The VC Fixer Upper

I had a visit from an entrepreneur yesterday who was deliberating about whether to take on a CEO job at a venture-backed company or start a new company from scratch.  The only problem was that the VC deal had some hair on it… $15MM of paid-in capital, nominal revenues, and just a few customers. I frequently see people in this situation and always give them the same feedback: run from a VC-fixer-upper as fast as you can.

A venture turn-around is a lot like remodeling a New York City apartment.  My wife and I remodeled our apartment in 2012, and everything that could go wrong, did go wrong. Permits were delayed for months, demolition revealed wiring and pipes that changed our plans, our co-op board mandated new A/C units at an exorbitant cost, our upstairs neighbors sued because “vibrations” caused a family heirloom to break, Hurricane Sandy prevented the construction crew from coming to work for two months (in reality they took other jobs where they could make more money), and on and on and on. In the end our 6-8 week project took a year to complete, and it cost three times what our contractor quoted.

If you think this sounds bad, turning around a broken start-up is worse.

In the start-up world, three or four companies get funded at the same time to solve the same problem. If a company stumbles out of the gate, wanders aimlessly for two years, and spends all its investor’s money – it has already lost.  There is no fixing it.

The only time I have seen a venture turn-around work is when the management team pivots the business into something entirely new. This is what I tell the prospective CEOs who come to my office. If you take over a broken deal, be prepared to start over and turn it into something else. At that point you have to evaluate whether it is easier to start a company with $15MM of liquidation preferences and a tired team, or start something from scratch.

Foundational Technologies

Humans have always been farsighted, but few knew it until 1450. In 1450 Gutenberg invented the printing press and soon afterwards the masses were reading. Then people suddenly realized that they couldn’t read small print, which created a huge market for reading glasses.

Reading glasses led to microscopes, which led to telescopes, which led to fiberglass, which led to fiber optics, which led to semiconductors. Silicon comprises over 90% of the Earth’s crust and it was useless until 1450. Now we can’t live without it.

The chain reaction that went from printing press to semiconductors was impossible to see in advance, but technology is good at exposing things we always needed but did not know we needed. The on-demand economy is one such example. Sure, we had taxis before we had Uber. But the idea of mixing telematics and mobile messaging to make the physical world respond to your phone was new. And soon we will have the “uber”-ification of everything.

Another foundational technology is 3D printing. Right now 3D printing is associated with tchotchkes and MakerBot, but we are on the doorstep of a revolution. Within the next few years everything that is made with job production (i.e. one-off manufacturing process) will be made with 3D printing. This means faster prototyping, lower manufacturing costs, less inventory, and cheaper replacements. 3D printing will make hardware investments exponentially more lucrative because it lowers the capital intensity of these businesses. And in the distant future, 3D printing will enable humans to travel through space because we won’t need to be tethered to the earth for spare parts.

Another foundational technology is virtual reality. While VR is largely a hardware and software technology, the biggest opportunity in virtual reality is content. Nobody has expertise in developing for the VR medium, and a lot of the old content rules need to be rewritten. For instance, the average cut in a typical motion picture is just three seconds long. In VR you can sit for minutes and be fully engaged in a shot, turning your head to follow the story. I have seen demos of this tech on Oculus and it is clearly the future of movies, gaming, and sports. The only problem is that once you see it you never want to watch “flat” television again.

Yet another foundational technology is sensors. Sensors underpin everything from wearables to driverless cars. Like other silicon technology, sensors follow Moore’s law. And as they become cheaper they will also become ubiquitous. Forks that tell you when you are eating too fast? Check. Baby socks that measure blood oxygen level? Check. Breathalyzers that check for cancer? Check. One of my favorite quotes from Heart of Darkness is, “One can’t live with one’s finger everlastingly on one’s pulse.” Joseph Conrad never anticipated Fitbit.

So what do I make of all of this?

I think these technologies pose the greatest opportunity for investment in the history of mankind. Period. And we are just at the start. Yes, I think the venture market is bubbly right now. And yes, I think some companies are over-valued. And yes, I think there is more noise than substance coming from Silicon Valley. But in spite of all of that, as I sit in my NY apartment in the winter of 2015, I am very optimistic about the opportunities ahead.

The Year of the Undercorn

“When a venture-backed company breaks through the $1BN valuation mark, we call it a Unicorn. When the same company falls back below the $1BN threshold, it becomes an Undercorn.”

