kbs+ Ventures

The ad tech industry as we knew it is going away. The startups that will prosper during the next 5 years will be the ones that can accelerate the macro shifts already underway or create new markets:

Native advertising ‘enablers’ (platforms)

Marketing automation & personalization services, including virtual assistants and AI

Full-stack influencer platforms built on social APIs

Technologies connecting TV to digital, to social, and to in-store retail

Content creators with a data & social-centric approach to distribution and audience.

As a corporate VC, there are some areas my firm is no longer investing in:

3rd-party mobile rich media platforms

3rd-party cross-device attribution (whether probabilistic or hybrid)

3rd-party Targeting / Re-targeting networks

Demand-side platforms

Mobile networks

Ad servers

A recent Goldman Sachs report summarized the shifting ad tech landscape well: “the infrastructure underpinning the digital ecosystem [will] likely go from the fragmented oversupply of largely recycled or undifferentiated content sites supported by a massive ad tech ecosystem toward consolidation around platforms and content owners.”

And a recent Andreessen Horowitz podcast puts it even more bluntly: “Ad Tech right now is like Search before Google.”

This has been the case in China for two years already, where WeChat is the anchor platform with 549 million global active users generating $1.1 billion in revenue. In this example, messaging serves as the single point of entry into a multi-layered commerce platform where (Chinese) users can order food, hail a taxi, pay bills, move money. Such consolidated convenience diminishes the need for users to download other stand-alone apps, as well as any brand rationale for developing such apps. Better to focus on one’s WeChat integration instead.

The major US platforms have taken notice: earlier this year Facebook announced Messenger for Business (with Zulily and Everlane as launch partners), allowing brands to have messenger IDs for the first time. After making an ecommerce purchase, consumers can opt-in to receive customer support via Messenger, thereby eliminating the need for email and phone calls.

Twitter, for its part, eliminated the 140 character limit in Direct Messages (DMs), allowing @handles to chat directly without following each other. The most obvious thing this does is to open direct lines of real-time communication between any brand and any Twitter user.

The convenience all of this enables cannot be overstated. Many consumers, particularly younger ones, actively avoid email and phone as ways to get things done. As any 25-year old will tell you, email is slow (and certainly not real time), and many Millennials find the ‘phone’ part of smartphone possibly its least interesting feature.

Mobile messaging, on the other hand, can be both real-time and asynchronous, on a sliding scale of user-defined urgency. Standing in a long line at the car rental desk? High urgency. Status update regarding tomorrow’s grocery delivery? Lower urgency.

As consumers come to expect real-time responsiveness from brands, legacy customer support systems that rely on rows of humans in call centers will feel the crush. This is where artificial intelligence steps in.

In August, Facebook announced “M”, a personal digital assistant that lives inside of Messenger and is “powered by artificial intelligence that’s trained and supervised by people.” Facebook is not first tech giant to enter the consumer AI space: Apple (Siri), Google (Google Now), and Microsoft (Cortana) are already there. But Facebook’s focus on human-assisted AI is important for mastering the idiosyncrasies of personalized, real-time communication at scale.

Another company leveraging human-assisted AI on behalf of brands ismsg.ai, a startup whose software creates customized, 1:1 conversations at scale between brands and consumers. This includes personalized product recommendations, fielding questions about product availability, and providing assistance with purchases. The company is well positioned to be the Buddy Media of its time, assisting brands in this new era of‘conversational commerce’ just as Buddy did during the rise of Social 1.0.

As ecommerce continues to take a larger part of overall retail, and mobile commerce becomes the majority of all ecommerce over the next couple years, we will see previously separate functions — customer service, sales, CRM, advertising — begin to collapse within single channels such as messaging.

Those brands that understand how to leverage the network effects of mobile, as well as transaction-optimized spaces like messaging, will be the ones we write about tomorrow.

