Gridley & Company

Yesterday, fellow Dartmouth classmate John Donahoe gave a fantastic interview with CNBC (http://video.cnbc.com/gallery/?video=3000102929&play=1) where he talked about the huge impact that mobile is having on the consumer shopping experience and on payments. In March, we released a report called POS Goes Digital: Evolution of the In-Store Shopping Experience  (http://bit.ly/POS-Goes-Digital) where we talked about the same thing. In both the interview and in our commentary around the report, we both have been saying that too many people are underestimating the impact of mobile…that the “consumer is way ahead of companies and brand marketers when it comes to mobile”. DO NOT IGNORE THIS MOBILE REVOLUTION.

In this interview, John is very well spoken about how and why mobile is having such an enormous impact. It is worth listening to the interview for the factoids that he sprinkles throughout. And, in a plug for EBAY, we have been saying all year that they are one of the few companies that have done a great job using M&A to transform their business. (http://bit.ly/eBayMA). The CNBC guys agree with us. Just listen to the trailing commentary after the interview.

Also, in our report, we talk about how the shopper marketing experience will become a battle of new big players such as EBAY, Google, AMEX, ISIS, etc. (http://bit.ly/NextGenPOSLeaders) and the vulnerability of traditional shopper marketing companies. In the interview, John Donahoe said that EBAY throws off $3 billion of cash flow a year and the company did 15 acquisitions last year. Yes, we would be worried about the “new kids on the street” if we were a traditional shopper marketing company.

Today, Gridley & Company released an industry overview on the dynamic in-store consumer experience called, “POS Goes Digital: Evolution of the In-Store Shopping Experience.” The report focuses on recent trends in the in-store consumer experience as well as our expectations about how the industry, particularly the payments and marketing sectors, will transform in the coming years. View copy of report. 

Recent Trends in the In-Store Shopping Experience
Gridley has found that, increasingly, the consumer is taking control of his/her in-store shopping experience. Consumers are using mobile and digital technologies to receive highly targeted offers, decide when and where to shop, compare product pricing and features, and make purchases. For example, during the 2011 holiday season, 25% of cell phone owners used their phones inside stores to compare prices. Of those, 19% eventually bought the product online, presumably for a better price. Roughly 24% of cell phone owners also used their phones to look up online reviews during the 2011 holiday season.

The in-store consumer shopping ecosystem has changed significantly over the last few years due to rapid innovation in digital and mobile technologies. Some of the most important recent trends we have seen include:

• Consumers are increasingly opting to go paperless and are searching online before going shopping;
• Mobile phones are offering more pricing transparency, greater convenience, and product information;
• Large technology companies such as Google, Verizon, Apple, and eBay and two dozen retailers including Target and Wal-Mart are trying to build integrated payment and marketing systems;
• Traditional coupons and incentives are being threatened by more measurable digital alternatives;
• Mobile couponing is well on its way to becoming ubiquitous. Digital couponing, which includes mobile and web services, surpassed print coupons for the first time in the fourth quarter of 2011; and
• The Durbin bill is causing disruptions to traditional debit payment methods and opening the door for new mobile systems.

Evolution of the In-Store Shopping Experience
As technology continues to change, so will the in-store shopping experience. In fact, changes in technology have begun to prompt big box retailers to pursue new strategies. For example, in January 2012, in an urgent letter to vendors, Target suggested that suppliers create special products that would set it apart from competitors and shield it from the price comparisons that have become so easy for shoppers to perform using computers and smartphones. If special products were not possible, Target asked suppliers to help it match rivals’ prices. It also said it might create a subscription service that would give shoppers a discount on regularly purchased merchandise. A few weeks later, the Wall Street Journal reported that Target and Wal-Mart are among roughly two dozen retailers working together to develop a mobile-payments system to compete with similar products from Google and ISIS.

Retailers are only one major group poised to make strategic changes in the coming years as in-store technology continues to evolve. As a result of big box retailers’ increasing need to retain existing customers and compete more effectively with online and discount merchants, loyalty and rewards programs should grow. Coupons will also continue to be an important part of retailers’ marketing plans since comparing prices of a product sold at different merchants is becoming easier and easier for consumers.

Smartphone use will also continue to increase in the coming years, driving the creation of more in-store marketing applications. The coupon, loyalty and payment segments will also converge within the next few years. It is currently unclear whether Google, Verizon, Apple, or eBay will ultimately develop the most successful integrated payment and marketing system, however, it is clear that someone will succeed at building an integrated system and will be a real threat to traditional payment and marketing leaders.

