Startups flourish when new technologies take the first 3-5% of a market – case study mobile advertising

Startups appreciate in value most quickly when consensus starts to build that the market is tipping in their direction, and this is when the high multiple exits occur. Looking at the mobile advertising industry over the last few years suggests that tipping point is around 3-5%. It’s an old cliche that for the first ten years of this century every years was supposed to be the year of the mobile, then the iPhone and Apple app store arrived and the mobile internet finally took off.

After the arrival of the iPhone mobile inventory sky-rocketed and revenues at the leading mobile ad network, Admob (a DFJ investment), went in the same direction. Their success led to a $750m acquisition by Google towards the end of 2009 and Apple responded by acquiring Quattro, the second player in the market for $250m at the beginning of 2010.

The latest news in the mobile advertising industry is of course the Milennial IPO on March 28th (2012) – their market cap peaked at $1.9bn, but has since fallen back to $1.4bn.

As you can see from the charts below (courtesy of AllthingsD) mobile advertising was 3% of the total online ad market in 2010 and rose to 5% last year.

The first wave of successful exits in a new market are about growth in that market. After that the attention turns to dynamics within the market as competing models start to emerge. That is the thesis behind our recent investment in StrikeAd which seeks to exploit and accelerate the trend towards mobile advertising being bought in real time over exchanges, instead of over ad networks.