Norwest Venture Partners Taps Engagement Thesis As Portfolio Expands Says Managing Partner Crowe

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Norwest Venture PartnersJeff Crowe is Managing Partner of Norwest Venture Partners (NVP).

NVP's portfolio includes companies such as Admeld, Brand.net, Turn, Komli, Kayak and SocialVibe.

AdExchanger.com: Recently it was announced that Google will buy NVP portfolio company Admeld pending regulatory approval. What intrigued you about Admeld initially? And, beyond a successful exit, what is it that Admeld did/is doing that you would hope for all of your portfolio companies?

JC: My original interest in Admeld came from the time that I was spending in the display space. I saw how DSPs like my portfolio company, Turn, were benefiting advertisers, and I thought that advanced technology platforms for programmatic selling would equally benefit publishers. When I looked at the supply side platform vendors, I really liked the Admeld team, their technology platform and their traction with premium publishers. Since our initial investment, Admeld has done many things right, but they have been particularly good at listening very closely to what their publishers want and then moving swiftly and creatively to develop innovative solutions for those publishers.

How and why is "engagement" playing a part of NVP's investment thesis?

In the online advertising world, we are constantly looking for new forms of advertising that are more effective with users and deliver superior results for advertisers. We think that engagement advertising is an up and coming form of online advertising, because it motivates a user to willingly take a quick set of actions with a brand that drives up the user's recall of the brand, intent to purchase, etc. Let me give you an example: our portfolio company SocialVibe offers engagement ads to Zynga users who want to earn more currency while they are playing a Zynga game. The user watches a short video, say a 30 second spot for the movie Toy Story 3, answers a simple question about what his or her favorite toy was as a child and shares that answer with friends via Facebook and Twitter. For that, the user gets virtual cash to spend within Farmville, which is what he or she wants. It is the act of watching/answering/sharing on Toy Story 3 that makes this user score higher on all traditional downstream advertising metrics for the movie. So it is a win all the way around: the user gets what he or she wants, SocialVibe and Zynga split the ad revenue, and the advertiser gets big bang for its advertising buck. It is working so well that the engagement advertising world is now exploding -- hence our attraction to the space.

Other than "engagement," what else is part of NVP's thesis? Any thesis changes in the last year?

We continue look for early stage innovators as well as later stage investments in market leaders in ad tech, e-commerce, mobile, consumer finance, as well as social and gaming in the consumer and enterprise worlds. That has been consistent for the last couple of years and has resulted in such recent investments as Admeld, SocialVibe, WhaleShark Media (online coupons), Clarus Marketing Group (loyalty offerings for consumers and merchants), Quirky (crowdsourced product development), Snapfinger (online ordering from restaurants for takeout), Branchout (career networking on social media), Badgeville (social rewards platform), Extole (social engagement platform), and Motif Investing (online retail investment platform). I don't know that we have changed our theses over the last year as much as expanded them. For example, we have spent considerable time over the last year taking our learnings in the US market, using those to predict what is going to happen in China and India and selecting innovators and early market leaders in those regions. This has led to investments in AdChina, Lashou, and AllReach Media in China, along with Komli and Quikr in India -- all leaders in ad tech and e-commerce in their countries. We have a number of additional exciting investments teed up in both countries that we'll be announcing in the upcoming weeks.

What has surprised you about the digital ad tech space lately?

I have been surprised by the large number of M&A transactions in the ad tech / digital media space over the last 12 months (Terry Kawaja counts more than 40), and yet it continues to feel like all market segments remain heavily populated and brutally competitive. For each company that has an exit, whether a successful sale or a capitulation, there seem to be two or three more that take its place. It's like "whack-a-mole." I keep expecting a net consolidation of companies and I'm not seeing it. The VC's must be to blame.

Do you see a connection between the real-time bidded world of exchanges and brand dollars and its brand-awareness goals?

RTB is ultimately about targeting audiences cost effectively and at scale. I see that with Turn on the buy side and Admeld on the sell side. Over time, the compelling economics of RTB for advertisers also means that more and more publisher inventory is making its way onto RTB exchanges as sellers respond to buyers' desires. Advertisers can use RTB to drive for all kinds of success metrics, including brand awareness goals, performance goals and various hybrids in-between, even when RTB has been mostly focused on remnant inventory. This has already been going on for the last couple of years. Now with the advent of private exchanges that firms like Admeld offer to give publishers more control over the sale of their inventory in RTB, we will see more premium inventory start to move via RTB, not just remnant inventory. And premium inventory has historically been the domain of pure brand advertising. All of these factors coming together mean that advertisers who want to programmatically attain brand-awareness goals with specific audiences will increasingly use RTB.

How does NVP's fund work -Are you mandated to use funds by a certain date, for example, or in a certain area of investment? How do you manage the requirements of the fund versus making appropriate investment choices?

No, we have no mandate to invest funds by a particular date, so we do not have any particular time pressure to invest. We simply invest in the best companies as we find them. Overall, we focus our investment in the areas of information technology, health care, consumer goods and infrastructure. The bulk of our investment over the last 20 years has been in information technology, and within the IT arena, we invest in everything from consumer internet firms like the ones listed above to semiconductor companies.

Do you expect infrastructure players like Oracle, Cisco and IBM to get more and more involved in the business of marketing? If so, when?

We do expect that the mainstream software vendors such as IBM, Oracle and SAP will increasingly go after applications that cater to the needs of the CMO, including applications that pertain to online marketing. It is a natural direction for enterprise software vendors to take, as they already sell applications to all the other functional heads in the C-suite. You saw IBM move in this direction with its acquisitions of Coremetrics and Unica. One interesting question here will be how far the big software companies want to go with applications that involve buying online media. Will these companies stop with just the analytics regarding audience targeting, or will they expand to go after the big data stores for marketing and will they go all the way with the software to buy the media itself? It keeps getting tougher to separate data/analytics/media buying, as software and the buying/selling of media are increasingly intertwined, and DSPs and DMPs work together more seamlessly. None of the big software companies have yet stepped up to go after software that does media buying, but I expect that they will in the next 12 - 18 months.

 There has been plenty of talk about an investment bubble. What are your thoughts on the topic?

We should be selling more than buying right now! Seriously, a lot of capital continues to come into the digital media space, top companies are commanding exceedingly strong valuations and too many companies are getting funded across the eco-system. That makes it a challenge to invest -- avoiding the "me-too" companies that will never achieve breakout status and not overpaying for the market leaders. The good news is that there is a lot of growth still available to both the innovators and the market leaders in the digital media world. So, as investors, we focus on keeping a steady pace of investment in early stage innovators and more established market leaders, regardless of the investment climate and valuations. We also work to make sure that, if/when a bubble pops and valuations decline, or worse yet, the economy reverts to another recession, our companies are sufficiently funded so that they can pursue growth for the long term and not worry about short term gyrations in the economy or stock markets.

How much does serendipity play a part of investment today?

At one level, all investors have to be humble enough to know that serendipity plays a large role in investment success, as it is so hard to predict which companies are going to succeed, to know when to invest in those companies and at what prices, and finally to know when to exit the investments. This can often be a truly humbling business. That said, the top tier investment firms that have the best track records, networks and deal flow seem to consistently enjoy a lot more serendipity than the rest of the venture world over a period of many years. So it cannot be all luck!

Follow Norwest Venture Partners (@NorwestVP) and AdExchanger.com (@adexchanger)on Twitter.

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