Battery Ventures' Patel Sees More Skepticism Regarding Ad Technology Investment Than Years Past

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Satya Patel of Battery VenturesSatya Patel is a Partner at Battery Ventures, a venture capital and private equity investment firm.

AdExchanger.com: Battery Ventures has been around since the '80s as a venture and private equity firm. Looking at a high level, can you take us through some of the strategy pivots the firm has made in regards to digital media and why?

SP: While Battery has a long history in digital media, online advertising specifically has become more of a focus in the past several years. Coming to Battery three years ago, after many years at both DoubleClick and Google, it was clear to me that the display advertising market was going to go through a significant period of incredible innovation. Battery shared that view and has always focused its online advertising investments in companies that we believe have differentiated technology, network effects or switching costs and incredible teams. We've avoided investing in many parts of the online advertising ecosystem that we believe will be commoditized over time or difficult to scale and differentiate in the long term.

As an investor in BlueKai, Lotame, FreeWheel, TrialPay and many more - the company appears to be committed to digital media. Can you discuss some of the bullet points you are using when evaluating a company for investment? And, where does the analysis start?

The answer probably isn't that surprising but it basically comes down to three major items. First and foremost is the team, their character and their understanding of the market. We don't believe that you can be successful in this market without understanding both the media and technology sides of the business so we looks for teams who have skills in both areas. Second is the product and whether it can have long-term differentiation. How easy would it be replicate or switch out? Last is the business model. How does it scale, what kind of margin profile does it have and how much change in behavior does it require in the market. We are pretty agnostic about stage and geography.

Looking at the human side of investing, when you meet an entrepreneur/CEO regarding possible investment, what characteristics are you looking for in her or him?

We want to back entrepreneurs that we hope to have a relationship with for many decades, not just for the current company. While we consider many things, there are four primary characteristics that stand out as being particularly important to us: integrity, passion, flexibility and expertise. I think those are all pretty self-explanatory.

What's your view on private digital media companies going public versus being acquired these days? Will the IPO market ever revive? Which way is "the exit" and when?

The exit path for the vast majority of digital media/online advertising companies will be M&A. I think that is true for two reasons. First, there are just so many companies who view digital advertising as critical to their businesses. There are the usual suspects like Google, Microsoft and Yahoo, but the agency holding companies, traditional media companies and technology vendors like Cisco, Akamai and Adobe are all interested parties in this market. Second, with very few exceptions, it's difficult to build a digital advertising business that has the scale, revenue visibility and consistent growth needed to be a successful public company. The IPO market will come back but I'm less certain that it will provide many great exits for digital advertising companies.

What are you seeing in the ad tech space today? Any sweet spots intrigue you, in particular? Is it too frothy?

Honestly, I'm seeing a lot of the same thing again and again in the ad tech market. It seems like we're largely past the period of innovation and going into the period of consolidation. I'm still excited about the prospects for data and the separation of data from media. That world is only getting more complex and companies that help automate it and simplify it are going to create a lot of value. Unlike some other Internet markets, I actually don't think that ad tech is particularly frothy right now. I would say that there is a higher degree of skepticism than 2-3 years ago.

How about a Google view or two or three... As an ex-Googler on the AdSense and DART teams among others, what's your view on Google's DoubleClick Ad Exchange? Will it dominate the exchange space? Etc.

Ah, I was waiting for the Google question. I think Google has an incredible position in the market and that it wants to dominate all parts of it. It will aggregate media and enable media buying via AdEx. It will build and optimize creative based on the team and tech they acquired with Teracent. It will eventually make more and more data, including search data and first party publisher data, available for use in AdEx. And it will provide the intelligence to tie all of those together to deliver the best display advertising performance. Google doesn't care which piece of the market captures the most value because they will play in all parts.

What do you like about being a VC? What don't you like?

Absolutely the thing I love most about being a VC is working with so many different, fantastic teams of people. I'm consistently blown away by entrepreneurs and their vision and passion and feel lucky to work with so many great ones. It's also fun being an industry "outsider" because I get to talk to everyone and look at the industry from many different perspectives to try to figure out where it is going and who is going to win. The main thing I don't like is not being able to get my hands dirty. I'm a product guy by background and no matter how involved or helpful you are as a board member, you're still many steps removed from building product and bringing it to market. For me, there are few experiences more satisfying.

What's your view on demand-side platforms? The new ad network?

I don't know that I have a particularly unique view on DSPs. Yes, basically I think that they are the new ad network or, in many ways, the new agency. Much like the ad networks had to evolve their businesses to add more value than simply aggregating inventory, I think that the successful DSPs will quickly do more than just enable RTB. DSPs will need to combine their exchange buying capabilities with optimization know-how that leverages various types of data (ideally with proprietary access to that data) and dynamic creative. I actually expect to see some vertical specialization particularly for high value verticals like online retail, travel and financial services. Even then, I'm not sure that we are going to see value creation in the DSP market like what we saw at the end of the ad network era (Tacoda, Blue Lithium, etc.).

You're on several company boards as well as a board observer. What makes a good board?

A good board is responsible for representing the interests of all shareholders. To that end, a good board pressure tests the assumptions of management based on a true understanding of the market and business. It also understands that it is not building the business so a good board ultimately trusts management to make the right decisions. A good board also "adds value" in ways that are asked for by the management team, whether that be in hiring, sales, business development or financing. Lastly, a good board is one that enjoys working together but also enjoys healthy debate. I don't think that you can ever stop getting better as a board member.

The agency model is morphing these days. If you were running a media agency, what would you do to stay ahead of the digital media opportunity?

I'm glad I'm not in their shoes! Arguably, agencies have two real assets, people and data. To me, the latter is the key for any agency that wants to have success in digital media. Agencies should build their proprietary data assets, leverage third party data and develop analytic and optimization platforms that give them a unique perspective on media buying, targeting and creative. Agencies need to become technology companies to succeed in the digital world. I'm not sure their DNA will allow them to do that successfully but that hopefully means good things for entrepreneurs who are building those capabilities in service of agencies.

Follow Satya Patel (@satyap) and AdExchanger.com (@adexchanger) on Twitter.

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