-Dan Primack

In 1974 Wilshire Associates launched an index with the aim of tracking every public company headquartered in the US. They called it the Wilshire 5000, where 5,000 was roughly the number of public companies at the time. At the end of the first Internet bubble in 2001, the Wilshire 5000 had swelled to about 8,300 companies. Today, the Wilshire 5000 is a pale shadow of what it once was – only 3,700 companies remain.

A lot has been written about the decline of the public markets. Nonetheless, companies still go public every year. In 2014 almost 100 venture-backed companies successfully IPO’ed. The odds are roughly 1-in-1,000 that an investment will go all the way from Seed to IPO and it takes, on average, 11 years to make the trip. But if you think going public is hard, stop and consider the hurdle to staying public.

In order to stay public, companies need predictable revenue, operating leverage, high barriers to entry, growing markets, and on and on. Otherwise you end up among the walking dead – valued for the cash on your balance sheet, traded by appointment, burdened by all the costs of being public but without any of the benefits. Great engineers don’t join walking dead companies, so technology businesses have a particularly hard time reversing this situation. But they are not alone. The average lifespan of an S&P 500 company, representing the best blue chip stocks in the world, has been cut in half since 1974 and is now down to just 18 years.

Now consider the contrast between the public markets and the late-stage venture market.  The number of privately-held companies valued at over $1BN is at an all-time high.  There are currently 40 venture-backed start-ups valued at over $1BN in the private markets, and 27 of these companies are headquartered in San Francisco. Investors assume that each and every one of these Unicorns will have a successful IPO at many multiples of its current valuation.

In case you believe the public market will absorb these companies at a premium, here is a point of reference. There are only 71 publicly-traded technology companies headquartered in Northern California with a market cap of at least $2BN… and this list is declining at the same rate as the market in general. Meanwhile SF-based VCs have been minting similarly-valued companies, in the private markets, at a rate of one per month for the past two years.

Earlier this year one of my partners made the comment that we are witnessing “private market intoxication and public market sobriety.” I have been struggling to explain why this is happening, and I think the answer lies in a structural difference between VC investors and public market investors.

Consider this example – a hedge fund decides to invest in a publicly-traded grocery company. The hedge fund hires data scientists and builds a panel to track consumer spend. A single panel can tell you how Whole Foods is doing relative to Fresh Market based on the amount their customers spend, how many times per week their customers shop, whether they are successfully converting users from less expensive groceries, average revenues derived on a store-by-store basis, and on and on. The information is not perfect, but it is accurate enough to take a long position in one company and a short position in another. Eventually the better business appreciates and the worse business declines. In the meantime the hedge fund is perfectly liquid, can cancel the trade at any time, and has a long time to make up his or her mind.  This process, when repeated thousands of times, results in very efficient pricing.

Now consider the venture market. A grocery start-up like Instacart meets with a half dozen Silicon Valley VCs. If a VC wants to win the deal, he or she has to move quickly, lest the company decides to go with someone else. A VC can’t use short selling to balance the position. A VC doesn’t employ data scientists to build proprietary consumer panels. And if the VC wins, he or she is locked up, potentially forever, unless the company goes public or gets bought for billions of dollars by the two or three companies that can afford to make such an acquisition.  Also assume that the VC has lost a couple of deals in the past (there are five losers for every winner in this example) and in hindsight has seen companies go on to become huge outcomes.  This process, when repeated thousands of times, results in very inefficient pricing.

One interesting fact is that the same research that determines whether Whole Foods will prevail over Fresh Market can also determine the fate of Instacart. And if grocery is not your bag, how about predicting if Uber will prevail over Lyft? Or answering the question of whether ZocDoc will be as valuable as OpenTable, even though consumers visit doctors 1/100th as often as restaurants. And perhaps someone knows whether Palantir should be valued as a software company or if it really scales more like a consulting firm. I have a feeling that the smartest investors have solved these riddles already while they patiently wait for the Unicorns to go public.

Meanwhile we keep stumbling upon panel companies in our internal research and have decided to fund the two we liked the best. The first is AppAnnie, which is the definitive panel for mobile application data. The second is Earnest, which is the definitive panel for consumer purchase data. Both companies provide large, clean, 100% opt-in datasets. We use them on virtually every consumer investment we do. Perhaps one of the positive outcomes from this blog post is that more VCs will pay attention to these services going forward.