As consumers continue to rely more heavily on their smartphones and computers, it will become possible to collect even more types of consumer data. As new applications and technology continue to develop over the coming years, it will also be interesting to see how big data companies find ways to take advantage of these new opportunities and develop more innovative products to help marketers and consumers.

While many things are uncertain, it does seem clear that the consumer of the future will have a much more holistic in-store experience as marketing, payments, and loyalty converge. In addition, better technology and data should allow shoppers to receive more targeted promotions in-store that are tied to their payment mechanism.

We hope you enjoy this overview and our perspectives. Please call us to discuss the content of this report.

1 Source: Pew Research Center, The Rise of In-Store Mobile Commerce (January 30, 2012).
2 Source: Wall Street Journal (January 23, 2012).

On February 13, 2012, AlwaysOn announced the winners of its first annual Power Players New York City competition. The results of the contest were based on readers’ nominations of New York-based champions of Internet and mobile entrepreneurs. Gridley & Company was honored that Linda Gridley was recognized as a winner by AlwaysOn. For over a decade, Gridley & Company has been committed to building deep relationships with internet veterans and entrepreneurs. We regularly meet with company executives and participate in conferences to gain intimate knowledge of the newest trends in e-commerce, mobile, social, and more. We also recently launched Gridley’s Guide to Digital New York, a comprehensive guide to New York City’s private emerging digital companies, their venture capital and private equity investors and the public companies that turn the industry. We feel our knowledge of the digital sector and relationships with industry leaders enables us to effectively help our clients navigate the rapidly shifting landscape, and we are thrilled to be recognized by AlwaysOn and its readers.

1. The Pace of Innovation and Adoption is Frighteningly High across Digital Media Ecosystem
Massive consumer adoption across social and ecommerce is certainly helping new companies scale faster and cheaper. 2011 started what we think is an interesting phenomenon where companies start and hit reasonably large scale in the same year.  Take eCommerce for example. Wine flash sales business Lot18 is on track to do north of $20 million in revenue in its first year of business. And recently launched daily deal design site Fab.com is generating over $6 million in monthly sales just a few months after launch.

Consumers also continue to explore new, more focused social experiences. Foursquare continues to gain tremendous traction as a location driven network, despite comparable features embedded into a variety of experiences such as Facebook. Pinterest, a new interest based social network, gained all of its traction in 2011, growing users by over 40x in the last half of the year to become one of the most trafficked social networking sites on the Web. Innovation is also clearly moving beyond B2C. Categories such as payments, data sciences, and large end markets with large, traditional incumbents such as healthcare are seeing considerable influence from new technologies and models.

Square, an innovative alternative payments technology currently geared towards small businesses, launched in late 2010 and has already reached considerable adoption, activating over 800,000 merchants and processing well over $2 billion in payments on an annualized basis.  The Company completed a financing round in the summer of 2011 at a rumored value north of $1 billion, about six months after launching.

Nothing smells more of innovation than an accelerator program. In early 2011, Rock Health launched a seed accelerator for entrepreneurs building health-related startups and has since funded nearly 30 companies. 2012 should be interesting year for the healthcare industry, which is arguably the largest in the U.S, but has been relatively resistant to new software and business model led innovation.

We expect the pace to only increase and broaden out in 2012 as software and science led models continue to challenge incumbent models and barriers to creation and adoption disappear.

2. Mobile Goes Everywhere – Latest Battleground and Area of Innovation Across Large End Markets
2011 was a big year for mobile adoption. The investments made in the past five years in network, hardware and software began to bear fruit as consumer up take in smart phones and tablet devices grew substantially in the year.  Although consumer gaming continued to grow in scale on mobile, the attention has turned to how mobile will impact user behavior in the offline world.  2012 will be transformation year for mobile, led by heavy investment and focus from industry giants in digital (Google, Amazon, eBay), Payments (PayPal, Visa, Mastercard, Amex), Promotion (Coupons.com, WhaleShark), and Social (Facebook, Twitter, Yelp). Location driven user experiences as travel, entertainment, shopping should start to fundamentally change for us all in 2012.

