In November 1999, Advertising Age sounded an alarm about the current ad scene.
The forthcoming Super Bowl was the subject of jokes about which newbie advertisers that had bought up all the ad slots would still be in business to watch their spots run in the big game. Big , expensive campaigns were being unveiled for companies no one had heard of, sometimes before they even launched websites. And those soaring marketing budgets for startups were being managed in no small degree by the venture capitalists pedigreed in the world of valuations, not creative. In cheeky fashion, the reporter on the scene then asked a couple of VCs whether they knew anything about advertising.
"Absolutely nothing," said one, words uttered just months before the dot-com bubble popped, sending a foul wind through the stock markets and retirement plans, and up Madison Avenue.
Eleven years later, the intersection of venture capital and advertising has created another, um, interesting moment. Years of massive investment in ad-supported business, from social networks to casual-gaming companies to mobile platforms to content properties that sell ad space to the lesser-known intermediaries that help filter, target and distribute those ads, has resulted in enormous valuations and now has observers wondering whether we're in a second bubble.
History in mind, I asked Bay Area-based investment banker and consultant Robert Heath to compare those days with our present.
"In the first bubble, an inordinate amount of advertising online, not to mention spending on routers, services and web design-services, was being purchased by startups that had no visible operating cash flow. There were ad budgets being spent out of venture investments and IPO market investments."
He added, "My sense now is that we're not seeing an abundance of pre-cash flow-positive startups buying lots of ads on Facebook and Google. The distribution of advertisers much more fairly reflects the real world."
The relative sanity that might be prevailing, however, doesn't mean we're not in another bubble. The stakes are certainly lower from a societal perspective, given that the risk of irrational exuberance is fairly localized in the investments of a few wealthy people and is not disseminated in 401Ks and the like. But that hasn't prevented the B-word, something most VCs and entrepreneurs loathe to utter in public -- from getting tossed around more and more in recent months, mainly because of the ballooning valuations.
At one end is Facebook, a legitimate game-changer with real revenue, whose January capital influx from Goldman Sachs made it worth $50 billion. At the other is Quora, a kinda, sorta interesting Q&A website, now reported to be worth on paper anywhere between $86 million and $1 billion. In between are any number of companies -- Zynga, LinkedIn, Foursquare. And there is not a little head-scratching that Demand Media's public offering wasn't at all dampened by news that Google, a major traffic referrer, is planning to change its algorithm to punish content farms.
The present and future success of all of these companies and hundreds of others is in no small way reliant on advertising and, when you consider all that advertising needs to provide for them, well, you sort of feel bad for the old girl. It's a big burden. Sure, budgets slashed during the global recession have come back to some degree and there is a will to experiment with new digital plays, but money is still being closely watched and precious few of the new plays have the scale necessary to entice marketers.
If there is a bubble, then advertising is fueling it, but not as it did 11 years ago. Rather than glitzy ad campaigns pumping stock prices, it's the hope of advertising as a source of revenue that is swelling companies' paper worth. Beneath that hope is the perhaps unconscious belief that the largesse of marketers is infinite, an all-too-convenient forgetting that big advertisers are bureaucratic and increasingly austere when it comes to how they spend. They, and their agencies, are not Medicis for the digital era who want to spend their days funding sociology experiments. Far from it. They want eyeballs and engagement of people who might buy their products. And, emboldened by the possibility of building and owning their own content, they don't want to pay media costs to others to get them. There's also some amnesia around the fact that advertising, during harsh economic times, is the first thing to go.
That doesn't mean a new ad-supported business can't make it, just that it will play in an intensely competitive and fragmented environment. There doesn't appear to be a ready figure that tallies up businesses that rely on advertising, but, to get a sense of the clutter, consider a few indicators:
First, on Crunchbase, the company database maintained by the blog TechCrunch, "advertising" is among the most-popular tags. As of last Tuesday, it cataloged 1,372 companies in the ad business, from 10th Degree to Zygella. Compare that to 417 for e-commerce, 192 for health care and 268 for green, each a popular area of venture investment.
Then there's a chart prepared by the investment bank Luma Partners that visualizes the ad-tech environment, plotting the colorful logos of the various companies in their appropriate categories. It looks like a post-sushi-dinner puke. That's not a swipe against the graphic design ability of its creators, but rather a comment on an incredibly complex and crowded scene comprising a chain that begins with the budgetary will to develop an internet ad, through its creation, optimization and distribution, to its delivery to a consumer's retina, to whatever commercial impact it might yield.