Ganging up on the ad gorillas

Despite privacy concerns, hyper-targeting could be the future of advertising.

It can feel a little Big Brother-ish when you’ve just been browsing online for flights to Miami, then head over to an unrelated website and an ad pops up for “Cheap Florida Getaways.” The online-ad industry, however, is banking on the fact you’d rather see an ad for something in which you’re interested, even if it means companies have extensive data on your surfing habits. So are venture capitalists, who since 2007 have invested US$4.7 billion in 356 online-ad firms according to Dow Jones VentureSource, a research firm owned by News Corp.

Tim Lee, CEO of Toronto-based venture-capitalist fund Growthworks, calls hyper-targeting “a bit of a holy grail” with both a big problem—maintaining privacy—and a big opportunity to bring relevant advertising to consumers. According to former Morgan Stanley analyst Mary Meeker, online advertising industry is a $26-billion-a-year market which could soon grow to $50 billion. Yet in December, the U.S. Federal Trade Commission (FTC) called for a “do-not-track” system, and several privacy bills affecting the collection and use of personal data were introduced in the House of Representatives this year. These seem like big enough red flags, yet VCs are undaunted, continuing to invest in audience-targeting companies they think may be the next superstars in an industry with huge potential for growth.

Currently, companies with the most extensive data on users are big players such as Google and Facebook. Vlad Stesin, co-founder of Montreal-based Bloom digital platforms, says a new online ecosystem is emerging where smaller companies are banding together to match the precision of audience targeting achieved by these bigger companies. Stesin worries pending privacy laws threaten to give these 500-pound gorillas a monopoly on the industry, which he thinks would be unfortunate, given the data most startups collect are not nearly as personalized as what Google can collect based on search results, or Facebook based on user profiles. “What they have is such a complete picture of who you are,” he explains, whereas smaller online startups have only “fragments here and there.”

The small online tracking companies are in some sense flying blind. They track consumer habits from a piece of code that stores info about a user’s browsing activity through a unique but anonymous identifier. Lee says though his company has backed three startups in the online ad industry, they won’t invest in a company where advertisers can tell who the actual person behind the identity is.

Chris Arsenault, a venture-capitalist with iNovia Capital, a company with seven investments in the online-ad industry, says targeting technology can provide a better user experience than print or broadcast, despite concerns over privacy. “We need regulation to limit companies abusing the system,” he says. “I just hope in doing so, the baby isn’t thrown out with the bathwater.”