3. Big Data gets Bigger
Data science was a key area of focus in 2011.  The scale of data being generated by enterprises today from both offline and online channels is staggering, opening up new opportunities for technology and expertise in turning data into actionable intelligence. In September, Opera Solutions raised $84 million from SilverLake Sumeru and others double down on the opportunity. And a few weeks ago, Mu Sigma raised $108 million from General Atlantic and others for a similarly positioned offering. A personal favorite, Urban Science, has brought data science to global automotive OEMs and dealers to help drive better marketing decisions and higher revenue.

Social data is also exploding on the Web, creating new opportunities and insights for a broad range of companies. Networked Insights raised $20 million in September to build out a marketing platform that relies to mining massive data sets of users and conversations to help brands determine how best to allocate advertising budget.  And companies like Recorded Future are mining thousands of social and editorial data sources to try to predict events for interests such as completive intelligence and financial trading applications.

If 2009–2011 was about gathering data and providing an analytic framework to view it, 2012 will be much more about deriving predictive insight from the data. We think that the data driven investment and M&A thesis should only get louder and more “verticalized” in 2012 as new data sources on the Web scale.

4. Traditional Industry Leaders Continue to Lose Their Way
Traditional industry leaders seem to continue to take a largely traditional, financial metric driven approach to investing in or acquiring new, digitally driven businesses. This strategy certainly didn’t pay dividends in 2011 as evidenced by the lack of significant M&A in the year. We believe that the M&A game in digital has permanently changed. Companies like Google, IBM and Adobe have developed an M&A strategy that is much more focused on team, technology, and long term vision than near term financial criteria.  And this has allowed these types of players to think of value very differently than traditional leaders.

Size and scale matters in M&A. And the new buyers are only getting stronger. The graph below illustrates the difficult situation traditional industry leaders face in the digital M&A market.

MICRO predictions for 2012

1. Changing of the Guard amongst the Internet “Titans” this Year.  Similar to the S&P 500, some companies go in and out of Internet Titan status and some stay in for the long haul.  2011 saw a few companies officially enter “Titan” status, most notably Facebook, Twitter, LinkedIn, Zynga, and Groupon. Yahoo and AOL both relinquished their status as they continue to find their way on the Web. Companies such as Google, Amazon, eBay and Amazon have and will remain long term residents in the category.  2012 should bring in a whole new wave of multi-billion businesses into the mix.

2. The M&A Buyer Landscape is in a “tweener” Stage, Creating Warning Signs for Digital Businesses.  A large gap is forming in the digital M&A market between long term strategic buyers (the “new buyers”) and financials driven, short term focused buyers (“traditional buyers”). New buyers consistently take a long term view on the business and team and are willing to apply multiples based on those views. New buyers fall into two camps: Large, highly strategic deal at scale. And small tuck-ins with an emphasis on cultural fit and technology.  On the flip side, traditional buyers have remained financially driven in their thought process and generally don’t have the appetite for larger ($100+ million) deals, irrespective of fit.  Small team driven deals aside, new buyers are only getting hungrier for strategic M&A opportunities that possess game changing characteristics and are clear leaders in their category. The bar is high, but valuations are exceptional for these businesses. Adobe acquiring Demdex and Google acquiring Admeld are just two examples. As it has become clear that traditional buyers can’t compete for those assets (due to size and value), a lower end of the range has formed based largely around metrics such as EBITDA.

Therein lies the challenge. Businesses that have raised north of $30 million of capital typically require somewhere in the range of $150 million to achieve a good outcome. If the business doesn’t develop a strong path to distinct leadership in a growth market, there likely won’t be a home for that company at attractive valuations. A middle ground alternative is currently not available in this M&A market. We expect this theme to play a greater role in funding and exit strategy in the digital sector in 2012.

3. AdTech will Experience a Breakthrough Year in 2012.  In 2011, we began to see companies break away from the pack. We see a continuation of that trend and expect to see three distinct tiers form this year. Tier one players will position themselves as viable niche competitors to Google and pursue M&A and growth capital aggressively during the year. Tier two companies will continue to pursue their niche and continue to chip away at growth and profitability. And tier three players will stall this year and aggressively seek strategic partners. In many cases, tier two companies have raised $30 million in capital and will face the dilemma outlined above. Some tier three companies are in the stage of deciding whether to sell or take significant capital to grow. We think an increasing number of them will decide to pursue the sale path. Some of those will represent good M&A opportunities.
In addition, as we predicted last year, we began to see some flexibility in doing private to private deals, typically a very challenging execution path to pursue. DDS/MediaBank and Tremor Media/ScanScout were two great examples during 2011. Our last prediction in this category is that we believe most traditional display ad networks will continue to lose momentum to emerging channels, technologies and buying methodologies in 2012.