So back to the Undercorns…

The “$1BN+ valuation private round” is a relatively new phenomenon.  I am sure that a few funds will make a killing if they are smart enough (or lucky enough) to bet on the next Google, Facebook, or Twitter pre-IPO. I also think that this market will last through 2015 and potentially into 2016, because right now everyone is cautious.  In my experience valuations only reset when everyone thinks they are invincible.

That said, in the past year we saw RocketFuel, Chegg, Millennial Media, Jive, Fab.com, and Horton Works earn the Undercorn distinction. There are a lot of other companies that are trading below their private market valuations (New Relic, Zynga, Groupon), but these companies are still valued at over $1BN so are not technically Undercorns by the Primack definition.

My theory is that we are going to see more Unicorns in 2015, followed by Undercorns in 2016. It takes a long time for companies to burn through large funding rounds, but bad businesses generally do not succeed in the long run.  2015 promises to be an exciting year under any circumstances, and I am looking forward to watching this all play out.

The Shenzhen Experience

I just arrived in Shenzhen for my first trip to China in a decade.  It is Saturday night and the streets outside my hotel are crowded with revelers wearing party hats and waving balloons.  I am not exactly sure what everyone is celebrating, but it has snarled traffic for miles.

Shenzhen is an unbelievable place.  In the past 35 years the city has gone from a small fishing village on the pearl river delta to a 15mm person metropolis, larger than NYC.  The growth is mind boggling.  Shenzhen has added nearly 7mm people since I was last in china in 2004 and it is still growing.  In fact it is adding a city the size of Boston or San Francisco to its population every year.

When I got off the transfer boat from Hong Kong an hour ago I was immediately struck by how the air smells like a campfire here.  They have warnings online about breathing the air, but people are still outside playing basketball and riding bikes.  To pass the time on the cab ride I counted the number of cement mixers and bulldozers going who-knows-where at 10PM on a Saturday night.  I lost count somewhere in the mid-teens.

On the main highway we were driving bumper-to-bumper with Mercedes, BMWs, and Audis.  The streets are lined with palm trees.  We could have easily been in Miami.

Meanwhile, the cabs charge 2.40 RMB per kilometer, which in USD comes to about 60 cents per mile.  I was doing the math on this – I figure that gasoline costs about 10-15 cents per mile and a car depreciates 20-25 cents per mile.  At the speed we were driving a taxi cab driver in Shenzhen is lucky to clear $4/hour.  I don’t get the sense that Uber is going to go well over here, unless they somehow make it up on volume.

My last thought for the night is that most of the US-based websites, including my blog, load very slowly in China. However I did an Internet speed test and I am supposedly getting 10 mbps.  I am guessing that none of these companies have local hosting so the data packets are making a round the world trip to get to my screen.  This is probably what the Internet would be like in the US if not for the scientists at Akamai who invented the CDN.




Where Are We Going?



In 1999, the Wachowski Brothers released The Matrix, set in a dystopian future where software governs the world and humans are bred into captivity.  I recently watched the movie again, fifteen years later, and a new thought came to mind.  In the movie, humans ended up in a predicament after losing a war to the machines.  In real life, I think there is a chance that we will opt into it.

Today’s Wall Street Journal features a parent’s firsthand account, “Returning from work every evening, I would find two zombies — the cliché never gets old, because it is accurate — in front of the computer.  In a catatonic state, the children would respond to my greeting with an unintelligible mumble.”

But it is not just children.  We all rely on software, whether it is to fly planes, drive cars, measure vital signs, or deliver medicine.  Software often requires some amount of human intervention – for instance, the automatic-shifting, power-steering, cruise-controlling, collision-avoiding car *still* requires someone to hold the wheel and occasionally push a pedal.  But even that minimal amount of human interaction is going away soon.

Parents lament that their children spend so much time in front of a computer.  I have seen a glimpse of the future and this trend is not going to get any better.  Game designers are hiring psychologists to perfect the Skinner-Box-Game-Genre, which produces endless, addictively stimulating games.  Soon enough the game will be attached directly to your face with an Oculus virtual reality headset.  Then life becomes about virtual goods, purchased with virtual credits, which are debited from a virtual paycheck, that was virtually deposited in your bank account.

Food seemed to be like a final frontier – I thought no one would voluntarily give up solid food and consume tasteless nutrients through a tube.  But maybe I was wrong.  At first I thought this was a joke, but then I saw that Andreeson Horowitz funded it.  While software is busy eating the world, the world is busy eating Soylent.

