Struggling Unicorn
InMobi, India’s first billion-dollar-valuation start-up, is finding it difficult to raise funds and survive independently.
InMobi, India’s first billion-dollar-valuation start-up, is finding it difficult to raise funds and survive independently
On September 15, 2011, when Japanese firm SoftBank Group announced a $200-million investment in InMobi, celebrations broke out in the company’s then main headquarters at Embassy Golf Links, a technology park in Bengaluru.
There was a palpable sense of excitement among InMobi's rank and file. An Indian company was taking on the might of the likes of Google and Facebook in the digital advertising technology space (ad tech) – a David taking on the Goliaths. The investment was a milestone. Softbank had come into the company, valuing it at a little over a billion dollars, officially making it India’s first Unicorn. A Unicorn is any private company, which has a valuation of more than a billion dollars.
Cut to June 22, 2016. The US Federal Trade Commission said in a statement that InMobi had “deceptively tracked the locations of hundreds of millions of consumers – including children – without their knowledge or consent to serve them geo-targeted advertising.” Under the terms of settlement, FTC slapped a $4-million civil penalty on InMobi, who admitted that it had made an inadvertent and unintentional error. Significantly, the FTC statement further said that the $4-million penalty was slashed to less than a fourth to $950,000 based on the “company’s financial condition”.
Why did India’s first ever Unicorn company, which had raised a cumulative sum of $220.5 million apart from a $100 million in venture debt, have to plead to have its penalty reduced? Rumours have been swirling for months that the company, which says it is the world’s largest independent third-party ad-tech player, was up for sale; that it was unable to raise further funding; that it was burning through cash; that it had laid off nearly a fifth of its employees; and that it was staring at an uncertain future.
Business Today spoke to the company as well as former and current employees, analysts and industry experts to get a sense of why India’s first Unicorn may end up as a Unicorpse (a former Unicorn, now valued at less than $1 billion). But before we get there, it is important to understand the digital ad-tech space and why InMobi has had a dizzy roller-coaster ride.
Genesis and the opportunity
The story of InMobi’s birth is by now well known. How Naveen Tewari, a whizkid who studied at IIT Kanpur and Harvard with work stint at McKinsey, even-
tually started a company with three friends in 2006. The company was initially called mKhoj (short for mobile khoj or mobile search) and two of the co-founders were his friends at IIT Kanpur – Abhay Singhal and Amit Gupta. The three along with Mohit Saxena started mKhoj in a Mumbai flat. It offered SMS- based search services.
The company even raised half a million dollars from Mumbai Angels in 2007. However, failing to find traction in providing SMS- based search services, and in keeping with the old VC thesis of investments being about people and not the idea, mKhoj pivoted. Then a concatenation of foresight and circumstances helped mKhoj hit the big time under a new moniker. It rebranded itself as InMobi.
The advertising business has been around forever. Even by the time InMobi took birth, the online advertising space backed by technology was not just growing but a clearly identified opportunity for at least a decade. Google, even in 2008, was a multibillion-dollar corporation, which earned revenue mostly by serving ads to visitors of its ubiquitous search engine apart from other properties. So did Yahoo and a then rising star called Facebook.
InMobi quickly realised that unlike the western markets where desktops and laptops were the mainstay, for millions of people in Asia – particularly China and India – as well as other emerging markets, their first online experience was through a mobile phone. If InMobi could act as the middleman by matching companies ( advertisers) seeking to reach these billions and those who owned content or platforms, it could make a tidy sum in the bargain. It could insert banners, pop-up ads, search, display, video, location and geo-specific advertisements to match the content/publishing property and the advertisers.
This, of course, would happen seamlessly with the help of technology. InMobi would just take a small sliver of percentage for the services rendered. However by scaling, that is serving billions of ad impressions, it could make a substantial sum. Think of say one paisa per ad, inserted. While that may not sound much, if you multiply it with a few billion impressions, the numbers start getting impressive.
InMobi was not alone in recognising this potential. Apart from the major players like Google, Facebook, Yahoo, AOL, Microsoft and conventional ad agencies, several digital ad-tech players sprung up.
What did help InMobi was its initial focus on markets like China and India, which were mobile first. While estimates vary depending on who is collating and interpreting data, the mobile ad-tech market is a $30-50 billion opportunity. Even if a player corners single-digit market shares, that is very big revenue. The company, which serves up the ads, charges its customers in many different ways. Cost per click, cost per view, cost per action, cost per install, cost per impression and many other ways. It passes on bulk of this revenue earned to the platform owner or content owner and keeps 30-40 per cent to itself.
InMobi says it is the largest ‘independent’ ad-tech network in the world. That is the largest player who does not own a platform to serve those ads like a Google or a Facebook does.
Investment and Inflection
Even before the Softbank investment, InMobi had raised money from blue-chip VC firms such as Kleiner Perkins Caufield Byers ( KPCB) and Sherpalo Ventures of Ram Shriram, an early investor in Google. When the Softbank investment came, ad-tech was the hottest sector to invest in.
While the market was fragmented, InMobi rode the wave and doubled its revenue each year. It counts the likes of Uber, P&G, Airbnb, Adidas, Yamha and several others amongst its customers. It also acquired small niche firms to plug gaps in its offerings. “We positioned InMobi as a true technology company and thought leader in the mobile ad-tech space, acquired a large base of customers, grew revenues like crazy and helped integrate acquisitions,” says Shrikant Latkar, a former San Francisco-based chief marketing officer of InMobi.
However, platform owners like Google, Facebook and Yahoo had one advantage over middlemen like InMobi. They own the inventory. Other middlemen have to either aggregate
inventory or match make the same. So, ability to manage margins and inventory was higher with the platform owners.