4. Online Measurement takes Center Stage.  The lack of standards has been a limited factor for large brands allocating more $$ online.  Despite breadth of innovation in online advertising to date, last click attribution remains the default methodology for measurement today. Measurement and effectiveness will take on a greater priority in the media buying process in 2012 as a key enabler of brand budget growth.

5. High Stakes get Higher in Payments. There has been lots of noise from very large players around controlling the payment value chain in 2011 as well new disruptive models designed to work around the interchange infrastructure. Incumbents such as Visa have been active acquirers, purchasing companies in new fields like Playspan for virtual goods and Fundamo for mobile payments. We expect Mastercard and AMEX will follow suit in 2012, thinking more strategically about the role of payments in the quickly evolving landscape of local, social and mobile.

6. eCommerce and Content will be Largely Indistinguishable. Curated commerce has been a big theme online in 2011. Companies like OpenSky have proven the value of high quality content in generating purchase intent. Thrillist has proven a similar theory, that trusted content can be very additive to a consumers’ experience when purchasing goods. 2012 will bring a continuation of this theme across the Web.

7. Explosion of the Seed Investor is Altering the Investment Cycle for Early Stage Businesses. Certainly lots more deals, but has quality been impacted and is this phenomenon good for innovation? We won’t add fuel to the heated debate on this topic, but what we’ve certainly seen is confusion from the entrepreneurial community about the right funding and exit path to pursue. We think this only continues in 2012 as “digital” continues to draws entrants from other parts of the economy and as technology removes more and more barriers.

8. IBM’s Digital Marketing Strategy will become more Apparent with a Large Acquisition in the Online Advertising Sector. IBM has certainly been a potential entrant to the sector for some time. Their ambitions towards data driven industries is pretty clear at this point. We think the online ad space is maturing to a point where their role and opportunity is becoming apparent. The real question and excitement will be around how they play with Google.

9. Mobile M&A will Continue to Move across Digital Categories into 2012. 2010 was a seminal year for mobile M&A with large acquisitions such as Google/AdMob and Apple/Quattro. Focus in 2011 broadened out into areas such as location based services and payments. For example, eBay acquired both Where and Zong in 2011. We expect 2012 to be a big year for many areas of mobile such as location based services (both social and commerce) and payments as these technologies develop further and new players come into the M&A picture.

10. We will Continue to see More Innovative SaaS Business Models with Companies Growing up Faster and Achieving even Higher Sale Valuations. This trend is just beginning and it goes back to what we said in the beginning of the newsletter. Ditch the old business models and technologies. The SaaS “genie” isn’t going back into its bottle

At the end of 2010, Gridley made ten key predictions for 2011. For the most part, our forecast was fairly accurate. We were right on the money with our predictions about social media becoming mainstream, mobile finally having its day, the continuing momentum in eCommerce, and the surge in SaaS and outsourcing services. Our predictions about disruptive models gaining traction, a healthy IPO market, the emergence of broadcast quality video content, and successful content models continuing to evolve also panned out to some extent. We ended up being surprised that Facebook did not turn into a real eCommerce platform in 2011 and that more VC and PE firms did not seek to more aggressively exit portfolio companies. However, we expect to see these themes play out in 2012.

1. Social marketing will be a focal point within online marketing broadly with companies across the online advertising landscape building or buying solutions.

2. The mobile opportunity will finally become a mass marketing opportunity in social and location based services.

3. Continued shift in the e-commerce landscape as the new wave of social / group buying / flash sales companies took the king of e-commerce, Amazon, by surprise and gained immediate, unprecedented momentum.

4. Big surge in SaaS/Outsourcing Services sector with continued growth in cloud computing based models and resurgence in IT spending amongst a healthier economy.

5. Disruptive payment companies will gain a lot of attraction and attention and there will be at least one “bubble valuation” sale.

6. IPO market will return with multiple Internet treasures going public. Facebook will be the deal of the year.

7. Broadcast quality video content will find a business model that works online beyond Hulu.

8. Value will begin to accrue back to high quality, professional created content publishers and creators. However, the definition of “quality” will continue to evolve.

