This year alone, there is an $11.4 billion mobile advertising opportunity, which means there is tremendous upside for nimble and innovative startups with disruptive mobile-first models. As we saw from Facebook last year, the company was able to turn around and actually make something of its mobile business – a business that didn’t exist at the time of IPO. However, despite the potential of the market, and Facebook’s early success, we’re still a long way from realizing the promise of the mobile medium.

When looking at the opportunity, it’s clear there are a few core challenges that need to be addressed quickly in this nascent market. The startups that address these challenges first will be the companies to watch.

THE PROBLEMS THAT NEED SOLUTIONS

In many ways, we’re at the same juncture with mobile advertising as we were with the desktop web circa 1996-97. At that time we were limited by basic ad-serving capabilities, browser cookies to track visits and boring, static display ads. Search keyword advertising, the most compelling ad format and targeting method the web has seen, was only in its infancy (at Goto.com, which eventually became Overture) at the time.

Right now, the two most obvious hurdles to overcome are what smart companies are focusing on: developing a reliable and privacy-safe method for user targeting across apps, and developing smartphone native ad formats.

Cross-App User Targeting. On the traditional desktop web, browser cookies became a reasonably reliable and standardized method for recognizing and storing attributes of any given user in between visits to a site. Today roughly 80 percent of online ads leverage cookies or some other form of a user-targeting mechanism.

In the mobile app world, an analogous, reliable and standardized mechanism has not yet emerged across either iOS or Android, and until it does, relevance-based targeting will be less effective in the mobile environment and remain a giant missed opportunity for advertisers. Currently there isn’t a robust way to track users across applications after Apple deprecated UDID as a targeting mechanism. In order for cross-app user targeting to be fully realized, the tracking of users in a privacy-focused environment must be solved.

Smartphone Native Ad Formats. The first ad formats utilized on smartphones were borrowed from the web. As a result, users are inadvertently clicking on too-small-to-read banner ads, thus ensuring annoyed users. Instead of a fluid and seamless experience, users are pulled out of their task at hand and brought to un-optimized web landing pages in the mobile browser.

The only way mobile ad monetization will flourish is when smartphone native ad formats that enhance the immediate app experience are developed. The good news is that we’re starting to see a few promising native smartphone format candidates with notifications and Facebook’s Sponsored Stories. There is still plenty of room for innovation, as these formats aren’t 100 percent where they need to be. Users and marketers alike can’t wait for some savvy startup to develop innovative and reliable ad formats that fit within the app experience and engage the user without disrupting the task at hand.

THE WINNER’S CIRCLE

Once the dilemmas of cross app user targeting and smartphone native ad formats are solved, there are some very promising areas within the mobile environment that are poised for the taking:

Offline-to-Online Ad Tech Providers. The ad-tech player who can get the ambient context digital wallet and in-app context right for the Walmarts and Coca-Colas of the world will be a really big deal. There will be several winners in this area, each focused on a particular vertical of offline-to-online.

Cost-Per-Lead Advertising. Yes, cost-per-lead advertising. The web performance stepchild to cost-per-click could emerge as a first-call citizen in the smartphone medium. Why? Well, the medium happens to be attached to a phone, and guess what leads perform the best: phone calls. The smartphone promises to connect this intent to buy to a live person more seamlessly than any other medium to date. This will lead to higher conversion rates and thus higher monetization rates. Inadco, a Redpoint portfolio company that started in the web CPL space, is one startup helping these advertisers take advantage of the mobile phone.

Ambient Context and User Analytics Providers. The fundamental problem of user targeting and analytics within the mobile world must be solved. This solution will come from a clever startup, not the underlying platform players Apple and Google. Just as Omniture emerged to be an important platform company in web analytics, there will also be similar companies built within the smartphone medium. Native mobile app analytics companies like Flurry are promising, as are the emerging players in audience targeting like BlueKai (a Redpoint portfolio company).

While we are a far way from identifying the smartphone equivalent of paid search, it will absolutely exist (it has to) and it will leverage ambient targeting, the digital wallet and smartphone native formats that interrupt but don’t disrupt the user from the task at hand.

The market is big and the current players are just starting to crop up, which means the challenge is for the taking. The next two years will undoubtedly be exciting years to see it all unfold – not only to see who the winners will be, but also to see the innovations that make it happen.

*This article originally appeared in TechCrunch and can be viewed here.

It’s not news that more and more people are accessing the Web from their mobile devices. Hardware players are winning big with the newest devices, the app market is flourishing with incredible innovation and success stories, and of course, marketers are salivating at the enormous opportunity these markets create.