In order to not get steamrolled by Facebook and Google, which had locked up nearly 40 per cent of the market, most others decided to focus on vertical strengths. InMobi made a contrarian bet and decided that it would continue to be a horizontal play. Meanwhile, newer players like Verizon, which has acquired AOL and Yahoo recently, apart from the likes of Snapchat, Twitter and Pininterest have emerged as other major players. InMobi, though, insists it reaches 1.6 billion unique mobile users a month and decided to continue headbutting against the biggies across offerings.
This was the inflection point.
MiiP and Markets
To further strengthen its offerings, in August 2015, InMobi launched MiiP (pronounced meep) – its branded offering for mobile commerce discovery – with much fanfare and more importantly substantial investment. A select bunch of Indian journalists were flown to the launch in the US. Naveen Tewari proclaimed that mobile advertising was broken because it didn’t include the user effectively. With a monkey as a mascot, MIIP was supposed to change that forever.
For instance, if you were searching on mobile for a flight ticket to Goa, MIIP would also serve up hotel room bookings, taxi services for your pickup and drop to airport as well as sell beachwear to relax in, once you reach the destination or that was the idea. It was all about contextual information and MIIP was touted as the next big thing.
A year later, Abhay Singhal, the Chief Revenue Officer and Co-founder of InMobi admits that MIIP could have done better. Faisal Kawoosa, Telecom Analyst at CMR Research says that “MIIP has not been able to add value”, which is why it has not taken off in the manner anticipated.
More than the failure of one single product, the biggest change is that markets and investors have turned sour on ad-tech companies. There is a good reason for that. Most of the ad tech companies that listed are quoting at a fraction of their IPO price. For instance, Tremor Video issued shares at $10 but is now trading at $1.91. Similarly, Millenial Media was valued at more than $2 billion on listing in 2012 – it was sold in September 2015 for a mere $238 million or a tenth of its peak value.
Ad-tech players are falling out of favour because platforms like Google and Facebook are purchasing their own ads, cutting out the middleman. Since they have scale they can afford to do so. This hurts non-platform players like InMobi. With high fragmentation, platform players are running away with the most profitable chunks of the industry.
There are some other concerns, too, such as advertisers being concerned about ad fraud (charging for inflated viewers), lack of transparency and accountability as well as increasing use of ad blockers even on mobile. To be sure, these are industry-wide issues but platforms are more effective in countering them than independent ad tech companies.
“The potential for mobile advertising to grow even further is very huge and we (InMobi) have been making the right moves in the marketplace” ARUN PATTABHIRAMAN/ VP & Global Head, Marketing, InMobi
“There are only three models. One is to be a large platform of owned inventory, like what Google, Facebook or to some extent even Twitter is. The second model is to be a tech provider to mega digital publishers. The third model, which is difficult to execute, is to become a very large aggregator and thus get pricing power. InMobi can pursue the latter two options – they have to decide what makes sense for them,’’ says Sharad Sharma, a former Yahoo India R&D head who now is both an active investor and leads the Indian software product industry lobby group iSpirt.
Layoffs, funding and profitability:
While InMobi raised a cumulative $220.5 million and has been witnessing topline growth, it has struggled to make money. While Singhal protests that the business enjoys 30-40 per cent margins and is “unit economics profitable”, the company is clearly making losses. It has accumulated losses of $224 million. On top of it, the company raised $100 million in venture debt from Tennanebaum Capital Partners, of which $40 million was used to repay an earlier loan raised from Hercules Technology Growth Capital.
Filings of the company indicate that at the beginning of the financial year it had a mere $30 million in the bank. Just for perspective, InMobi had losses of $40.91 million in 2015/16 and that of $45.5 million in 2014/15. So this has to be a do or die year.
To turn profitable, the company has laid off approximately 15-20 per cent of its workforce. Arun Pattabhiraman, VP of Marketing, however says the company still has 975 employees and “we continue to hire”. A series of senior leaders has left the company in the recent past. Manish Dugar, CFO; Samuel John, Director of Operations; Atul Satija, Chief Revenue Officer; and Nimish Joshi, Head of M&A, Investor Relations, among others. Counters Singhal. “Most of them with the exception of Manish (Dugar) were not that key. All start-ups face some attrition. People who had left us in the past have returned recently.”
To ensure that it becomes profitable in a tough climate, InMobi also has cut back on funding for so-called moonshot projects (long-term projects with low probability of success). Singhal, however, says that they continue to invest in developing products required to help InMobi’s customers.
Softbank, the main investor in InMobi, is itself facing turbulence after its COO Nikesh Arora recently left the organisation. Another analyst who did not want to be identified, says “Nikesh came from Google and understood the ad-tech business very well. The fact that even when he was at Softbank and when InMobi was desperately looking for additional funds, he chose not to invest, must say something. InMobi is clearly at crossroads.”
Singhal asserts that InMobi will be profitable in a quarter and does not require additional funding for survival. His claims are however being taken “with a bucket of salt” says the analyst quoted above. “Since 2011, they have been publicly saying they are a quarter away from profitability. Unless they raise equity or debt, they are a good acquisition candidate who will be likely sold for pennies on the dollar.”
Softbank, which is a major stakeholder in the company, might not also allow InMobi to raise funds in a down round making them a Unicorpse. ‘That is for the board to decide and I cannot comment on it,’ says Singhal.
Naveen Tewari in the past had declared that InMobi would reach a billion dollars in revenue by 2016. It looks like this year they may end up closer to $300 million. The US IPO that Tewari has spoken in the past is unlikely to happen, too. China’s Youzu Interactive is often mentioned as a potential investor/acquirer of InMobi. However, with accumulated losses and debt equal to revenues, it is unlikely to pay the kind of price that existing investors may want.
For InMobi, the next couple of quarters might decide its future.~