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Ad-tech Companies Step Up Marketing Before IPOs

Firms Accelerate Spending to Entice Investors, But Some Say It Can Be Red Flag

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Rocket Fuel made headlines Friday when shares from its initial public offering immediately more than doubled when trading opened. But even before making its market debut, Rocket Fuel had been working hard to get the public's attention.

The company's sales and marketing expenditures surged to $41 million in 2012 from $17 million in 2011. In 2013, the pace picked up further, with $34 million spent on sales and marketing in the first six months, according to an SEC filing. Rocket Fuel is sponsoring seven conferences this month.

A number of ad-tech players, including YuMe, Millennial Media and Marin Software, significantly bumped their sales and marketing spending in the year before hitting the stock market. AppNexus, OpenX and PubMatic all have either recently hired senior marketing executives or stated plans to increase sales and marketing budgets.

The added millions in marketing spending can end up in the pockets of a variety of media companies. In the run up to its IPO, Rocket Fuel ran a full-page print ad in the Harvard Business Review and sponsored NPR.

In such a highly competitive industry, ad-tech companies believe they need to heavily invest in marketing in order to prove their worth to investors.

But Mark Zgutowicz, senior research analyst at Northland Capital Markets, said that "while marketing is certainly important when it comes to differentiating a product or a service, dependencies on it may not support sustainable long-term revenue and profit growth." He noted that growth is most often powered by differentiated intellectual property.

Brian Kardon, who as CMO helped prepare marketing-automation company Eloqua to go public in 2012, said a pre-IPO jump in spending can be a red flag. It can take six months to a year to reap the benefits, he said, meaning pre-IPO spikes may be geared mostly toward investors. "They may fool people on the IPO day, but eventually it's going to come home to roost."

Marin Software increased its marketing budget before going public and has kept it at a higher level, said CEO Christopher Lien, who dismissed the notion that the spending was meant to draw attention away from Marin's unprofitability. "Going public was part of a long term journey," he said about Marin's pre-IPO marketing efforts. "Investors and the media like to focus on what's going on this minute, but it will play out over several years."

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