To set the context on just how big the mobile market is, according to IDC’s Worldwide Quarterly Mobile Phone Tracker, in 2012 we saw 44.1% more smartphones shipped globally than we did in 2011. What’s more, according to Flurry Analytics, the average American consumer spends 2 hours and 38 minutes of their day “glued” (Flurry’s words) to their smartphones, tablets and the applications therein. Of the 1 billion devices that Flurry tracks, they found that the average U.S. consumer spends 80% of their time within apps, while 20% is spent on the mobile web. However gaming apps takes a rather impressive 32% slice of the app pie.

All of this incredible growth of both devices in use and time spent on the devices means one thing for the advertising industry: there is a huge opportunity for mobile advertisers and the mobile platforms that move quickly – and intelligently – to support them.  Yet, with all the wide-eyed enthusiasm and early innovation, there’s also tremendous confusion about the mobile advertising opportunity in relation to the confidence analysts have in the overall Web advertising market (which is expected to reach $100 billion this year). The one company that knows this mix of excitement and fear all too well is Facebook.

Facebook’s IPO performance last summer epitomized this mobile monetization anxiety. After a bumpy market entrance where analysts lowered projections citing the faster than anticipated traffic shift to mobile, Facebook shares dropped slightly to $38 per share (vs. the $40-42 per share in private trading pre-IPO), which many felt was too high. Eventually the price settled at the $18-20 range after the market realized that Facebook hadn’t yet figured out how to deal with the shift of time spent to the mobile world. So, instead of the roughly $90 billion valuation that investors had been hoping for, Facebook’s valuation plummeted and media labeled the IPO a failure (basically a $40 billion black eye) thanks largely to the uncertainty of mobile monetization.

Here’s what analysts got wrong and why it matters: they overlooked several important aspects of mobile that make it a fundamentally compelling monetization medium, potentially surpassing the monetization capabilities of the desktop Web.

Like all new media, it takes time for entrepreneurs (and perhaps a few incumbents) to identify the winning elements of a new medium and to develop monetization models that take advantage of them. Case and point: the early days of television. Radio had been around for decades and so the first TV ads were basically filmed radio ads. Years later, advertising executives figured out more compelling formats for the new medium. The same applies for mobile. To date, we’ve largely ported desktop Web ads to the smartphone but I’m certain that very soon we’ll figure out the formats, targeting methods and performance metrics that are native to the mobile platform. One this is solved, the marketing dollars will start to follow.

What the analysts missed about mobile

I strongly suspect that the monetization rates and the winning players in mobile marketing will soon surprise the hand-wringing analysts who have been hesitant to get excited about the mobile ad market. Here’s why: in essence, the smartphone is a Swiss Army Knife for the digital world. Book a table for Saturday night on OpenTable. Check email. Make a bank account deposit. Check the weather. Find your next meeting location on Google Maps. Even for entertainment activities – largely social newsfeeds, games and video – it’s usually a “quick fix” during a few minutes of downtime.

Another important attribute of the smartphone ad opportunity is that users are not stuck with the pre-packaged tools. Rather, they have the freedom to download whatever apps they choose. Given the ease of the iTunes App Store, users experience little friction when purchasing and downloading new apps since their credit card is on file. This is a huge difference from the desktop Web where more barriers exist. This matters because it shows that smartphone users are willing to pay for useful or entertaining apps, and are doing so enthusiastically. According to Bloomberg and App Annie, from June to December in 2012, iPhone users spent $333 million per month on apps and in-store virtual goods. As a result, apps with high user-pay monetization have seen the largest returns in early mobile advertising, even within the currently crude smartphone ad environments.

The Birth of Ambient Context

With the possible exception of our wallets, nothing is with us more during the day than our smartphone. Unlike our wallets, it has the intelligence to understand where we are. This new combination of app data, time and geo-location context – which we call “ambient” context – has the potential to dramatically improve relevance for monetization services in several meaningful ways.

I’d bet Proctor & Gamble or Coco-Cola would be interested in spending premium CPMs to send me a notification or an offer while I’m in the grocery store – particularly if they knew from my virtual Safeway Card on my phone whether or not I was a loyal customer of their brands (or their competitors’). I also bet my fourth favorite take-out restaurant would be interested in moving up to number one by pushing me a notification for a deal on my drive home from work. Both of these are examples of incredibly premium smartphone ad “placements” that leverage the potential of ambient context.

Who will win the mobile ad game first?

As for the possibility of a Web incumbent becoming a dominant player in the mobile monetization space, my money is on (surprise) Facebook.  Facebook will continue to prove those analyst naysayers wrong. They’ve created the first truly native mobile format with Sponsored Stories and coupled it with a marketplace of advertisers.  You can see the potential of this model with the first few quarters of performance in addition to their installed based that have incorporated Facebook Connect to streamline sign-on identity management. With Facebook Connect, the social networking giant has effectively built a proprietary cross-app tracking platform that would enable their monetization platform to understand user behavior across most of the popular apps on phones today, solving the biggest problem in the smartphone medium.

