Why Investors are Afraid of Search Engine Marketing

    August 3, 2004

The Search Engine Strategies conference, in San Jose, is full of exuberant professionals and entrepreneurs eager and excited to learn more about the search industry. Amid the din of optimism and over-caffeinated exuberance there are a few words being spoken that are, shall we say, somewhat less than ebullient. It’s probably no surprise to anyone who’s been paying attention to tech stocks of late that most of the downer talk here has to do with investors.

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Gerrard Jacobs, CEO of CGI Holdings had some sobering insights into the minds of investors. Mr. Jacobs maintains that roughly 30% of the small fund investors he’s talked with recently say that they have absolutely no interest in investing in the search industry.

Why? Well, for starters according to Jacobs, there is a “very profound skepticism on Wall St. and in small cap funds about (SEM) because our industry is viewed as a tech play’. The tech bubble has left many investors burned and once burned, twice shy.”

During his talk in Monday’s SES track about investor’s perceptions on SEM Jacobs focused on two global issues’ that investors seem to have with SEM.

Issue number one: Investors do not understand SEM
To many investors, the lack of specific details and the level of speculation surrounding many aspects of SEM leave investors questioning the legitimacy of the industry. “Is it a collection of tricks, gaming the search engines? Is voodoo? Is it hype?” Jacobs says from the perspective of the investor. (Editor’s note: I hadn’t considered voodoo up to this point, but it’s on my list now.)

There are plenty of shady characters in the search engine industry. The suspect ethics and tactics of the disreputable few too often taint the overall perceptions of an industry. We’ve seen the same type of thing happen to email, courtesy of unscrupulous spammers. SEM has its own crosses to bear it would appear.

Issue number two:
The second global issue as outlined by Jacobs had to do with the long-term viability of the industry. He observes that investors wonder why reasonably successful businesses don’t just bring their SEM efforts in-house. Also, if the industry is a viable moneymaker, why don’t companies in positions to best handle things like SEO, for example not enter the sector? In other words, what’s to keep search engines from setting up affiliated companies and performing their own optimization? Who could optimize for search engines better than the search engines themselves after all? Who says existing agencies won’t just co-op the entire field at some point? It’s not too hard to imagine the huge, already established advertising giants simply teaming up and dominating the field.

Jacobs wasn’t all gloom and doom however. He also put together a list of 10 things SEM (or any) companies can address if they want to be more attractive to investors.

1. Profitability – Fairly self explanatory. Does your company make money?
2. Growth – Again, fairly straightforward. Does your company have the potential for growth/scalability
3. Acquisitions – Could your company gobble up other companies and be stronger?
4. Name customers – Recognizable clients make investors feel like you are established and go a long way towards legitimizing your business.
5. Sustainable earnings – can your company continue to make money doing from your core product/services?
6. Clean Balance Sheet – Is your business in debt? Too much debt is always a red flag.
7. Intrinsic value – Jacobs made the comparison to a law firm, do all of you assets go home every day like law firm attorneys? Is your company’s value in it’s business or are you a runaway bus away from ruin?
8. Margins – Do you have healthy, sustainable margins?
9. Credible within the industry – Lacking credibility within your sector is a kiss of death
10. Management team – Do you have a capable and reliable management team? Investors like company’s that have established management teams with clearly defined responsibilities.

Mike is a manager at iEntry. He has been with iEntry since 2000.