Perspectives November 8, 2011

Four takeaways for start-ups from last week’s Adobe-Auditude acquisition


*This article was co-authored by James Slavet and Chris Moore of Redpoint Ventures and originally posted on VentureBeat.

Adobe acquired Auditude, a platform for monetizing premium video content, on Tuesday.

Not many startups get to such a positive outcome, even after years of work.  So how do you successfully navigate scaling up a company and interacting with potential acquirers?

The two of us were investors in Auditude, and we sat on its board for the past several years. We’re excited about this outcome, which reflects the hard work of the entire team at Auditude and a series of smart decisions the team made over the years.

We’ve been reflecting on a few insights from this experience, which are relevant for other startups.

Don’t be afraid to dive into big, choppy waters

One important choice you have to make as an entrepreneur is the market you decide to target. You have a better chance of building a substantial business if you engage in a big market that’s in serious flux.

For Auditude, traditional television was the market to transform. Traditional TV is an $80 billion annual advertising market, not to mention the many billions more spent on cable and satellite subscription fees. As viewers shift their video consumption from traditional to digital, supporting technology and revenue models are also changing. The stakes are high for content owners and publishers to get this multi-billion dollar transition right (just think about what’s happened in music and newspapers), and there will be several big new players in the digital video ad market as a result.

Gaming, health care and mobile are other examples of large sectors in the middle of profound change. That’s a very good thing if you’re a startup that enters early and competes aggressively.

Pivot with purpose

Iterating successfully requires the right balance of urgency and steadiness. We see some startups sticking too narrowly and literally to their original roadmaps, and others that pivot so quickly and so often that it’s almost impossible for them to prove out a path.

Auditude’s core team was focused on monetizing distributed premium video content for the past four years. But the specific products the company delivered have evolved based on the insights the Auditude team picked up from working directly with customers.

Auditude’s first application was focused on identifying and serving ads adjacent to TV clips that had been uploaded by users to the web (e.g. a John Stewart clip shared with friends on MySpace). The product had sex appeal and opened the door with publishers and content owners, but it was serving a niche versus a primary need.

Its second product was a broader ad platform for content owners and publishers to monetize their premium video content wherever it was distributed. This product addressed the more fundamental needs of customers, set the stage for Auditude to introduce additional video platform innovations, and helped the company scale customers and revenue.

A startup may choose to stay on the general path of its original mission, but it should pivot within that context to produce specific products that best address its customers’ needs.

Establish a large technology footprint, then turn the revenue crank

It’s conventional wisdom for today’s consumer-facing internet companies to focus on building a great product that will drive user engagement and growth first, and to only shift attention to scaling revenue after achieving meaningful consumer adoption. This sequencing actually applies to ad infrastructure companies as well.

There are some companies in the ad infrastructure space that start with an emphasis on sales, and then try to backfill with technology later. However, bigger success stories such as advertising startups Admob (acquired by Google) and Right Media (acquired by Yahoo!) focused first on building a large footprint of customers and ad impressions through their technology, and then scaled revenue through media sales and platform enhancements.

For the first few years of the company’s life, Auditude’s team was heavily weighted towards product and engineering. Once it had several billion monthly ad impressions flowing through the platform, the company turned its attention to also ramping media sales.

In sectors where scale helps determine the winners (for example in online marketplaces) entrepreneurs especially need to challenge themselves and their teams to focus on product excellence and broad market adoption, sometimes at the expense of gaining revenue early in the company’s life.

Know thy less obvious neighbors

We would not have predicted that Auditude would be acquired by Adobe. The more obvious acquirer for a video ad platform business would have been a major existing player in the online ad space. The Auditude executive team managed to maintain a positive relationship with other key players in the extended online video ecosystem.

Advertising is actually a logical extension for a range of major tech companies (for example Amazon, Apple and Akamai, Adobe, and those are just companies that start with the letter “A”). Acquirers with large existing customer bases can layer on advertising as a high margin enhancement.

Amazon, for instance, has built a significant advertising business because it has extremely valuable data on shopper intent and can target ads to the 90 percent plus of site visitors who don’t convert to an e-commerce transaction.

The right online advertising startup acquisition can inject valuable DNA into these “non-advertising” companies. Adobe’s video business will benefit from Auditude’s products, customers and revenue, and also the deep domain expertise of the team.

While it wasn’t obvious to all that Adobe was going to be a major player in premium video monetization, it actually makes a lot of sense given its video publishing and analytics franchises. There was mutual trust and respect between the teams, and this led both sides to become more interested over time in making the acquisition happen.

In short, establishing positive relationships with strategic neighbors helps a CEO enhance the reputation of his company within his industry and stay connected into the flow of emerging opportunities. Those relationships might even lead to an acquisition, as it did for Auditude.

“One important choice you have to make as an entrepreneur is the market you decide to target. You have a better chance of building a substantial business if you engage in a big market that’s in serious flux.”