Optimists will say that all this automation enables us to save time.  Pessimists will say that it enables more work to be done by fewer people.  My favorite video on this topic is “Humans Need Not Apply.”  It is the best 15 minutes you will spend on YouTube this month.  Ironically, I just clicked on it when writing this post and the preview ad was for a Dyson self-driving vacuum.

The perverse reality is that people plug in in order to “unplug.”  Come home, sit in front of the television, veg out.  Perhaps play a game on your phone, shop on your iPad, listen to music, and text friends.

And the result is that we are getting lonelier and lonelier.  And that is what troubles me most about all of this new technology.

So here is a thought experiment: when we spend too much time with machines it makes us feel lonely.  Yet, to avoid being alone, we spend more time with machines.  This is the crux of why I think the end state for humanity may not be so promising.

Food in America

(PHOTO OF DINNER AT SIGALOW HOUSE – 8/25/2014 – #NoFilter)

Did you know that 50 years ago there were no Thai or Japanese restaurants in the United States?

When I first heard that factoid I didn’t believe it. From my apartment on the Upper East Side, I have delivery options from 6 Thai restaurants and 18 sushi restaurants, each within a short walk. But that is just the start. Menupages.com divides its selection criteria into 103 different cuisines. Chinese food can be ordered at the province-level (Szechuan, Cantonese, etc). And this is not just a NY phenomenon – all over the country consumer’s palates are becoming more diverse.

At the same time, food helps us connect with the past. Grandpa Milton (my wife’s grandfather) owned a Jewish deli on the Lower East Side. His cooking is legendary. Many people have a similar story – whether it is an Italian Nonna or Polish Babka – about a grandparent’s cooking. They may even have recipes that go back to when their families first came to America.

Unfortunately, the ritual of weeknight cooking has taken a 30 year hiatus. By the 1980s, drive-through windows and take-out entered the main stream. And, for the first time, more households than not had two working parents. I was lucky to have family dinners growing up, but it was a different experience from my parents’ generation. We had home-cooked meals that my mom prepared after work, but we also had Boston Market chicken, House of Hunan, Rudolph’s ribs, Leonardo’s pizza, and a fried chicken place called Jimbos that was later converted into a gas station. Of the home-cooked recipes, a few were really excellent. And then there was “chicken-in-a-pink-sauce”.

It is no surprise that we are struggling to cook in the 21st century. It is a complex issue because we want healthy food. We want food that is easy to prepare. We want food that fits our personal taste profile. We want food that is priced reasonably. And we want food that can be found in any US grocery store.

A few months ago I met with the team at Plated. They came up with a brilliant idea – it starts with a service that essentially replaces grocery shopping. Plated delivers DIY meals, with each ingredient and spice portioned to prepare at home. Every week they have 7 new recipes to choose from, plus accompanying videos on YouTube in case you need help. I have been using the service for the past few months and have taught myself how to cook over a dozen new dishes. In the process we have also saved time and money, and I find that I am eating a lot healthier than take-out alternatives.

What these guys have done in a short period of time is almost miraculous. They already deliver in 40 states. They built a fulfillment center in the South Bronx, which is the poorest Congressional District in the country, and employ over 150 people with benefits. And they have been on Shark Tank, twice.

Last week we closed our Series A investment in Plated. It is the largest initial investment we have made at Greycroft, and I am very proud of my association with the company. The food sector is the largest market we have tackled at Greycroft, and I think Plated has the potential to be a colossal business.

Dark Pools Come To Madison Avenue


This piece was originally published on Business Insider.

Dark pools on Wall Street were once heralded as a way for clients to get better deals on stock trades, but now they are associated with fraud and market manipulation.

In the latest dark pool scandal, Barclay’s was accused by the New York Attorney General of misleading investors by funneling trades into Barclay’s dark pool without prior consent.  Barclays lost over $5 billion in equity value just moments after the news was released.

For those who aren’t familiar, “dark pools” are essentially private stock exchanges. The theory is that a bank can match buyers and sellers from its own trading book, resulting in lower fees and benefiting both parties. There is also an argument that trading in stealth helps clients get a better price.

Both of these theories have largely been debunked. Exchanges are a prime example of a natural monopoly, where buyers and sellers get better pricing and trade execution as exchanges get bigger, not smaller. Dark pools have persisted, however, because they are huge money makers for Wall Street banks. They essentially allow the bank to trade against their own clients in secret, and not surprisingly they are now a source of ignominy.

