There has been a lot of investor interest in the Online Brand Protection sector over the last six months, so I thought it would be worthwhile to assemble a list of the top ten questions to ask of a target business to help determine its potential.
How are you differentiated ?
Since 2010, when OBP demand really started to grow, there have been a lot of new entrants to the market most of whom focused their go to market on “we can do the same as the market leaders at half the price”. This led to significant a reduction in the ARR of many OBP contracts which was great for new entrants, seeking to build market share and gain a customer base, but less good for the original vendors and also for those seeking to establish long term growth plans.
Today, the messaging of the leading players does attempt to provide some technical differentiation : terms such as “artificial intelligence” and “machine learning” are common but, in terms of results achieved, the true differences are essentially qualitative – compliance rates, reporting flexibility, breadth of marketplace coverage. The market for the basic requirements of scanning, confirming and enforcing against infringing content is, essentially, commoditised.
This makes it extremely difficult to protect both market share and price and, for this reason, questions around differentiation or planned differentiation are where the inspection of any vendor should start.
How much of your revenue is actually professional services ?
Because of the diverse nature of internet infringements and the sheer breadth of the problem, it has been near impossible to achieve a fully automated detection, analysis and enforcement process and so many of the larger contracts are fulfilled with significant amounts of manual effort.
This may be fine in terms of results, but definitely impacts the scalability of the business and the profitability of the provider – managing and growing services teams, especially where language and geographic coverage are important, leads to many challenges that will have a negative impact on the long-term prospects for expansion. There is a reason why professional services businesses command much lower multiples than true SAAS !
Many of today’s leading players make much of their high levels of automation but questions around the size of the services team and the composition of contract revenues will help uncover the truth.
What does your renewal rate tell us?
One of the most challenging aspects of the OBP space is that it is not very “sticky” and switching vendors is easy from the customers’ point of view (quite the opposite of domain management). Some customers have switched several times as they search for the right mix of service and value.
There are two key measures associated with renewal rates – the value that is maintained and the customer count and both are very important. Clearly if only a 90% Dollar value is renewed, the business needs a minimum of 10% new sales just to stand still in revenue terms, which in itself is a burden on growth. If numbers of customers are switching out, even if they are smaller ones such that the Dollar impact is less substantial, the drag on the organisation in terms of effort as well as the impact on market reputation, may be significant.
When reviewing these metrics for diversified businesses, where OBP is just one part of the revenue mix, it is particularly important to seek out the metrics specifically for the true OBP element – it is common for businesses to attempt to blend their renewal numbers so that sticky, cash cow businesses hide the volatility of a higher growth component such as OBP.
How are you managing your technology spend ?
One of the major hurdles for an OBP business is keeping up with the rate of change in the online ecosystem. Marketplaces and social media platforms that need to be scanned for suspicious activity are continually being modified for their own business reasons and the list of target sites grows continuously. Consider a counterfeiter with a warehouse full of goods – if he finds his route to market is eliminated on eBay and Alibaba, he does not just give up,he sets up shops on social media or uses more region specific marketplaces such as Gmarket and Rakuten.
This means that just to stay current an OBP vendor needs to have a significant tech maintenance budget and then, if they wish to deliver new, differentiating functionality they need to spend even more in adding features and new solutions.
In addition, given the amount of M&A that has already happened, how can the tech overlap be reduced eg having acquired both Yellow and Pointer, how did Corsearch benefit from rationalising their technology platforms ? When they add in Entura, can they consolidate their anti-piracy solutions on that same tech stack ? How has Opsec rationalised its own legacy online platform with MarkMonitor’s ? These are some of the questions that need answering.
What adjacent solutions could you buy/build ?
As I have previously (https://www.charlieabrahams.world/articles.html) suggested, the OBP market is most likely in the $750m-$1Bn range and there is no single vendor with more than $50m of genuine brand protection only revenues, which means there is a lot to play for if you are hoping your target can get to something like $100m and exit.
Some of that ground can be achieved with an aggressive growth plan but the obvious shortcut is to have an active acquisition strategy, but which segments fit together well ?
One adjacency play that has been attempted a couple of times now is Trademark Solutions but history suggests that is not as simple as it looks – Clarivate subsequently divested the OBP business and kept just Corporate Domain Management alongside Compumark, and the jury is still out on Coresearch’s roll up of OBP players. The primary issue is that trademark services are usually bought by lawyers and in many cases via law firms; OBP is less frequently bought by the legal department now, and not generally via a law firm.
Anti-Piracy solutions are also a route that has been trod before – MarkMonitor acquired first Dtecnet and then NetResult, Corsearch just bought Entura and Marketly and there are clear synergies in terms of the target client organisation. Media, sports leagues and software companies suffer both digital content and often physical good abuse online.
The challenge with Anti-Piracy is how to avoid a duplication of technologies – both solutions need scanning, analysis, enforcement, etc but unless you can consolidate the tech stacks there is double the drain on funds and the piracy criminals move even faster than counterfeiters in technological terms.
