Union Square Ventures partner Brad Burnham has been at the forefront of investing in technology startups for the past two decades. Along with partner Fred Wilson, Mr. Burnham has taken stakes in closely watched startups including Twitter, Zynga, Foursquare and Tumblr, most of which are sure to see rising valuations in the near term.
But it is Mr. Burnham's insight into the ad world that may be even more prescient and speaks to the larger changes going on in digital media.
"If you look at the advertising technology space with all the recent investments and the new companies, those businesses are going to find themselves competing with each other pretty viciously, and it's going to be hard to justify over time," he said at the Advertising Age Digital Conference in New York today. Mr. Burnham feels that while the digital ad industry may be crowded, the bigger problem is that companies invested in creating ad networks or ad-serving technologies aren't creating sustained value because they don't have direct relationships with consumers online.
"A network has a defensible network effect because it benefits from the number of people that use it," he explained. "Is that true of ad networks? Is that true of a traffic-management system? Not necessarily."
Mr. Burnham feels that as networks such as Facebook and Twitter grow, the opportunity to capitalize on its users will increase, but for all the analogies to mighty TV that these companies continue to inspire, it is a mistake to think of these networks in the same way.
"It's not like a television network," he said. "It's more like a phone network -- it's flat, and all the nodes are equal. The content is clearly separated form the connectivity."
That distinction is important for advertising. Marketing executives have been used to operating as preferred players in traditional media, but according to Mr. Burnham, within socially driven networks, companies cannot immediately expect to promote themselves with authority. "The brands that have been the most successful are ones that respect the rules of the network, when they act like one of its citizens," he said.
While some of the more experienced advertisers are aware that digital marketing messages cannot be controlled in the same way as it can be within traditional media outlets, spending money still helps.
Twitter has been selling sponsored posts and trends for the past year and is expected to rake in $150 million in ad revenue this year, according to eMarketer. The company has also been working on special pages centered around major TV events such as the Super Bowl or the Academy Awards. These pages would pull in relevant tweets related to the event, which a company can sponsor, according to one person familiar with the pages. This product is in the experimental phase and has not been released yet.
Tumblr, a much smaller startup but one that has gained a lot of attention from media brands such as the New York Times, has been experimenting with invoking quality scores, Mr. Burnham said.
But even as these examples attest, digital marketing is still evolving, just as the expectations of users online continue to change. "Citizens on these networks see banner ads as a tax," Mr,. Burnham said. "And that's OK as long as it serves infrastructure. But if they see that as a way to line the pockets of people like you and me, they're going to be like, 'Hey, we're the ones providing value here.'"
Some ad agencies have seen the need to invest in emerging media and have created their own venture arms, but Mr. Burnham doesn't see potential benefit of these relationships coming from an agency's creative expertise.
"They're bringing their experience with influencing human behavior to the table," he said of these new agency-backed funds. "But do I think that having access to a traditional creative team will benefit a a network startup? I think it's going to be very unlikely that that group will be as insightful about this medium as the kids who grew up in that."
Mr. Burnham also addressed a recent blog post from Mr. Wilson in which he writes, "I believe that marketing is what you do when your product or service sucks or when you make so much profit on every marginal customer that it would be crazy to not spend a bit of that profit acquiring more of them (coke, zynga, bud, viagra)."
"He made one huge error that was pointed out by Seth Godin," Mr. Burnham said. "He conflated marketing and advertising. He's coming from the perspective of somebody who's invested in these networks. These networks are designed to promote themselves."
Mr. Burnham pointed out that marketing is actually much more crucial to startups than ever before, but they are being done in atypical ways. He pointed out that when Tumblr founder David Karp releases new products on the service, he hides them in the code and then reaches out to a select few power users, what is known in the engineering world as dropping an Easter egg.
"In my generation, when we released a new feature we put on a party and sent out a press release," he said. "Historically, marketing didn't know about a product until later. With these networks, because of how they promote a new feature, marketing is going to become more important but it's going to become much more important earlier in the cycle."