Unfortunately it looks like Madison Avenue is following in the same footsteps.

Last week WPP announced that they are going to create the first “dark pool” in adtech. Rather than buy media on a public exchange, WPP plans to create a private exchange. The storyline sounds like a chapter from Goldman Sachs in 2001: “If you trade on our private exchange, you save on fees and get better pricing on media.” Unfortunately this ignores the logic around how marketplaces actually work.

In the interest of full disclosure, Greycroft has significant adtech investments that may be affected by this trend, but I am sure the announcement has other people scratching their heads as well. One obvious question is why would a publisher voluntarily move from Google’s exchange, where they get paid a lot of money, to WPP’s exchange, where they are promised less money?

In all likelihood, there are deals going on behind the scenes. In the past, tech companies have used guaranteed spend to move publishers onto new platforms, allowing a publisher to make at least as much money as they did before. Our adtech companies do this off their balance sheet and assume the risk if it doesn’t pan out. This would be the first time, however, that an agency would use client dollars to accomplish the same feat.‎

‎If you are curious about how this benefits clients, so am I. The one thing that is very clear to me, however, is how it could benefit a media agency that is on both sides of the transaction.‎

Therefore, buyers beware! Free and open buying and selling of advertising works best in a free and open market, not one where the owner is trading on the same system. Remember that you heard it here first, while there is still time to resist the power grab.

A Model For The Long Run

Back in 2006, when my partners and I set up Greycroft, every VC we knew insisted on 20% ownership, board seats, and being a “lead investor”.  We built Greycroft on the premise that there was a better way to do venture capital that didn’t require arbitrary rules for entrepreneurs.

Venture capital is a long term business, which gives investors an opportunity to build trust and equity over time.  For instance, I am still on the board of Collective, which was my first investment at Greycroft in 2007.  That was seven years ago.  In that span I met my wife, got married, bought a house, had a kid, and had innumerable other life events.  And seven years is not unusual in the venture business.  As of 2013, the average holding period of a venture-backed company from Series A to IPO was 8.1 years.  Some of the sectors we invest in have even longer holding periods, such as IT Services (9.1 years) and Telecom (16.8 years).

Every entrepreneur should stop and consider this point.  If you are successful, the person you raise money from may be your partner for your entire career.

With this in mind, my partners and I felt it was wrong to start a relationship based on arbitrary requirements.  In particular we always chafed at the notion that an entrepreneur needed to sell 20% of his or her company to a firm that he or she barely knew.

So we came up with a different model.  Instead of insisting on 20% at the beginning, we decided to syndicate every investment and focus on proving our value over time to entrepreneurs.  And instead of Greycroft insisting on board seats, we decided to only take board seats when an entrepreneur insisted on having us.

This may seem like a small change, but it puts the onus on us to perform. In order to build a meaningful position in a company we must become an entrepreneur’s best partner.  If we do that, entrepreneurs make room for us in secondary investments and follow-on investments, which allows us to build up ownership over time.

A lot has changed in the eight years since we started Greycroft, but to this day we are the only firm I know with this strategy.  And it has worked for us time and again.  We were originally a small investor in Buddy Media, owning just over 4% of the company, and when we sold the company four years later we were the second largest shareholder.  It was a similar story at Vizu, Pulse, Maker, Babble, Extreme Reach, M5 Networks, and a number of other successful investments.

What is native advertising?


In the past year we have looked at over 100 companies claiming to do native advertising.  If you haven’t heard of native advertising you will soon, because it is the hottest trend in online advertising right now.

I figured it would help to clarify what native advertising actually means.  I wouldn’t normally do this, but so many people who claim to do native advertising are definitively not doing native advertising.  Someone needs to define this segment.

There are two components to native advertising:

Part I: Native advertising is an integrated ad unit on a publisher’s website.  It is customized to fit into a consumer’s normal browsing behavior as defined by the publisher.  This means it looks and feels like any other piece of content even though it is sponsored.  The sponsorship is labelled, although it is often in small print.

But that is not all.

Part II: If a consumer clicks on a native ad, he or she must get the same action that results from clicking on any other piece of neighboring content from the publisher’s website.  THIS IS THE MOST IMPORTANT PART OF NATIVE ADVERTISING. Otherwise you just have a rich media company.

Here are two examples in case this second point is confusing.