Anti-Fraud is a good match in the sense that plenty of companies that need OBP have fraud and phishing issues (financial services, telcos, travel companies, etc) but the buyer is more IT oriented and often requires technical specialist sales support to engage with the Chief Information Security Officer’s team. It also takes one into competition with more cybersecurity focused players such as Risk IQ and Zero Fox. Interestingly, PhishLabs and FraudWatch have pushed the envelope in the other direction, building or acquiring relatively lightweight OBP solutions so as to broaden their offer.
In my opinion, however, the best match has always been Corporate Domain Management – that worked superbly well for MarkMonitor when it was an independent company but the challenge here is finding targets. CSC rolled up most of the likely suspects a decade ago and that only leaves a very small number of hitherto unwilling sellers but, if achievable, domain management brings the stickiness and gross margin that OBP typically lacks, and thereby balances the risk.
What is your gross margin ?
The surge of new entrants into this market from 2012 onwards, focused on market share and not on profitability has significantly reduced the ARR achievable in the OBP space which, together with the unrelenting demand for technology investment, has put a lot of pressure on gross margin.
Identifying the path to growing profitability is a key topic for potential investors in the space – large services teams, highly paid executives and an excessive spend on marketing would all be red flags that need to be addressed. At the same time, attritional cost cutting and lack of market presence have seen both CSC and Opsec lose their leadership positions in the space.
It is therefore a tricky balance that is required to identify the truly essential areas of spend that need to be maintained or increased and the redundant costs that can be eliminated. This requires detailed knowledge of the sector in leadership positions and it has become clear that generic managers from legacy segments of the technology sector do not flourish in this business and are a prime source of poor decision making.
How do you get to $100m ?
This is more a test of the thinking at executive level than a requirement to reach that absolute number but, typically, any sort of worthwhile exit or IPO requires a significantly larger revenue stream than is being achieved anywhere in OBP today.
What is key is to have a plan that combines organic growth, inspired M&A and great customer retention in order to build a business that can truly stand on its own two feet. If we consider that demand and the market itself is growing rapidly and that, as budgets get freed up post coronavirus spending should increase, then double digit organic growth is very possible.
In pure mathematical terms a business would double in size over seven years at 10% growth so, add in some judicious acquisitions, and it is entirely possible to get an OBP business to this kind of size with 3-5 years, which is a typical investment horizon.
What do your staff and customers say about you ?
Without doubt, the two most important assets any company has are its people and its customers. Employee satisfaction can be assessed via Glassdoor and other sites but it is more difficult to get a true understanding of customer sentiment as any “reference calls” will undoubtedly be handpicked.
However reviewing the website and observing the number of recent case studies and the level of detail in them is very insightful. Getting customers to endorse a vendor in print is challenging and so if they are plentiful and up to date it is a positive sign and, similarly, customer participation in market facing events is a sign of close customer relationships that generally result in both high renewal rates and peer referrals for business.
In addition, identifying the type and scale of customers is very insightful – Red Points have done a great job of recruiting customer case studies and it is clear from these that their focus is the SME market, especially start-up businesses with a go to market that is dependent on digital sales and marketing. That gives us an understanding of their business model and enables us to assess their growth and revenue potential.
How do you plan to globalise ?
This is a crunch question for many early life software businesses of any type, be they European companies trying to conquer the USA or Americans branching out into Europe and Asia.
It is expensive and difficult to cross the boundaries of culture and language especially when so many other cost pressures, mentioned above exist, but to be a serious player in OBP it is essentially not just to be selling in the Americas, EMEA and Asia but to have operations there, too. For the larger contracts with global organisations such as the pharma companies or automotive, the presence of teams in China and Europe can be essential to a successful project.
The key, therefore, is to understand what exists today and what the plan is going forward to meet that need, be it acquisition of companies with local teams or a structure and hiring plan. This has been a make or break element for tech companies in the $5-$25m revenue space, where many of the OBP players sit today, and so it is vital to ensure this is in plan.
What is your vision for the space ?
The existence of a vision has been a defining factor in any great business I have been part of - it plays such a large part not just in defining strategy but also in achieving employee and customer engagement.
Once businesses become part of something bigger, it is tough to maintain that vision which is why “roll-up” strategies often fail, as the original positioning of the constituent organisations gets diluted. This often comes down to executive strength and presence – there is no doubt that Jerre Stead, of Clarivate, is a great example of someone establishing a culture and a vision whilst executing a massive M&A strategy, so it is undoubtedly possible.
In the OBP space, for anyone aiming to be either market leader or market disrupter a vision for the space is especially important - it is such a dynamic sector that clients look to their vendor for direction and guidance as the online ecosystem moves and develops. Being able to describe it and thereby proscribe the outlook for the market is a defining element of a successful player in the space.
Hopefully, these provide a good platform for inspecting a potential target for investment, but feel free to reach out to me via CA@charlieabrahams.world for more specific help or advice.