We recently had the pleasure of sitting down with Sean Dempsey, Co-Founder at Merus Capital, to talk about venture capital, M & A activity, and online advertising trends. Sean brings 10+ years of experience in Corporate Development at Microsoft and Google to his role at Merus and to his role as Board Member at AdRoll. You can follow Sean on Twitter or read his blog.


Josh Breinlinger: Tell us a little about yourself.

Sean Dempsey: I’m a founding partner of Merus Capital, an early-stage venture firm. My two partners and I founded Merus in late 2007 to focus on software and Internet investing. The three of us worked together for about a decade at Microsoft and Google prior to starting Merus. My role at both companies was in Corporate Development, where we were responsible for all investments and acquisitions. I’ve been thinking about entering the venture business for about 15 years now, so it’s great to finally be doing it. On a personal note, I’m into trail running, skiing and tennis and think that besides the iPhone, the Sonos music system and the Garmin Forerunner 405 are the best consumer products in the last few years!

Josh: As an early stage VC, what are some trends you see in the types of companies that are getting started and getting funded?

Sean: There is certainly a lot of attention paid to consumer-focused startups. Even though it can be exceedingly difficult to predict consumer behavior, companies with breakout viral growth potential are always interesting to investors. With all the focus on consumer Internet startups, I think there is a tremendous opportunity to fund companies catering to the needs of other businesses, both large and small. Particularly where these companies can take advantage of the social nature of today’s web to rapidly build a brand, attract customers and get product and service feedback.

We also love seeing what I’d call “SaaS 2.0” companies–whereas the first generation of software-as-a-service companies stored and reported on your company information and could tell you what you are doing, with the computing power economically available today coupled with the right algorithms, companies can take and process all that data and tell you what you should be doing.

Josh: What are the characteristics you look for in a startup before deciding to invest?

Sean: At Merus, we’re pretty focused on investing only where the business opportunity seems sufficiently large. The question we always ask ourselves is: “Is this the type of business that can generate $50 or $100 million in revenue at some point or are there structural constraints to this kind of growth?”  We try to “score” an opportunity along many dimensions–barriers to entry, customer impact, competitive intensity in the market, network effects, market size and ease of implementation among other metrics. And of course, we have to have full faith and trust in the team and they in us. A question we ask about the team is: “Do they strike the right balance of having a deep-seated belief in their vision and yet possess the flexibility to listen to customers and users to make informed course corrections?”

Josh: Let’s talk about the online advertising industry. With your background at Microsoft and Google and now as a VC, what trends do you see in this space and what type of M & A activity would you expect over the next couple years?

Sean: Well it’s hard to underestimate the importance of real-time bidding (RTB) in the online display industry. Though I like to call it IBB for impression-based bidding since that’s what we all care about–the ability to tailor advertising and content on a per impression basis.  The recent rise in retargeting is perhaps the first indicator of the power of IBB. There is still much to be done to increase liquidity–boosting inventory on exchanges and more broadly implementing real-time bidding–but the promises we’ve heard for the last few years are finally becoming real.

It will be fun to watch the M&A activity in this space over the next few years. All the ingredients are there to suggest a series of consolidations. Thematically speaking, I think we’ll see a couple things. The first is a flight to technology, by which I mean that networks and other inventory aggregators who don’t possess a highly scalable targeting and optimization platform will look to acquire that capability in order to serve a broader set of display advertisers. The second, which is already underway, is a consolidation of optimization capabilities–media + data + creative + landing page–in order to fully serve an advertiser’s needs and maximize ROI.

Josh: Question for you about data transparency and privacy concerns. Targeting technology is getting really powerful, but there are some privacy concerns out there as well. Do you see any major changes happening in this area?

Sean: Privacy will always be a concern on the web, though what tends to be forgotten is that marketers have long known a lot more about our real, offline lives than our online personas. The best, and perhaps simplest, thing to do is make users aware of how their data is being used. If people know more about what is happening in the background–what preference or historical data is being used, how it can be altered, and how to opt out–and this results in the display of highly relevant ads and content, then I think users will respond favorably. While some publishers and ad networks are starting to provide better transparency, I think an independently-managed “dashboard” to help users manage their personal data across sites and networks could be a very useful tool for cementing user trust and even improve targeting. What’s hard to predict are the actions of an overly aggressive market participant who broadly abuses user trust, sending us down a path of strict regulatory reform. I would hope we could avoid this through improved transparency and user controls.

Josh: Ok, now it’s time for a quick, shameless plug. As an investor in AdRoll, what do you see as the future for our company?

Sean: While Google’s introduction of remarketing has broadened awareness of general retargeting, we’re still in the early stages of what can be accomplished with more advanced retargeting techniques–customizing messages based on shopping, search and other intent-oriented behaviors, social connections, and individual preferences to name a few.

As the lead investor in AdRoll, I’m of course highly biased(!) but I’m really excited to see the company pushing the envelope on retargeting. And doing so in a way that is highly scalable and automated so that the benefits a large customer are also available to the broader base of display advertisers. Couple this with the site-targeted campaigns that AdRoll offers and it’s a very powerful yet simple way for advertisers of all sizes to benefit from display advertising. Companies like AdRoll will open the eyes of search marketers to the power and demonstrable ROI of display and help close the wide gap that exists today between the number of search marketers and those active in display.

Josh: Thanks Sean!