Digital advertising draws dollars

While shares of the biggest players in Internet advertising flounder on public markets, private companies in the sector are riding high.

So far this year, more than a dozen companies targeting the online and mobile ad markets have raised in excess of $200 million in investment rounds that drew capital from U.S. investors. Three of the largest financing rounds went to companies that announced rounds in the last couple weeks, including women-oriented publishing site Glam Media, advertising network Adconion Media Group and advertising software provider WideOrbit.

The investments follow a blowout year for M&A in Internet advertising sector. Acquirers spent $11.9 billion buying online media companies last year, up from $8.9 billion in 2006, according to boutique investment bank JEGI. Google and Microsoft accounted for much of the 2007 total, as Google paid $3.1 billion for DoubleClick and Microsoft shelled out $6 billion for aQuantive.

Investors are betting the acquisition binge is far from over.

“A lot of the opportunity is in the long tail,” says Paul Barber, general partner at JMI Equity, which took DoubleClick private in 2005, along with buyout fund Hellman & Friedman.

Barber says he sees growth prospects for companies targeting small and mid-sized businesses, the so-called “long tail,” which require tools to manage online marketing campaigns and to earn advertising revenue from their sites. JMI’s current portfolio contains several companies with a digital marketing focus, including ClickTactics, an automated Web-based marketing provider; Eloqua, which sells applications for business-to-business marketing; and Unica, a marketing management software developer.

Given the costs and efforts associated with becoming a public company, Barber says acquisitions will probably be the primary exit mechanism for most companies in the Internet advertising and marketing industries.

That was certainly the case last year, with M&A deals providing big returns for several VCs with an Internet advertising focus. Yahoo and AOL each acquired several ad networks in 2007, including venture-backed Blue Lithium, which sold for $300 million to Yahoo, and Tacoda, which AOL bought for $275 million. The deal flow continues in 2008, with Microsoft agreeing to acquire venture-backed YaData, an Israeli provider of online advertising solutions, for an undisclosed sum.

The latest surge in venture funding comes as established heavyweights are seeing shares sink amid lowered expectations for near-term revenue growth. Shares of Google are have shed more than one-third their value since peaking at nearly $750 in the fall. Reduced estimates of U.S. keyword advertising growth triggered the selloff. Stocks of ad market leaders including ValueClick and Yahoo (prior to Microsoft’s acquisition offer) also have fallen sharply in the last half-year.

In venture circles, however, optimism continues to brew. Adconion Media Group, operator of an online advertising network, said last week that it closed an $80 million Series C led by Index Ventures and Wellington Partners that qualified as “the largest European Internet media investment in history.” The three-year-old company, which has operations in Europe and Australia, will use the money to fund expansion in North America and Asia.

Glam Media, a site targeting women, also recently closed a financing round of $84.6 million, including $64.6 million in Series D funding and $20 million in debt. The round was led by magazine publisher Hubert Burda Media, and also included GLG Partners, Duff Ackerman & Goodrich Ventures, Accel Partners, Draper Fisher Jurvetson, Walden Ventures and Information Capital. Hercules Technology Growth Capital provided the debt financing.

Days later, advertising software company WideOrbit said it raised a $14.5 million Series C round from Khosla Ventures, Greycroft Partners and Hearst Corp. The company manages the advertising sales process for television stations, radio stations, cable networks, cable interconnects, mobile video, movie theatres and digital display networks.