9. Facebook will become a real ecommerce platform.

10. We will finally see the VC and PE community looking more aggressively at portfolio company exits.

Over 475 executives representing over 330 companies expected to attend the invitation only event to discuss current trends in the information services industry and identify strategic opportunities within the marketplace — TOMORROW, January 10th at the Plaza Hotel!

Key decision-makers from across the industry will come together to share their insights.

We will have it all. This year’s conference will cover important aspects of the digital environment including advertising, content, ecommerce, payments, social media, mobile and data. We are also very excited about the lunchtime keynote address from Michael Rubin, the former CEO of GSI, who will give an insightful view of recent ecommerce trends.

Our conference will also feature an end of day entrepreneur fireside chat moderated by the very humorous Henry Blodget, Editor-in-Chief of Business Insider. The entrepreneur fireside chat will also include panelists Brian O’Kelley, CEO and Co-Founder of AppNexus, Tom Evans, CEO of Bankrate, Russ Fradin, CEO of Dynamic Signal and Kevin Ryan, CEO of Gilt Groupe.

Be sure to check back here after the conference for commentary!

On December 9, GfK SE, an international market research firm headquartered in Germany, announced the acquisition of Knowledge Networks Inc., a Palo Alto-based digitally-focused market research company. We served as the exclusive financial advisor to Knowledge Networks on this transaction.

The acquisition of Knowledge Networks marks the ninth significant acquisition in the market research sector in 2011. Consolidation has been driven by:

1. Increasing Need for Scale as clients consolidate their vendor relationships amidst a tougher advertising environment and recessionary economy
2. Heightened Interest in Digital Capabilities that offer higher growth opportunities and innovative business models.

The chart below was taken from a presentation we gave in October at the Market Research Council’s quarterly meeting. It shows the clear market leadership, in terms of size, of WPP and Nielsen. It also helps explain why Ipsos made a big bet in July with its £525 million purchase of Synovate and why GfK is buying high quality digital assets like Knowledge Networks. For a full copy of this presentation, please go to: http://bit.ly/vrlH9I.

Another recent Gridley presentation you might find interesting is the one we gave at the OMMA Display Conference in November titled: Transformation of the Data Measurement Industry: How Much Can be Attributed to M&A? For a full copy of this presentation, please go to http://bit.ly/v0DfZe.

While many of you were out at the beach or on the golf course this summer, we had a team toiling away on our latest industry report. We are very excited to present Gridley’s Guide to Digital New York — a unique and comprehensive report for investors, buyers and entrepreneurs looking for one place to quickly get up to speed on New York’s exciting, explosive digital ecosystem. In addition to this report, we have designed an “easy to use” website that lays out the information in the report (and more) in a fun, creative way. You can access this website at www.gridleydigitalny.com.

We decided to put together this report when we were out visiting companies and investors in May/June and people starting asking us about all of the “digital momentum” in NY. There was a feeling that lots was going on, but people didn’t really understand just what “it” was and how extensive “it” was. Well, four months later, we can tell you a few things about “it”:

• There has been $4 billion of capital invested in Digital NY companies since 2006.
• While the total number of Digital NY private companies probably is well over 500, we have identified approximately 280 to be included in this report. Companies in our report either have raised at least $5 million of outside capital or are prominent enough in the Digital NY scene to merit inclusion. The digital sectors we focused on are: Content,
• eCommerce, Marketing, Mobile, and Social.
• There are approximately 120 investors with a focused interest in Digital NY. This includes all stages – Seed, Early Stage, Growth, and Buyout – and includes local firms as well as firms with little or no physical presence in NY.
• There have been five private companies that have raised over $100MM of capital (Tremor Video, ZocDoc, Gilt Groupe, Tumblr, and Everyday Health) and 12 that have raised between $50MM and $100MM.

• There have been eight $100MM sale transactions of private Digital NY companies since January 2008 (Mediamind, Admeld, Huffington Post, Webloyalty, Hotjobs, Register.com, Daily Candy, and Answers.com).

The Digital NY scene is still in its early formation days with lots of growth ahead.
We believe that New York’s existing ecosystem with big traditional advertising and media companies as well as many large data and internet industry leaders all headquartered here sets the stage for the unique development of the next generation of disruptive digital companies. Nowhere else in the country is there such a blend of the “old guard” with the “new kids on the block” – all in the same city.

So, whether you are looking to buy, sell, invest, or merely “browse”, we hope Gridley’s Guide to Digital New York and our accompanying website (www.gridleydigitalny.com) will be of great use to you.