VCs eye mobile advertisement firms to park investments

With the country’s mobile operators adding close to 9-10 million subscribers every month, venture capital firms are exploring the mobile advertising space for investment opportunities.

“Mobile advertising companies today operate as mobile versions of advertising agencies. This trend will continue until the introduction of relevant mobile applications that drive huge traffic and stickiness. Once the market has killer mobile applications, mobile advertising network will truly be able to provide an optimised service to their end clients. There is an opportunity for this for sure,” says Gautam Patel, a partner with US-based Battery Ventures, which has $3-billion capital under management in eight funds.

Another US-based VC fund which sees good investment potential in mobile advertising is Clearstone Venture Partners. Clearstone began as a vehicle for investing in opportunities created by the maturation of the Internet and has $650 million of committed capital for investment. It has been investing in India since 2006 and focuses on sectors like telecom, financial services, gaming, media and entertainment and business and consumer services.

“We are yet to invest in this space though we have been in talks with a couple of interesting companies. We are typically comfortable investing up to $10 million in a company over its lifetime with an initial investment of under $5 million. Our return on investment (ROI) expectations are commensurate with our stage of investment and we are typically targeting a return of greater than 25 per cent,” says Rajan Mehta, venture partner at Clearstone.

The telecom carriers have pursued the spam SMS channel in the last few years with not much success. This has created numbness in the user’s mind towards SMS spam. Battery Ventures feels that there is an opportunity in permissive or contextual marketing via mobile mainly through SMS.

“If you compare direct marketing data in more developed markets and India, it shows the market is hugely underserved in direct marketing. However, permission or context-based direct marketing will effectively monetise this opportunity. We are actively looking at direct marketing businesses that are using the mobile channels and are planning to make a couple of investments in this space in the next one year,” Patel adds. Battery Ventures’ investments typically range from $5,00,000 to $50 million.

Direct marketing in the US against the total marketing spend is 50:50, whereas in India it is only 10 per cent of the total marketing spend. If the Indian ad spend is $4 billion, print and TV take a lion’s share of 70 per cent. However, Internet and mobile ad spends will be two of the fastest growing categories in the next few years, he feels.

The exciting growth story of mobile advertising — though a Rs 40-crore market in India now, it is expected to reach Rs 500 crore by 2012 — doesn’t end here as even digital marketing companies are gearing up to plunge into this arena.

For instance, Ybrant Digital, an over $25-million Hyderabad-based online marketing company, is looking at acquiring a content-based mobile advertising firm in the US for $100 million. The company is close to signing a letter of intent and expects to seal the deal sometime this fiscal. The zero-debt company would fund the buyout through a combination of debt and equity for which it is currently working out modalities.

“Advertisers, after targeting TV and personal computers, are now gearing up to reach out to their target audience on the third screen — mobile — as it brings together internet, video, text, gaming, music and more. The key lies in publishers creating ‘media on mobile’ based on SMS and permission from the subscribers. We believe the biggest digital marketing in India and China is in mobile marketing,” says Suresh Reddy, chairman of Ybrant Digital.