3.    Schedule monthly (or quarterly) report backs with senior executives

Each month we share highlights on the progress of our portfolio, bubble up any introductions on our founders’ “Wish list”, and discuss new investment opportunities in our pipeline.  While senior leadership isn’t involved in investment decisions, it creates a more vested interest in the success of our companies and helps identify new collaboration opportunities across our brand network.  Additionally, it feeds into our own internal culture of innovation and invention, while giving our venture team a fresh perspective on the companies.

4.    Create Venture Ambassadors through grassroot educational initiatives

kbs+ Ventures Fellows is course we teach twice a year about venture capital and entrepreneurship. Employees of all levels can choose to take this 3 month class.  We recently revamped the course and made it a more authentic experience to teach the students how to turn ideas into businesses.  Throughout the semester, we weave our portfolio founders into the curriculum – so they’re able to connect on a deeper level by learning about their personal journey about the highs and lows of building a company.  We’ve found this not only helps our employees have more empathy to better understand and collaborate with startups, but creates relationships that can extend into mentoring or new business opportunities for the portfolio.

Each CVC and venture fund needs to think about what’s right for their respective organization, but with the funding landscape becoming more and more competitive for the best deals- funds need to clearly define their own unfair advantage.

Dextro’s new product, Stream, pulls in publicly shared Periscope videos and then uses sophisticated technology to aggregate and classify the thousands of live videos into defined content categories. This level of transparency and organization is ground breaking for unstructured video data, making it possible to to discover multiple videos from the same sequence of events in real time.  While as a basic feature, image recognition exists within existing social listening platforms, these tools rely on still images and controlled video environments -- in other words, a lack of complexity. But the real world is complex. Real-time video changes scenes, people, and imagery instantaneously, requiring a much higher level of technical sophistication to process and interpret.  

For marketers, this is debunking the myths of live streaming (is it really only cat videos?).   The end result of this process is providing brands more contextually relevant data for a deeper view into consumer behavior, their preferences, and how they’re interacting with products- the core foundation of social media strategies. For example, "Dash cams", streams from people in cars, happens to be a popular live streaming category in the afternoon.  Auto brands might leverage this intelligence for their social or CRM strategy, driving along or recognizing these road warriors with a surprise drive in a luxury vehicle.  (While Dextro helps discover these streams, the outreach would be on Twitter).  On the flip side, if a CPG brand discovers it's rare to find live cooking videos, or they aren't generating any views- they’ve learned a new insight about their consumer.  While it's important to test, learn and monitor emerging channels early on, certain verticals may decide its unnecessary to dedicate significant social resources today.

This new Stream capability is still in its infancy, but its applications – and promise – are huge.

Mobile has created an ecosystem unlike anything we’ve seen before. Apps such as Amazon, RedLaser and Smoopa enhance the shopping experience, giving people instant access to price comparisons at the point of purchase. Yelp, Swagbucks and Shopkick all help accelerate consideration. We also have apps that take people from discovery to purchase effortlessly, such as Gilt, Groupon and even Fancy. Social platforms such as Pinterest, Twitter and Facebook are the mobile highways that transform purchases to mass awareness, consideration and brand advocacy.

Not surprisingly, expectations have evolved just as quickly. According to the 2014 study conducted by the MMA, xAd and Telemetrics, we know three important things: 42 percent of shoppers say mobile is the most important media for their decision, 66 percent of mobile consumers are looking to make a purchase that same day, and pricing and location look-ups for purchase research make up 60 percent of top activities.

Here, then, are some considerations that we share with clients when we map out the mobile purchase journey.

Delivering awareness The best places to deliver awareness are the places where your consumers are already spending the majority of their time. To reach today’s mobile-first audience, retail brands that have yet to establish a presence on Facebook, Twitter or Instagram will need to play catch-up.

Take Nike, for example: By encouraging women to join the conversation, Nike’s most recent campaign “Better for it” amplifies its social reach with every mention of the hashtag, #betterforit. Additionally, Nike’s social posts drive users to the Nike app and encourage consumers to shop on their mobile optimized site, making their social platforms a nucleus for cyclical awareness, advocacy and ultimately purchase.

