Pattern Recognition, by Ian Sigalow

A License to Print Money

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Ian Sigalow

Ian is a co-founder and partner at Greycroft Partners in New York City. He has been a venture capitalist since 2001.


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A License to Print Money

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For all of you tv watchers out there, have you ever wondered how the advertisements you see on television actually get to the station?  If the ad is from Coke, Ford, Geico, Hyundai – and many, many others – chances are that one of our companies, Extreme Reach, is delivering that ad spot.  Extreme Reach is one of the lesser known companies in the Greycroft portfolio, although I expect that is going to change in 2011.  As the title suggests they are doing really well. 

Extreme Reach is a young company – they were founded in mid 2008 – but they have quietly built a digital network that connects advertising agencies to television networks, such as ESPN, NBC, etc.  Media companies are notoriously hard to convince to sign up to new technologies, and it has taken John Roland and Tim Conley two years to get the pieces in place.  But once you have the media companies signed up this business has large network effects – kind of like computer operating systems.  It is not winner-take-all, but it is winner-take-most.  The business model of delivering advertising from agencies to publishers is generally called ad serving.  And our bet is that Extreme Reach will become the undisputed king.

A nine sentence history of the ad serving business:  the original ad server, back in the 1970’s, was Federal Express.  Advertising agencies needed a way to get tapes shipped to TV stations, so they sent them in a FedEx box along with instructions.  The ad agencies would literally dub copies and send them in packages across the globe.  The next iteration of that concept used satellite networks to beam the spots.  There is a public company called DG Fastchannel, which is a conglomeration of satellite distribution companies, that owns the satellite distribution market today.  The team from Extreme Reach previously founded FastChannel and took it public years ago, before it was merged with DG Systems to become a billion dollar public company.  In the online domain, DoubleClick currently has the leading display ad serving product, which is called DART.  DART was built at a time when the Internet was not fast enough to distribute television advertising, and as a consequence DART is designed for banner advertising online.  Google bought Doubleclick for $3bn in 2008, primarily for the DART asset, and Google has bet their display media business on this technology.  Analysts expect that the Google Exchange, which at its core uses the network from DART, will generate many billions of dollars in revenue this year.

The innovation of Extreme Reach has been using the Internet in lieu of satellite networks for television distribution.  One of our core theses at Greycroft is that the advancement of Internet technology – faster bandwidth, cheaper storage, limitless computing – is enabling new business models.  That is certainly the case with Extreme Reach.  They have the know-how and customer rolodex, but just as important they are riding a new technical trend.  This is a trio we don’t see very often and the results have been impressive.

The reason I am bullish on Extreme Reach in 2011:  Internet video delivery.  We are already known in radio and television, and we are winning major accounts in these markets, but traditional media is a sleepy world for venture capitalists.  Online video is where the action is, with a dozen companies like FreeWheel, Auditude, Live Rail, etc racing to own what promises to be the next billion dollar market.  These companies all have different angles on the market – some are working with advertisers to help them deliver ad spots, which is called agency ad serving (and the most analogous value proposition to Extreme Reach), and others are working with publishers like Yahoo to help them flight video campaigns that their ad sales team has sold, which is called publisher ad serving (which Extreme Reach has no interest in doing).  The lexicon is confusing online and truthfully it is still the wild west, with companies running from side to side to see what sticks.  What Extreme Reach has today is a huge library of video spots, transcoded into the right format for online delivery, an all-digital network that is capable of delivering the spots to online publishers, and advertisers who want a one-stop shop for delivery and reporting.  My bet is that the next billion dollar company is not going to be a pure-play in online video, but rather a cross platform play that harnesses the power of multiple mediums.  Extreme Reach is poised to be the company that finally makes this happen.

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Ian Sigalow

http://sigalow.com

Ian is a co-founder and partner at Greycroft Partners in New York City. He has been a venture capitalist since 2001.

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