In January, the legendary Durham startup ReverbNation announced publicly it had spun off a 21-person division into a startup that’s already turning a profit. If that wasn’t surprising, then the nature of the company might have been—called AdWerx, its first product is an online advertising tool for real estate agents.
February 6, 2015
How ReverbNation Built a Startup Within a Startup
Durham's fast-growing software firm for the music industry innovates in real estate, and ends up with its own startup called AdWerx
ReverbNation has built a global client base for its software that helps bands and musicians grow their followings, licensing revenue and album and ticket sales online. It employs 85 people (mostly) in downtown Durham, and in 2013, reported $17.5 million in annual revenue, representing 447 percent growth since 2010.
The link between the two businesses might seem murky, but if you know anything about the history of ReverbNation, and the strategy and drive of the two men behind it, then the creation and takeoff of AdWerx makes perfect sense.
It isn’t often that a startup is incubated within a startup in the Triangle. In most cases, executives leave a successful company to start a new one—Art.com execs left to start Canvas On Demand, Bronto Software leaders left to form Argyle Social (and then RevBoss). But either case is important for growing a vibrant startup community. Startups need to be successful enough to churn out capable entrepreneurs to start new companies and create new jobs.
I only recently had the chance to meet ReverbNation and AdWerx founders Mike Doernberg and Jed Carlson and hear their story. And I quickly recognized the one downside of the spinoff—they aren’t side-by-side building a company every day.
Though they met only months before ReverbNation was formed in 2006, it’s clear the men’s relationship is as much family as co-founders. Perhaps that helps to explain how they’ve successfully built and led two companies in one, and how they convinced investors to take a bet on both.
The idea for AdWerx came before ReverbNation launched its first products for the music industry.
The pair met after Carlson, fresh out of Duke’s MBA program, pitched an early version of ReverbNation to one of Doernberg’s former business partners. Doernberg had recently sold his second startup, marketing software provider SmartPath, to DoubleClick, and was ready for a new adventure. After an introduction, the men hit it off.
Soon, they had a vision for a product in the advertising space targeted to small businesses, and independent musicians and record labels happened to provide the first case study. Advertising technology also hadn’t evolved enough to allow the type of big data collection, automation, ad inventory and targeting that powers the AdWerx platform today.
But in 2010, Reverb released a tool that let musicians and labels promote a song, album, concert, video or website to a specific audience. The “secret sauce,” Carlson says, was the way Reverb targeted that audience. Over time, the company developed sophisticated techniques to identify consumers most likely to listen to a band’s music (based on Internet browsing behavior) and then push ads for that band to those consumers wherever they went online.
“There was a move away from advertising on a site to advertising to an audience,” Doernberg says. But the average band or record label didn’t have the slightest idea how to take advantage of it.
Reverb’s Promote It tool was developed for the person “who looks at Google AdWords and thinks it’s the cockpit of a 747,” Carlson says.
It only made sense that a simple tool for one type of small business could be relevant to another. The big idea, Doernberg says, was to make the sophisticated technologies used by larger companies available at the same level of sophistication but cheaper and easier for small businesses.
ReverbNation has since grown to 3.8 million customers and continues to add 50,000 new ones each month.
As the men brainstormed which market to target next (Hint: there will be others.), they focused on industries in which a professional isn’t expected to know about advertising and shouldn’t be spending time on it. They also researched industries driven equally by return on investment and validation.
For example, musicians hope an ad for a new song gets the music heard more than they’re expecting a huge boost in sales. Realtors expect a bit more return on investment on advertising, but validation and exposure also matter a lot.
Other keys to the decision were the local nature of the business, the copycat nature of the professionals (Do they watch others in the industry and pick up best practices?) and the behavior of consumers. Are they using the Internet to find information about the industry?
Real estate might seem drastically different from music, but its consumers and professionals operate largely the same.
In late 2012, ReverbNation held focus groups with local real estate agents to determine how an automated advertising tool might be used. From those conversations, they built a tool that promoted for-sale properties to the demographic most likely to buy them, wherever those people searched online. That launched in June 2013.
But it didn’t take off—it was too difficult to measure the effectiveness.
Their next move was to bring agents in one at a time—unlike in a group setting, they opened up about how they compete. It became clear to AdWerx that the ability to promote Realtors themselves online was more valuable than the actual properties they listed. And the existing tools in the industry, many purchased at a big expense through brokerages, weren’t helping them do that.
In October 2013, an agent branding product was released to market.
AdWerx for Real Estate mines the Internet for people within a certain zip code searching for homes, using mortgage calculators, researching moving companies, etc. and places ads for its Realtor clients on all the pages those people are visiting. A Realtor ad could show up on Trulia or Zillow or on Nordstrom.com or Facebook.
“We relentlessly pursue them with ads for real estate agents so we unleash the power of repetition,” Carlson says.