Building brand familiarity Even if you have the resources to develop a mobile-first app for your customers, there’s little guarantee that it will see engagement. Instead, consider partnering with the litany of apps out there that consumers are using to discover products and enhance their shopping experiences. These include but are not limited to Gilt, Wanelo, Fancy and Shopkick. For instance, Shopkick offers retail brands a complete and unique mobile solution that places products in front of consumers throughout the entire purchase funnel, while driving an average cost per conversion that can be 10 times more efficient than search.

Purchase The fact is consumers still prefer to purchase on desktop and in-store. The speed with which retail brands are optimizing the purchase for mobile has not caught up with consumer expectations. We expect this to change over the next few years. In the meantime, it’s important for retail brands to embrace this behavioral shift and support it. Consider offering in-store Wi-Fi, engaging with consumers with beacon technology, and partnering with vendors such as Urban Airship to send relevant push notifications that can significantly impact sales.

Often,retail advertising is used ineffectively and dumbed down as retargeting. Amazon and a few other brands have shown that it can be effective, even when retargeting on mobile devices, but this still requires a cross-platform audience connector such as Facebook.

However, as we see consumers weave effortlessly in and out of the purchase funnel using mobile, we also see an opportunity to drive better engagement because we now have the means to pinpoint where consumers are in their purchase journey.

To demonstrate that this isn’t just an Apple story, here are some other things we didn’t have back in spring 2007:

-       Android OS

-       Amazon Kindle

-       Xiaomi (world’s 3rd largest smartphone distributor and most valuable private company; currently valued at $46 billion)

-       Uber (current valuation: $41B)

-       Snapchat ($15B)

-       Pinterest ($11B)

-       Airbnb ($10B)

The point is that when you try and predict the potential size of a new market, it is not necessarily useful to look to existing, mature markets for comparisons. We learned this when:

Typewriters gave way to PCs

Wired phones gave way to wireless phones

PCs got displaced by smartphones

In these cases, the new markets that emerged became much larger than the markets they replaced.

As Benedict Evans has eloquently described, when trying to estimate the market potential for something fundamentally new, you have to do two things:

Look past what is now, and consider how much better and cheaper that product might become

Think about who would buy it now versus who else might buy the product later as it becomes better and cheaper, and how they might use it.

As technology companies become lifestyle companies, and every new sensor creates a new business opportunity, we are going to see this happen not only with well-designed wearable products, but with ioT in general, as well as the new platforms and use cases they engender.

We should never underestimate the ability of new markets to completely upend the current state of things. To the contrary – we should assume they will, and plan accordingly.

I had written about the Fellows program several times in the past, but I asked Peltz and Engroff if I could enroll in their first one so I could write a first-person perspective story on it. Full disclosure: I told them I wanted to audit the classes, because I was also in the throes of an early-stage startup that I was bringing to market, and I wanted to learn as much as I could from them because I believed they had a unique understanding of both venture capital and media, and frankly, I couldn’t think of a better way to learn what I needed to know. What you are about to read are the highlights of what I learned, and some of the people who taught it to me -- not just Peltz and Engroff -- but a series of guest speakers ranging from VCs to startups, as well as the Fellows themselves, two dozen of the best and brightest young turks from a cross-section of disciplines and KBS+ companies who were divided into a half-dozen teams that each developed a venture to bring to market over the course of the semester.

The session in which Peltz gave her “you’re telling a story” speech was the first of two “demo” days at which the teams got to present their ventures to a group of startup founders, venture capitalists and industry executives. The teams were competing for four slots that would go on to pitch in the final demo day that would decide which one won, so there was a lot at stake for them. Think Shark Tank funding meets Madison Avenue pride.

