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AppNexus Tries M&A, Mulls 2015 IPO

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brian-okelley-2014The world’s largest independent ad tech company broke character this week.

Before snatching up Paris-based ad viewability firm Alenty, as AdExchanger was first to report, AppNexus had been historically inclined to build rather than buy owing to its strong engineering culture. But that may be changing as bargains present themselves in the form of mature startups whose founders and investors are ready to sell.

Of course, to buy you need cash. CEO Brian O’Kelley confirmed to AdExchanger that AppNexus is talking with prospective investors about a new round. The Wall Street Journal previously reported that the amount could exceed $100 million and that Alibaba Group Holding is among the potential investors. If it materializes, the investment would precede a likely IPO that could come in 2015.

“There’s no immediate incentive to put money in the business,” O’Kelley said. “At the same time … it’s attractive to have cash to do acquisitions like Alenty and grow the business globally.”

O’Kelley spoke in depth about Alenty, viewability and investment dyamics.

AdExchanger: Why buy viewability technology now?

BRIAN O’KELLEY: Viewability is not a standard in other media. There’s no guarantee that just because someone hung the international edition of The New York Times outside my door this morning that I saw the ads inside of it. It’s exciting that in the online advertising world we can use technology to improve our ability to understand how users behave. That’s what viewability is. It’s a signal.

It’s interesting input for a trader but it’s not the only input. Buyers are smart. If there’s a place that’s not getting engagement, clicks, conversions, whatever, they pay less for it. All we’re saying is, let’s improve our toolkit to help advertisers understand how consumers behave when they browse.

We’re not trying to penalize publishers for building sites that require scrolling. Facebook’s entire wall and news feed is a big scrolling universe. Twitter is infinite scrolling. It would be silly to say, “Hey, you shouldn’t scroll.”

How did you come across Alenty?

Alenty was one of the first companies to build an app in the AppNexus app marketplace. They were talking to Mike Nolet, our co-founder, about how to use viewability to improve conversion rates. The idea they came up with was, “What if you dropped a conversion pixel when the ad is viewed and use that as an intermediate conversion?” Our system supports multiple conversion events, so you could have it be a quarter conversion on view, a half conversion on click and the rest a conversion on the actual conversion event. And it worked really well.

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Why buy rather than build, and why now?

Six or eight months ago, we started having this conversation about viewability. It seems right to us that if an ad isn’t seen, it can’t influence behaviors. If we can make advertising work better, we put more money in the pockets of the best content producers. Separately, we started brainstorming about how valuable it would be for optimization. This happened to coincide with some conversations we had with Alenty.

It was a fortuitous moment. We’re not a big acquirer. We have an engineering culture. They did too. A little-known fact is that France has extraordinary engineering talent. We were really impressed with the culture fit. There were too many reasons this made sense.

How will you use it? For instance, could you strip nonviewable ads from the marketplace?

First of all, “it” is not a static technology. There are many aspects to it. How long is the ad in a viewable area? How much of the ad is viewable? And for how long? There’s a lot of research still to be done on exactly what this means. [Ed: The current standard set by the Interactive Advertising Bureau and certified by the Media Ratings Council is that 50% of an ad’s pixels must be in view for a minimum of one second.]

The point is, we want to use this in a lot of ways across the platform. We certainly want to give basic viewability metrics to our customers so they can at least see what’s going on. And then we want to start plugging these insights into our optimization system. Alenty provides advanced analytics for many customers around Europe – not just viewability but also effectiveness.

We don’t want to strip nonviewable impressions from pages. I suspect the indirect outcome is publishers will redesign their sites to be more viewable more of the time, just because it will be financially beneficial. Also, viewability technology isn’t perfect. We don’t always get the signal we need.

This is different than bot detection. If there’s not a human using the website or the app we’re not going to show that. We are actively and very effectively stripping out all bots from our platform.

Why Alenty? Why Europe?

I’ve been very impressed with the number of European companies that have been innovating and pushing the limits without huge amounts of funding. The model where you have to raise tens of millions to prove out an idea isn’t the only way to innovate. Our partnership and acquisition of Alenty is an interesting model for the future, where entrepreneurs are rewarded for creating real value, even if it’s not the entire value chain.

Are you raising a round, as WSJ has reported?

We are definitely talking to investors. But we’re always talking to investors. You could ask me that question at any time and I’d say that.

I’ll say this: We are the largest private ad tech company by a large margin. We are larger than many of the public “ad tech companies” and we’re always in demand from the investment community. From my perspective, the questions are “what’s the value of raising money?” and “what’s the cost of raising money?” There’s no immediate incentive to put money in the business. At the same time, if people come along and say, “We really like your business and we’d like to put money in at a reasonable valuation,” it’s attractive to have cash to do acquisitions like Alenty and grow the business globally.

Do the post-IPO experiences of Criteo, Rocket Fuel and Rubicon Project give you pause about going public?  

Marc Andreessen says the market doesn’t understand technology companies. I think he’s right. We have a technology company that’s extremely high growth with a huge market opportunity. It seems extraordinary. The markets will eventually value not just us but Rocket Fuel, Rubicon, Millennial and Criteo as companies that are shaping the Internet. If you look at some other companies that are shaping the Internet, they have significantly higher values but in many ways are not as valuable financially or strategically.

We will look at the public markets as a source of funding, and believe there will be a change in how the investment community will look at companies. It would be great if AdExchanger and other publications would help investors understand what all of us do. There’s still a fog of war, a confusion that has to clear a bit.

But I’m in no way afraid of being a public company. I don’t think now is the right time. I think it would be 2015 or even 2016. But it hasn’t scared me off, and I doubt it has scared the CEOs of those companies.

But in the short term, lower public market valuations make it harder for companies like Rocket Fuel to do acquisitions.

We have a weird public-private valuation mismatch because of the timeframes of those investors. Private investors are looking forward three to five years, saying, “This space will grow from a $6 billion to a $50 (billion) or $60 billion space in four or five years. I want to get in on that.” Public market investors are saying, “It’s going to go from $6 billion to $7 billion in the next three months, and are they going to hit their number this quarter?”

That’s a challenge when you’re building a long-term business. Companies like Amazon and Salesforce.com have done this successfully.

Rocket Fuel has advantages. They have a couple hundred million in the bank, regardless of valuation. Anyone in the industry who wouldn’t trade Oracle stock for Rocket Fuel stock is looking at different numbers than I am. They have a strong opportunity to buy companies.

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