For the Realtor, it’s as simple as typing in a zip code and credit card information. The tool generates ads automatically using the Realtor’s photo, logo and contact information, even customizing the colors of the ad to the images. AdWerx staffers review each ad before it is published.
The service costs about $50/month for one zip code spot—10,000 Realtors subscribed in the first year.
The men got that following by using their own tool—and databases of agents they built—to market AdWerx. They also worked with corporate marketing divisions of brokerages like Century21, Sotheby’s and RE/MAX for help promoting the tool to their agents.
Durham Keller Williams agent Chris Combs started using AdWerx in the fourth quarter of 2014. He now averages 150,000 impressions a month in six key Durham and Orange County zip codes, a figure that he can’t translate directly to sales, but which he believes will impact his business over time.
“It’s a lot less dollars than what you’d expect to spend for that kind of exposure,” he says. “There is nothing negative about putting your face in front of people.”
The incubation of AdWerx may not have been a stated goal when the company began, but investors supported ReverbNation when it dedicated internal resources to building a new product and a small team around it in 2012.
Jonathan Perl, an investor with Boulder Ventures in Washington D.C., was particularly taken with the idea. It was part of the reason he put money into ReverbNation’s $3.6 million series C round in June 2012. (In total, it has raised $8.6 million).
“One of the things I thought was interesting about the business was the scope of what they could do with musician relationships, and the ability to expand,” he says. “We live in an age where either socially or online, we promote our interests. It seemed natural to test it outside of bands.”
But it became clear over time they were building two different businesses.
“For investors, it meant breaking up the team that they invested in,” Doernberg says. “Ultimately, for me, the opportunity became so compelling that it outweighed whatever fear or risk there was.”
Perl worried that a single company with such different products would cause the management team to vie for resources, people and capital. Especially worrisome was the capital piece. What would new investors think of a company with such different focuses internally?
Lucky enough, Carlson was already willing to lead AdWerx and the board felt both men (despite that Carlson would be a first-time CEO) capable of leading their respective businesses.
Perl calls Doernberg “a great all-around CEO,” who after launching four startups is skilled at communicating, planning, delegating and hiring.
Carlson, meanwhile, has been privvy to every decision made at ReverbNation, from hiring to product development to participating in three rounds of fundraising. He’s also an independent thinker, and creative. And he’s already built a business with meaningful revenue out of the gate.
Along with David Jones of Bull City Venture Partners, Perl now sits on both companies’ board of advisors, and as an investor in ReverbNation, holds the same equity stake in AdWerx. That’s the unspoken benefit for investors—because the cap structures are the same, if both companies are successful, they’re twice as rich.
Doernberg and Carlson say the timing was perfect for the spinoff, both for the real estate industry and ReverbNation.
Over time, they’d recruited an experienced management team at ReverbNation—the CTO worked at SmartPath and DoubleClick, CFO was an investment banker in New York and executive vice president of music spent 15 years at Atlantic Records. Marketing is led by a former head of product management at ChannelAdvisor. General Counsel came from a publicly-traded company in the Triangle.
Carlson was already dedicating the majority of his time to AdWerx and assembled a team that included the senior product manager and several engineers who built Promote It.. The team moved out of Reverb’s space 10 months ago and has already made key hires, like a CTO and marketing director. Soon, a CFO will be added.
The real estate industry also appears ready for a technology like AdWerx. According to the National Association of Realtors, the industry spends $7 billion a year on marketing. Technology companies are beginning to grab a piece of that spend and according to Inman News, investors have taken notice. More than $1 billion has been invested in real estate technology companies.
Because ReverbNation has been a success and AdWerx is already turning profit, the spinoff could happen without additional investment. AdWerx can be choosy about the investors it brings to the table over time.
Here’s how Doernberg explains it: “We built a company that hired a bunch of people in the area and grew and added assets that add value over time. That gave us the license to do other things. And that’s what became AdWerx.”
According to Doernberg, with a laugh: “We’re each going to be bigger and the other will be bigger than us.”
Translated: It really is a toss up.
ReverbNation wants to fundamentally change the way the music industry operates, helping artists get discovered and content used in any medium easily and quickly.
“Owning the farm system of music is going to allow that to happen,” Doernberg says. “It’s a big goal and big idea and if successful, it’s going to be an important part of the history of the music industry.”
AdWerx is just getting started in its first of hopefully many industries. The vision is for AdWerx to be an umbrella company for a suite of advertising automation products targeting a variety of industries.
Carlson expects to double the size of his team this year to support that growth.
A spirit of innovation will continue in both companies. Another byproduct of their success is the young startup Freebooksy, a recent NC IDEA grant winner with software to help independent authors promote their ebooks.
“We’re now driving our own companies and our own people are starting companies,” Doernberg says. “This area has finally gotten to a place where it can start to do stuff like that.”