The Funding of Adware
In several past articles, I have often compared Adware to Email, two highly lucrative areas of Internet marketing whose unfettered growth ultimately led it to the brink of collapse. Similar to the complaints against email marketing, users started receiving marketing messages that weren’t necessarily illegal, but in many cases they were “uninvited.” As the proliferation of lawsuits and complaints filled the popular press and fueled countless millions of anti-spyware purchases, it’s easy to forget the amount of money that investors poured into adware companies. This article takes a look down investment memory lane into four of the largest adware purveyors – Claria, 180Solutions, WhenU, and Hotbar.
The trip begins with one of the more recent announcements, this one taking place in July 6, 2005 when (no pun intended) WhenU announced that it had completed a round of $35 million, $15 million in funding from Trident Capital plus $20M in funding secured earlier that year from ABS Capital Partners. By that time, WhenU had committed itself to becoming a model for ethical marketing in the adware space, something that would sound like an oxymoron to many. Nine months earlier the company announced what seems like a major win, they brought in Bill Day, co-founder and former head of About.com to lead the business. They stopped purchasing ActiveX, weeded out risky distribution channels, posted a toll-free number on ads, and greatly increased notification to users. They lost a reported 50% of users during the cleanup, but those that remained, still make money and the war chest gives the company the opportunity to figure out what it wants to do when it grows up.
Another company that has experienced both ends of the distribution spectrum in terms of notification to users is Claria. They began in 1998, about a year earlier than most other adware companies, and were founded by Denis Coleman of Symantec. His incredible connections no doubt helped when the company went to raise money after seeing the great growth upon launch of their eWallet product. In January 2000 Claria did just that, raising $11.7 million in their first non-angel round of financing with contributions that included money from the founders of Intuit and Sun. Later that year, in July, the company announced another round of financing, this one totaling $44 million. That put the total raised to approximately $59 million, although later reports suggested the total number tops $80 million. Fast forward six years, and Claria announced that they had again taken in money. In a double whammy, they not only told of the $40 million they raised but also declared their exit from the adware business by looking to sell their 40-plus million member user base.
It’s hard to top keep up with Claria in terms of raising money, but one of the companies that we focus on in the other adware related piece didn’t do so badly with respect to capital. In February 2001 about seven months after Claria completed their fourth round, Hotbar announced that it raised $11 million, an impressive feat considering that this was during the dot-com collapse. The company had one prior round that took place in November 1999 in which they raised $3 million. More interesting than the amount of their initial funding was from whom; the list included DaimlerChrysler, Deutsche Telekom, and Lockheed Martin Corp. Hotbar added to their second round of financing with a third round that wrapped up in April 2001, just two months after raising $11 million, taking on an additional $3.5 million.
The second company profiled in the previous post is 180Solutions. Like WhenU, Claria, and Hotbar, they too took in funding. Their only round occurred five years into operations in March 2004, when they disclosed that they took in a whopping $40 million, a pretty amazing amount considering they had 60 employees at the time. Then again, Spectrum Equity Investments, who provided the capital, had $3 billion in management, so one can only surmise that the amount fell into their normal range. Upon making public the funding, 180Solutions, which was reportedly near bankruptcy during the Internet downturn, said that it planned to use the money to hire as many 150 people, launch two new brands, all while on pace for $50 million in sales for 2004. At an estimated $20 million in earnings, they were practically printing money; the funding was merely icing on a really sweet cake.
The past two years no doubt hearkens back to 1998 and 1999. We’re in a frothy market today. While no one is really asking when it began, I’m going to say right when 180Solutions, a maker of adware and attractor of complaints left and right, took in an unbelievable sum from a very established private equity firm. Their ride sounds like something from the first bubble – a college dropout, his brother and two buddies from high school start a company. Unlike Bubble 1.0 though, 180Solutions made money – profitable quarter after quarter, 30 million installs in March 2004, and revenue growth of more than 5x from the end of 2001 to Q1 2004.
I still don’t think 180’s investors really understood what they were buying. I do think they understood the potential upside. To them the business probably looked like Mike Tyson with them being Don King. Boxing certainly isn’t pretty, but it makes money. The adware guys get to do the same thing they did before, only bigger. Not a bad deal. Then again, Mike Tyson didn’t turn out to be all that good for boxing in the end.