As someone who writes for a living daily, let me tell you that Peltz’s advice is easier said than done, and the more important a story is to you, the harder it is to tell. That’s why this particular story is weeks late. It was so important to me that I wanted to tell it right and the result was weeks of anguishing, organizing, drafting, writing and rewriting -- a lot more than we normally do at MediaPost -- to get it right. I’m not sure this version actually will achieve it, but at some point, you just have to tell your story, as good or bad as it is, and put it out into the world for other people to judge. And that’s exactly what the six teams of Fellows were about to do: Put their stories out in front of a group of seasoned experts to rip apart, judge, and pick some winners and losers. Along they way, they would get some advice. Amazingly, most of it was simply what Peltz said to kick things off.

I decided to follow one of the startup experts -- Jeremy Levy, founder and CEO of Indicative -- around as he met with each team, listened to their pitches and gave them advice. Like the other startups who judged, advised or presented during the course of the Fellows semester, Levy’s Indicative is one of KBS+ Ventures’ portfolio companies, and Peltz and Engroff integrated them as much as possible to cross-pollinate their businesses with the Fellows, whose day jobs often involve working with startups to find innovative solutions for their clients’ businesses.

In each one of the Fellows teams Levy met with, he listened to their pitches, made some suggestions about their style, their area of focus, some technical details about their business models or their go-to-market strategy and even their fundraising approach, but mostly he focused on their story, reminding each one of them about what Peltz said to kick things off. In the back of my mind, I couldn’t help wonder if Levy wasn’t also somehow inspired by that idea -- the simplicity and essential truth with the way Peltz expressed it -- and wasn’t just letting it reverberate around his mind as he listened to and advised the teams.

In one session with a team developing a venture called “Breakfaster” -- a business that enables companies to provide fast, easy and nutritious breakfast meals to busy workers who might otherwise skip it -- Levy offered some technical advice, pointing out that the millions of dollars they were seeking to raise at this early stage wasn’t realistic and that would be a non-starter for most potential investors. He advised them to raise just enough money to develop what they needed to get to the next stage of their business -- a recurring theme that was echoed throughout the Fellows semester, that the main job of startups and their founders is to achieve “traction” points. Sometimes traction is raising funds. Sometimes it is a product innovation or breakthrough. Sometimes it is adding a key player to your team. All of them are important to a startup’s success, but not all of them happen equally, so the main point is to focus on the thing that is moving the startup forward. And that largely is the story the startups are telling: Why their business is working or will work based on achieving some traction.

Fundamentally, they are proof points designed to convince a key stakeholder -- usually an investor, but sometimes an advisor, a supplier, or another member of the team -- that this thing can work, and already is to some extent. It’s the spectrum between having an idea -- a founder’s so-called “vision” -- and making it real.

Much of what was taught during the ten Fellows classes had to do with refining and perfecting that narrative and taking the idea from concept to execution. Like most stories, almost everyone listening or telling it had some slight variations on the theme.

For Peltz and Engroff, much of the focus during the classes had to do with the foundation elements of a startup: the product, the market, and the team. Coming up with the right “product/market fit” is essential, they said, but having the right team to execute and manage it, was just as, and maybe even more important, they said.

The reason, explained Engroff during one class, was that it is possible -- indeed highly likely -- that a product could be modified to fit a marketplace, if it has the right team in place that can execute it. Conversely, he gave examples of a number of successful products that started out aimed at one market, but ended up successfully servicing a different market, because the team understood how to pivot.

The theme of iteration -- testing your idea and product execution, learning from the results, and adapting and repeating the process over and over again until it is either perfected or the team learns there is another path -- was the course’s mantra, and was embodied by all the literature, videos and extracurricular sessions that were required as part of the class, especially the book “Lean Startup.”

Engroff, a veteran of many startups from the earliest days of the digital revolution, drew from his own personal experiences many times. Once he even circulated his first startup document, a terse business rationale that was more than an inch thick and was passed around the Fellows’ roundtable like some ancient sacred scroll.

During that class, Engroff summarized the lean startup ethos that had shifted the world of startup innovation from the old “waterfall” approach -- releasing a product only after it was “perfected” and then watching as it either succeeded or failed in the actual marketplace, vs. the lean approach of constant iteration and innovation.