Example 1: Let’s say you go to the New York Times homepage and click on a story.  That action always takes you to another page on the New York Times with the story. Similarly, clicking on a native ad on the homepage takes you to a deep link on The New York with the sponsored story.  The landing page must look and feel exactly like any other page on the New York Times and it must be on the New York Times domain.  In this context, a native ad does not hijack the consumer and take him or her off to another website.

Example 2: Let’s say you go to DrudgeReport, which has no proprietary content but is just a list of links to other websites.  If you click on a story, Drudge opens a new browser tab and sends you to that website.  A native ad would have exactly this same behavior.

Part of the problem is that agency RFPs are confusing the market because they do not differentiate between a rich media campaign (banner ads disguised to look like content) and true native advertising. I have seen a bunch of examples floating around.  Hopefully this helps with the definition.

High Frequency Media Buying

Archaeologists debate when the first stock exchange was formed – most say it was around 400 BC in ancient Rome. By that account the hand-to-hand trading of securities existed for over two millennia before the US Congress and SEC authorized the first electronic exchange in 1998.  Within a few years the physical stock exchange was replaced by computers, and computers changed everything.  The spread between buyers and sellers decreased by a factor of 100x, the volume of trades increased exponentially, data scientists became more wealthy than public-company CEOs, and protesters occupied Wall Street.

I mention this short history because the media business is following the exact same path.  And just like the financial markets, fortunes will be made and lost over a short period of time.  It is hard to grasp just how fast this space is changing – I have spent the last eight years looking at the market and still underestimate how quickly budgets are moving to electronic, biddable forms of online media.

The main term that people use to describe this movement is programmatic advertising.  Here is an overview of programmatic if you are interested.  In general, “programmatic” is a good descriptor, but it only captures a subset of the new phenomenon.

A broader term that we use at Greycroft is “indirect advertising”. Indirect refers to any ad revenue that originates without a sales team (usually through exchanges, networks, or affiliates).  Indirect advertising already accounts for the majority of revenue at Google and Facebook, and I believe it will eventually take over 90% of all online media budgets.

Why is this happening?

There are three main advantages with indirect advertising.

The first advantage is control over media selection/optimization.  In the direct world, agencies place a purchase order with a media company (i.e. agency says “we are buying 10mm impressions at a $5 CPM on your home page”) and the media company runs and optimizes the campaign.  As a result, every campaign gets some component of high-performing impressions and some component of filler.  Even if a publisher is doing a good job he or she can only optimize against impressions on-site, versus a holistic view across the entire campaign and multiple websites. Indirect media planning solves this problem by allowing an agency or network to pick each impression across all publishers, in real-time. This results in better performance.

The second advantage is speed of execution.  Let’s say that a consumer engaged in some action – shopped for a pair of sneakers, researched airfare, searched for a car – and an advertiser wants to respond to that signal with an ad. By the time an agency goes through the traditional, direct mechanism of insertion orders and paperwork the user has moved on.  As a result, all advanced targeting campaigns use indirect for faster execution.  This is quickly extending beyond display and into other forms of advertising as well, like affiliate and email marketing.

The third advantage is proprietary data.  Let’s say that you know something about consumers that no one else knows.  In the direct world, you have to trust a publisher to hold that data and run the media for you, or you could disguise it by using “pages” as a proxy for “audience”.  On one hand you give up your secret sauce and on the other you give up performance. In the new, indirect world you can keep this data to yourself and execute in stealth. This is particularly important as more advertisers use first-party data to buy media and don’t want to share their customer files.

The move to indirect will inevitably create winners and losers.  I expect that we will see more media companies with 50%+ profit margins thanks to indirect revenue.  However, these companies will look very different from traditional media organizations.  For starters, they will need much larger audiences to compensate for lower revenue per page, and many of them will be built on larger technical platforms that provide the publisher with infinite editorial and large network effects.

I also expect that product companies will be major winners. We see new products launching on the Internet every day – from toothbrushes to mattresses – and they are using indirect advertising to pinpoint an audience and measure a marketing funnel from impression all the way through revenue and repeat purchase.

Last but not least are the advertising agencies. The big agency holding companies foresaw this shift and built internal ad networks to capitalize on the trend. As a result they are making record profits today from digital advertising. But beneath all the big data hyperbole is a common piece of licensed software, which is simple enough for most advertisers to bring in-house. Over the long run I have a hunch that the Internet will do what it has always done best – eliminate the middleman – just like it did to the stock market circa 1998.

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