrics, you still have to be paranoid," Pivotal Research Group analyst Brian Wieser said of players in the ad-tech space. "There's going to be a shake-out at some point."

Nonetheless, these ad-tech companies are becoming part of the advertising industry's fastest-growing segment: where dollars are spent on real-time bidding of inventory that is bought and sold in a "programmatic" manner—that is, using automated processes to target the audiences that marketers want to reach.

By 2017, programmatic advertising using real-time bidding will be the dominant digital-advertising segment, controlling 41% of total online and mobile display ad spending in the U.S., according to research firm IDC.

The ad-tech companies that perform best in that segment will be the ones with the most stable and contractually recurring revenue streams, says Colin Knudsen, managing director at investment bank Coady Diemar Partners, which focuses on technology and media. He includes AppNexus in that group because it has long-term contracts with the companies that use its technology and doesn't rely exclusively on media-buying dollars.

"If you're getting a percentage of a media buy, there's a lot of money, but it's fickle," Mr. Knudsen said.

Searching for stability

Collective seems to have already embarked on the path toward a more stable revenue stream. The nine-year-old, long-profitable New York ad-tech company, which has more than $200 million a year in revenue, has no plans to go public, though it is IPO-ready, according to founder and CEO Joe Apprendi.

Its focus, instead, is on expanding its relationships with big marketers, including managing their data, not just their media campaigns.

"We'd like to see that business grow, so we have a lot more predictability," Mr. Apprendi said. "Predictability is critical to being successful as a public company."

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