During the semester I struggled, as I did while covering previous Fellows semesters, to understand what the benefit was to KBS+ in expending the time and resources to the Fellows program, since it is almost all theoretical. No actual venture has been launched to date, and Engroff is proud to point out that there has been zero turnover from employees who have participated in the program, even though they theoretically were being trained to develop ideas that would lead them to strike out on their own and leave the organization.

In the end, I realized that was one of the points -- the so-called “ROI” for KBS+ -- that it simply makes the Fellows smarter, happier and more innovative people that end up loving their organization even more for investing the time and resources in them. It’s not entirely altruistic, because in addition to making its staff better people, Engroff believes it sends a powerful, if intangible, signal into the marketplace that KBS+, and its sister companies like The Media Kitchen, are a great place to work, because among other things, they invest in making you a better person. And in an industry whose greatest assets aren’t fixed things like machines or real estate, but the people who work with them, being a place people want to work is a pretty important thing.

Not all the experts who presented at the Fellows classes had such altruistic bents. When Brian Cohen, a serial entrepreneur, venture capitalist, author and chairman of New York Angels spoke to the class, he asked them if they knew what he did.

The Fellows gave standard replies such as, “you invest,” “you help startups,” etc., to which he said, “wrong, I exit.”

By “exit,” Cohen was referring to the term used to describe when a VC converts their equity investment into a return -- ideally a monetary one.

“Oo-oo, exit,” Cohen said to the class, sounding quite sexual and a bit lecherous when he intoned it. That’s what he said excited him about the business and gets him to invest in a startup. Not good ideas. Not product/market fits. Not even the team. It’s all about the exit, he said, and those other elements were just ways for him to understand if the potential for an exit is there, and how long it might take to get to it.

Cohen hammered this point home, because in the he said/she said world of venture funding, whatever story a startup founder thinks they’re telling, that is what a VC is hearing.

Cohen’s point may have been extreme, and during the course of the Fellows semester, Engroff and Peltz talked about other forms of returns on venture capital investment that were not so bottom line -- at least not in the capital return sense. They spoke of new venture models being built around so-called “impact” companies whose business models -- and returns to investors -- are tied to societal benefits that can be measured and reported alongside other quarterly metrics like earnings.

Before, during and after the Fellows program, I kept asking Engroff and Peltz if they could explain the turn on KBS+’s investment for the time, resources and energy they put into the Fellows program. They conceded much of it were intangibles that could be attributed to goodwill like esprit de corp, making their organization happier, and attracting better talent and clients to work with KBS+.

But they said there were real tangible benefits too, like training their organization to think better, smarter, faster -- and hopefully -- more iteratively and innovatively, like a startup. This in the end, I think, is the chief benefit of the Fellows program and why KBS+ has stuck with it, and whatever return it puts against it. Whether it was the seminal version developed by Herman and Davidson, or the more practical, real-world version refined by Engroff and Peltz, it is about creating a better organization. It is not, as Cohen might suggest, about the exit. It is about being in it for the long haul. About making a commitment and staying committed.

There were many innovative venture concepts developed during the course of the Fellows semester, especially the final four that made it to the last demo day: Breakfaster (described above); Talktivity, a service helping people learn a new language by pairing them with professionals and mentors who could teach them and immersing them in environments where they could practice them; PopOut, a dating service that enables people to meet significant others based on common interests generated from pop quizzes; and GearedUp, a sharing economy platform that enables skiing and snowboard enthusiasts to rent high-end equipment for the day.

From my perspective, all of them were worth investing in, not just because of the ideas, but because of the teams that developed and might execute them. I identified GearedUp early on in the Fellows sessions as being a winner, and it did win the final competition. I liked it because it wasn’t just about pairing powder enthusiasts with equipment, but it was really about creating a new kind of “lean product experience” where people could constantly sample and learn what kind of equipment was actually best suited for them -- and suited best for particular conditions. It wasn’t about renting, convenience, etc., so much as it was about an opportunity to experience an outdoor sport with equipment you wouldn’t otherwise had an opportunity to experience. I am not a powder enthusiast, but I am a golfer and I told the team I believed the idea could be extended to any category where enthusiasts could have a different experience by using different equipment in different conditions.