The Facebook stock has returned to the $27 range, and the company is just beginning to exercise their mobile monetization muscles. Mark Zuckerberg is now describing the social networking company as a “mobile company” and announced that its mobile ad business brought in almost $300 million in revenue in Q4 2012 alone, accounting for 23% of total ad revenue. According to Flurry Analytics, of the 80% time spent in apps, a good 18% of that time is spent on Facebook.

However, there is still plenty of room for winners from the more nimble start-up space. With the mobile advertisement market expected to reach $11.4 billion this year, there is most definitely room for innovation, and the players who do it right will make it big. Very big. 

I’m excited to announce Redpoint’s investment in Scripted, a human capital marketplace startup with a novel twist that is fueling the next wave of online marketing.

The Opportunity

Over the last few years, the rules of online brand marketing have quietly changed in a fundamental way, thanks to the spread of social media and the accompanying proliferation of publishing tools and platforms. As a digital marketer, it’s no longer sufficient to litter the Web with banner ads and pre-roll videos to get your message out there. Consumers have increasingly become blind to these “ads,” and are instead busy consuming and engaging with content. Be it blog posts, Facebook posts, Twitter posts, articles, reviews, or tips (or white papers for the B2B crowd) – the content types and platforms continues to grow. Consumers are now demanding more from marketers than catchy ads; they expect a conversation. And marketers don’t have a choice – they must publish good content regularly across all relevant platforms, or risk losing ground to their more social and content savvy competitors.

Trouble is, publishing good content regularly is hard for most online marketing departments. Most don’t have the time (or, let’s face it, the capabilities) to come up with the ideas and the words a week’s worth of content. What they need is a virtual content creation department – an on-demand, domain expert network of skilled content creators that can help with both what to say, and how to say it.

The Solution

That’s where Scripted comes in. Scripted has attracted 10,000’s of freelance writers with the promise of supplemental work. Unlike most other freelancer marketplaces, Scripted takes responsibility for quality of the work product delivered and, therefore, for the satisfaction of the marketers demanding the content. Using the Scripted platform, content marketers specify the basics of piece(s) of content they’d like to “buy,” and Scripted handles the rest. To insure quality and performance, Scripted employs several techniques, including a Wikipedia-like peer review system, a customer feedback loop on every job, and a programmatic cataloguing of freelancer domain expertise through the crawling of every piece of content produced on the platform. By leveraging the Scripted platform, the content marketer gets the content producer that is best-suited for the specific content job, and the best content producers get the most relevant work.

One thing from our investment diligence that got us really excited about Scripted was that both the demand-side and supply-side found the experience on the platform superior to the other approaches that they’ve tried. On the demand side, content marketers just want high quality content, period. They don’t want to waste time and effort sifting through 100’s of freelancer bios, haggling over compensation and then hounding the freelancer to get it done on time. On the supply side, freelancers want to let their work speak for itself, and to get as much work as they want within their areas of interest and expertise. The Scripted model delivers both.

Attractiveness of Marketplaces

At Redpoint, we like marketplace models a lot. If done right, there are natural network effects to marketplaces which provide barriers to entry, sustainable competitive advantage and, with a little luck, winner-take-most dynamics in terms of market share (and ultimately, company value). We’ve seen it in the vacation rental market with our investment in HomeAway, and in the online ad space with our investment in Right Media, and we’re seeing it in other markets at Adap.tv, Just Eat, Axial Market, and BlueKai. The growing organic demand and high customer satisfaction levels that Scripted is enjoying gives us encouragement that we will see it in the content creation market as well. We’re thrilled to be in business with the Scripted co-founders Sunil Rajaraman and Ryan Buckley, and look forward to working together to scale the Scripted platform for content creation.

As we kick-off 2013, the Redpoint team is excited to announce Redpoint V, our early-stage focused fund.

After 16 years of investing as a team, we’re as enthusiastic as ever about the environment for early-stage tech venture investing. Despite the general macroeconomic gloom, Silicon Valley is booming.  A confluence of technology trends is enabling the disruption of nearly every large market (and the emergence of several new ones).

These trends are fueling as much opportunity for startups as we have witnessed since the initial build out of the Web, which is why we’re looking forward to supporting more bold entrepreneurs with Redpoint V. The new fund closed at $400 Million and will support early stage entrepreneurs and startups as they create industry defining businesses.

With Redpoint V, we now manage over $3.3 billion across our multiple funds, and will focus investment in emerging and new markets.

Since 1999, we’ve invested in over 350 incredible teams – and with Redpoint V, our focus will remain on founders and businesses creating new markets or redefining existing ones.

You can read more about our current portfolio here, as well as our investment themes here. We’re looking forward to creating the  next stage of the Redpoint story.