San Diego’s Covario Rides Wave of Search Engine Marketing
I didn’t really know what to expect when I sat down with Covario CEO Russ Mann recently over a lunch of fajitas and enchiladas. Many CEOs adopt a kind of taciturn presence to maintain their command authority, but words gush from Mann. Ask a question, and he responds at length. Yet the most-succinct explanation of Covario’s business and the potential market that Mann and co-founder Dema Slotin saw more than five years ago came when he was describing a typical Covario customer.
“Our clients are some of the largest companies in the world,” Mann says. “They may be operating 50 websites in 20 countries and they are paying for hundreds of thousands of search terms to lead prospective customers to their websites. They want to make sure that every single phrase works, and of course, they want to analyze which phrases and terms work best.”
And that, in a nutshell, is what Covario does. The three-year-old, venture-backed startup provides high-end analytical software and services for search engine marketing, or SEM, and search engine optimization, also known as SEO. Mann says an average client pays Covario from $100,000 to $200,000 a year; its Fortune 1,000 customers include Intel, Adobe and Procter & Gamble. If that seems pricey, Mann says Covario’s sophisticated analytics have helped some companies increase Web traffic such that their online profits surged between 30 and 300 percent. “Not their revenue,” Mann emphasizes. “Profitability.”
He explains that most of Covario’s clients “simply license our software to do the PPC (pay-per-click) and SEO work in-house, leveraging our software for analysis and optimization, or to better work with and keep track of the agency doing it for them. About 10 of our 65 clients outsource the entire buying and optimization work to us, and we in effect become the agency,” Mann says.
At a time when daily newspapers and other conventional publications are reeling from plunging advertising sales, Covario reports that online spending for paid search advertising remains robust—despite the global economic crisis.
Based on an analysis of 12 of its U.S.-based high-tech and consumer electronics customers, Covario found spending on global search advertising increased 43 percent during the last three months of 2008, compared to the same period in 2007. Spending during the fourth quarter also grew sequentially, by 7.2 percent, over the previous quarter, Covario recently reported.
“We were actually surprised by that,” says Craig Macdonald, Covario’s vice president of marketing. “Everybody was saying that Google’s growth was going to slow down.”
Macdonald says spending for search engine advertising probably continued after the credit crisis erupted in September because companies were already committed through the holiday season. It now appears that search engine advertising has retracted, and he estimates spending for the rest of 2009 will be flat to just 5 percent growth over 2008.
Until this year, though, the overall global market for paid search marketing has expanded dramatically—from about $500 million in 2001 to an estimated $20 billion this year.
Mann says the key advantage of search engine marketing is the mathematical precision with which software analytics can be applied to online transactions. Unlike advertising in conventional media, he says, “It’s not about arts and crafts for business professionals. It’s all about the math.” The company even derived its name by combining “covariance,” a mathematical term for the statistical measure of the variance between two random variables, with the sigma symbol (σ), which is used to indicate one standard deviation from the mean. (As an aside, Mann sees the flourishing concentration of software analytics companies in San Diego as a development that could differentiate the region amid the innovation economy nationwide.)
He attributes Covario’s mathematical underpinnings in particular to co-founder Zlotin, “a brilliant visionary” who is now vice president of strategic services. Zlotin had developed what Mann describes as a “search engine marketing management system” as a co-founder of Silicon Space, a San Diego provider of customized, Web-based enterprise software.
Zlotkin’s product was spun out from Silicon Space in 2006 as a separate company then known as SEMDirector.The co-founders bankrolled their startup with roughly $6 million in venture funding, which came initially from Dubilier & Co., a Stamford, CT, private equity firm, and later from Seattle-based Voyager Capital. The two investors joined in a secondary round of $16 million that was led a year ago by FT Ventures, a fund based in San Francisco and New York that specializes in software developed for the financial services industry.
In an email yesterday, Voyager’s Erik Benson says he met Mann in 1997, after he had moved to Seattle and Mann was working for what was then a promising startup called ONYX Software. They kept in touch after Mann left for San Diego a year or two later for a succession of jobs at software developers HNC, Fair Isaac, and Peregrine Systems (where Mann helped rebuild Peregrine following its 2002 bankruptcy). When Mann approached Voyager in 2006, he knew Voyager had previously invested in Seattle’s Avenue A, an interactive advertising and analytics startup. Avenue A later changed its name to aQuantive and went public through an IPO—and was acquired by Microsoft in 2007 for $6.4 billion.
“When Russ pitched me on Covario in early 2006, his pitch was very reminiscent of the factors that created and drove the growth of Avenue A,” Benson wrote. “I like how Dema and Russ are focused on the fundamentals of building a real business, not a momentum chasing business. They provide real value to customers and partners, and generate a profit, which is nice for Covario’s shareholders, especially in today’s difficult times.”