Despite Facebook's recent success as a haven for advertisers, it took the social network a few years to find its footing in digital marketing. And one startup very familiar with Facebook's myriad ad experiments is a little-known Toronto-based company called AdParlor that now is one of the social network's biggest third-party vendors of advertising.
Founded in 2008 by Hussein Fazal and Kristaps Ronka out of the respective basements of their parents' houses, the two-person venture started out with a handful of clients looking to advertise on the nascent ad banner network within Facebook's exploding game apps like Zynga's Farmville. After a year, AdParlor started booking "hundreds of thousands in revenue" every month, according to CEO Mr. Fazal, "when we started seeing some real money."
The two founders moved out of their parents' houses, found office space and hired a few more people to handle all the work coming their way. Today, the company has 15 full-time employees servicing more than 200 clients, which includes ad agencies Digitas and OMD as well as group-buying firm Groupon, which filed for a public offering early this month.
Groupon, in fact, is the company's biggest client, buying all of its Facebook ads through AdParlor. "They're a big performance advertiser," Mr. Fazal said, pointing out that the company largely looks to collect email addresses. "It works great on Facebook, because we can help Groupon target to all kinds of people based on the offers they have, which are all local."
AdParlor now books monthly business "in the millions," according to Mr. Fazal, but unlike most other startups, the company hasn't taken any investment dollars from the venture capital community. "Almost everyone reaches out to us with a term sheet," he said of investors. "But how many of those chats can you do?"
While Mr. Fazal doesn't rule out the possibility of offering equity, he's in no rush. "We're growing really fast," he said. "We're looking to hire pretty aggressively, as fast as talented people come in, and we're not restricted by our cash flow. At this point, we're highly profitable."
But getting to this point took years trailing Facebook's sometimes wayward path into advertising. AdParlor started off selling ad banners within the games that still dominate much of the social network's activity. Zynga was one of AdParlor's first big clients, but it was everybody's first big client at the time. "Those guys bought everything," Mr. Fazal said. "We couldn't keep up with how much they wanted to buy."
While the in-game banner network fueled AdParlor's initial growth, it eventually became a wasteland of "offer walls," programs that entice users to give up their email address or purchase an item in exchange for currency in one of Facebook's many games, such as Farmville.
"There were a lot of scams that ran through it," Mr. Fazal said, pointing out that many of the offers included contingencies that weren't properly disclosed or involved selling the obtained email addresses to spammers. "Facebook took a closer look at it, and that 's why, I think, they're moving everyone over to the universal credits system, so they can control it."
Despite some initial success in the games network, Mr. Fazal saw that it was a fast-dwindling area. The offer walls tainted the ad environment on the games platform, and Zynga, which had become much bigger, began buying advertising on Facebook directly when the social network turned its advertising platform into a self-serve system. AdParlor took advantage of that same opportunity and was one of the first third-party companies to gain direct access to Facebook's API.
At present there are at least 22 companies listed on Facebook's "preferred developers consultants" page, including AdParlor, but according to one industry executive who measures Facebook advertising, "AdParlor is probably the best source to understand the ad environment on Facebook."
The company claims to know more about how to target people on the social network. "The benefit we have is our strong technology, it's super super effective," Mr. Fazal said. "We can say, for example, this particular ad targeted to females in Texas at 2 p.m. on Sunday work best for a particular ad. This kind of high targeting gets high click, high conversation rates."
Facebook ads are typically sold on a cost-per-click basis, but AdParlor claims its algorithms are strong enough to allow for some arbitrage. The company will often bill its clients on a cost-per-acquisition basis, while buying Facebook traffic on its traditional terms.
Mr. Fazal is hoping to market his company's Pulse software to ad agencies, which allows media buyers to directly access the Facebook advertising platform. "We're basically getting a phone call from clients, asking us to change something, which we're happy to do, but for some clients, doing it this way might be more efficient, more cost effective," he said.
He pointed out that brand advertisers could learn something from the social-game companies, which have been advertising on Facebook from the beginning. "We work with almost every social game developer on the platform," he said. "For brand advertisers, they have a fixed budget and fixed time-frame, but when you look at some of these game developers, they'll see a campaign may cost them 50 cents per user, but they know they're going to get 60 cents per user, so they just tell us to keep buying ads as much as we can. You're increasing your business that way."
AdParlor's Facebook expertise has netted the company more business, but it hasn't decided on an exit strategy.
"If a company came to us and said, 'Here's a $100 million in cash,' it'd be hard to not take it," Mr. Fazal said. "But at the same time, I feel like we're just at the beginning of this massive Facebook-ads opportunity. Eventually Facebook is going to build out an ad network through Facebook Connect, and their announcement with Bing, there's going to be powerful search capabilities there, and they haven't even touched mobile yet. Just the beginning."