Confessions of a Startup CEO

What’s the worst part of the VC process?
Easily the worst part is the lousy partners at some firms who never say no, they just string entrepreneurs along. This is not normal. The best thing you can have is a fast yes, the second best thing, though, is a fast no. I feel bad for entrepreneurs who do meeting after meeting with partners at firms that just aren’t ever going to get there.

Do VCs truly understand the market dynamics, or is there more a herd mentality?
Good VCs understand the markets extremely well and are constantly trying to learn and get better. That’s actually what feeds the dynamic I mentioned above. VCs are professional investors; it is their job to understand the company, the ecosystem, etc. Most partners I know read a ton, meet as many companies and entrepreneurs as possible and talk to their peers to try to pick the winner. Frankly, regarding VCs, I think they mostly get a bad reputation that they do not deserve. Most ideas are bad, most entrepreneurs are bad, and most teams are bad. For some reason, we as an industry want to believe venture capitalists are stupid and evil. I just haven’t found that to be the case. They may not like your business, of course, but they aren’t evil. I had a VC tell me once that he met 350 companies in one year and gave six term sheets. That’s the market. For some reason, we spend a lot of time forming our opinion of VCs by the 344 that don’t get funded. That’s just silly. Imagine if our opinion of Harvard was taken only from listening to the 97.5 percent of applicants that don’t get in. Very odd. Sure, there are VCs who are dumb, but plenty of entrepreneurs have shitty ideas or have good ideas but have no ability to execute on that good idea. Go ask successful entrepreneurs about their VCs, and you will mostly hear positive things.

What do you make of the current ad-tech market?
Seems to be calming down a bit in terms of new entrants/entrepreneurs, which is a good thing. I believe the financing markets have realized there won’t be 50 big ad-tech companies and have slowed the funding pace down a lot. Google owns the entire ecosystem. There may be four or five other decent companies in the space when all is said and done, but most of the companies started and funded in the last decade are going to either go out of business or just exist as zombie companies where they have some business and break even but won’t ever return the money to their investors because there isn’t an IPO or M&A market.

Why is it inevitable that Google will own the ad-tech system?
Google doesn’t get enough credit for their strategy and execution in the ad-tech world. It wasn’t inevitable when it started. It was just smart enough to buy the right assets, leverage their relationships with millions of advertisers, buy other great assets to supplement their offerings, etc. Now, it is inevitable for a simple reason: Advertisers and publishers don’t want there to be an ad-tech industry. Ad-tech, at its best, should enable advertisers to buy what they want and publishers to sell what they want and should fade away. People want solutions, not unique features. Google is in the unique position with all of their publishers, advertisers and data to drive up innovation and, most importantly, drive down pricing to reasonable levels. I think Google is smart enough to continue buying integrating unique solutions into their core platforms.

Will clients crack down on trading desks for double-dipping and taking too much margin?
I believe the original sin of Web advertising was that clients were so focused on the fees they paid their partners (the agencies) that all innovation was pushed out of the agencies and into the ad networks. The agencies are just an extension of the advertiser, the networks are their adversaries in a way. Ad networks aren’t anything more than outsourced media planning and buying; those services are worth 15 percent, maybe, not 50 percent. To answer your direct question, I expect advertisers to eventually go nuts and push down agency fees yet again. If they were smart, they wouldn’t worry about the trading desk fees and they’d go after the real culprits driving the insanity of Web advertising.

Why do so many ad-tech acquisitions fail? It seems like the acquirer quickly abandons the tech in a lot of cases.
I disagree. I think most of the “failed ad-tech acquisitions” were really more acquisitions of ad-tech companies by failing companies. I don’t believe Right Media was a bad asset for Yahoo. It was a crazy price, but that was the market at the time. Yahoo has been a slow-motion train wreck for the last decade. Yahoo fundamentally believed they were more important to the online ecosystem than they were, so they had no chance to leverage Right Media because Yahoo just doesn’t matter that much and they have always been bad at building innovative technology. That’s the exact same issue with all the stuff Time Warner acquired for AOL. Ad.com wasn’t ever an important player, so rolling up a lot of other assets wasn’t going to matter. Microsoft and the load of shit they bought is yet another
example. I would argue that when good, healthy, well-run companies buy good ad-tech assets, there has been a really high success rate. Adobe’s stuff has been great for them. Google’s ad-tech acquisitions have a great track record. The Platform seems to be going well for Comcast. If anything, I believe that people have realized that ad-tech acquisitions can give your business great leverage, but they are not a strategy unto themselves so if you don’t have a strong, important place in the ecosystem you’re in trouble regardless.

Are many middlemen still taking too much margin?
Absolutely, but it is trending down thanks to transparency. Advertisers seem like they understand how badly they are getting ripped off. This will not be the case in another decade.

What’s your take on the state of agencies?
Struggling to find their place. They still matter a lot for their clients, but their business isn’t fundamentally profitable enough to retain great talent. I think social is the game changer for agencies. If they own the social, customer service, earned media for their clients, they will matter. If that moves in house, they’ll continue down the margin-squeeze death spiral they’ve been in since the early ’90s.

Are standardized display ads forever commoditized?
Of course, but that isn’t a bad thing at all. People misunderstand supply and demand and act like this is a bad thing or that it is changeable. It’s gravity. CPMs are heading towards zero for most inventory because there is truly unlimited supply. That’s not because creative is bad, it isn’t because agencies are stupid or anything like that. It’s just simple supply and demand.