Following their win, I asked the team what they got out of the experience, and whether they would actually try to bring GearedUp to market. They glanced sideways at each other, and I could see they had the bug, but I couldn’t figure out whether they had really connected as a team.

The teams participating in this semester’s Fellows program were put together randomly, and one of the things Engroff and Peltz said they would do differently in the future is allow the Fellows to create their own teams.

“Zemanta is an ideal partner, given how their team is building a DSP focused on native formats,” stated AdsNative CEO Satish Polisetti. “The AdsNative platform, being a pure-play native SSP, enables our companies to align and grow each other's businesses. Both AdsNative and Zemanta will work closely together to keep building and improving our product offerings."

Less noted, but equally significant, are the changes being wrought by mobile modes of production. When it comes to media or content, many people still consider the smartphone to be the younger, peskier cousin of the desktop, inheriting all of its innovations of the past two decades, while still stubbornly resisting large-scale advertising. In fact, the opposite is true. These days, mobile often leads the charge, with smartphones and tablets serving as the test bed for experimentation in user experience. And mobile innovations are now often driving change on desktops. Here are four examples to consider:

1. Website architecture and design: The dominance of the Visual Web as a design metaphor is reflected in every major website redesign of the past year—from MarthaStewart.com to Weather.com—and owes its rise to the mobile camera. Never before in history has it been so easy to create and share high-resolution photos, and it is no accident that websites become less text-heavy and more image-rich at the same time high-quality images became easier and cheaper to create. Additionally, many media properties are finally embracing responsive design and some, like Quartz, are bringing mobile idioms—single-column scrolls with Twitter card types of functionality—into the architecture of their desktop sites. 

2. Native advertising: They say every new medium borrows the advertising formats of the past. That has certainly been true in mobile advertising, as anyone who has ever mistakenly clicked on a scrunched, illegible, resized 320x50 banner can attest. But as it became clear that ad adjacencies were often nonexistent on small screens, Facebook, Twitter and others created noninterruptive in-feed units, growing their mobile revenue famously in the process. Some desktop sites, like Quartz and BuzzFeed, now avoid standard IAB placements altogether in favor of units integrated within content. And a new AdTech cottage industry of native advertising platforms has arisen, including standouts like TripleLift and AdsNative. 

3. Push media: When Oracle’s Responsys group acquired mobile push notification company Push IO last year, it noted that “while push notifications are primarily delivered over mobile devices today ... marketers will soon deliver push notifications through Web browsers, gaming devices and entertainment systems.”  Push notifications are the newest channel under the categories of direct marketing and CRM. According to the founders at Roost, a recent graduate of the Y Combinator accelerator program, Web push is clearly superior to both email and SMS, with higher opt-in rates, lower price points and more sophisticated analytics. 

4. Survey data: Not necessarily the sexiest area of media, surveys and panels have nonetheless formed the backbone of major media research companies such as Nielsen and SurveyMonkey. But in a world in which the average person consults his or her smartphone 150 times per day, there is diminishing patience for the long-form survey. Startups like Wedgies and Polar (now part of Google) bring a BuzzFeed- like sensibility to an old format, turning surveys into interactive content and capturing massive amounts of user data in the process. 

Over the coming years, as an additional 1 billion people come online through smartphones, digital will come to mean mobile, and mobile will continue to drive innovation in ways we’ve only begun to imagine.

Alternatively, we see the potential for Dextro’s technology to evolve situations where video is often meticulously reviewed.  It has the ability to create more efficient processes saving time and money examining security camera footage, evidence for legal cases, or evaluating natural environments for science research.  Providing transparency around visual data can benefit numerous verticals, and Dextro represents an exciting advancement in the space.