VigLink Aims to Turn Links Into Gold—But Will the Golden State Force the Company Out?

6/7/11Follow @wroush

In the spring of 2009, when former Microsoft engineer Oliver Roup was finishing his second year at Harvard Business School, he entered the idea for his future company, VigLink, in the school’s annual business plan competition. During his live presentation to the judging panel, he showed off some code he’d written to help Web publishers make more money from affiliate commissions—essentially, mini-kickbacks from e-retailers for the outgoing links they place on their pages. On his last slide, he included his cell phone number.

As it turned out, Roup’s idea didn’t advance to the finals of the competition. But the “link” he’d included on his slide, in the form of his cell number, actually did bring him some money. One of the people in the audience that day was Rich Miner, a partner at Google Ventures and the co-creator of the Android mobile operating system. “Before I even got to the door, Rich had read my cell number off the slide and texted me,” says Roup. “He said, ‘This is very interesting.’”

By that summer, fast-moving Google Ventures had put some seed money into Roup’s idea, and VigLink’s software went live in February 2010. Now the company is based in San Francisco—though how long it will stay in the state is up in the air, thanks to a political showdown brewing in Sacramento over Internet sales taxes; more on that in a moment. And it’s growing fast, counting 17 employees and a “four-digit number” of customers, according to Roup. Already, pages outfitted with VigLink’s affiliate commissions code are viewed roughly 2.5 billion times per month.

It’s all part of an ongoing technological revolution in what’s called “performance marketing.” If you were under the impression that bloggers, copywriters, and other content creators pepper Web pages with outgoing links like this one purely for your edification, I have some disappointing news: trillions of those links are actually designed to send you off to a page where you’ll buy something. Whenever you do, some money changes hands between the site that profited and the site that sent you. Those are called affiliate commissions, and performance marketing is the science of maximizing both the commissions and the sales they’re designed to incentivize.

Roup says he became convinced that there was room for improvement in the performance marketing business—and for a startup like VigLink—after he wrote an experimental Web crawler to count the number of links pointing to product pages on Amazon. Fewer than half of the links that he found included the extra code needed to activate an affiliate commission from Amazon. For whatever reason—lack of awareness, or perhaps lack of technical skills—Web publishers were leaving tens of millions of dollars in Amazon commissions on the table.

VigLink’s service offers a simple fix: it gives its clients a bit of Javascript code that they can add to their sites’ HTML templates. Once it’s installed, VigLink tracks all of the clicks on links pointing to merchants with affiliate commission programs, and it makes sure that publishers get paid what they’re due. The company profits by keeping a 25 percent slice of each commission.

Here’s a quick VigLink video in which Roup explains the concept; article continues after video.

It’s an easy way for any publisher to get into the performance marketing game. But there’s more to Roup’s vision than that: ultimately, the startup wants to give publishers the data they need to get more proactive about earning affiliate commissions. VigLink’s analytics dashboard shows which outgoing links are bringing in the biggest commissions, information that can guide business decisions about where to place outgoing links and where these links should point to get the highest commission rates from merchants.

“Every click that leaves a site and arrives at another is delivering value from the origin to the destination,” Roup argues. “Publishers generally give that value away for free. They don’t track where their outbound clicks to, they don’t demand compensation, and they definitely don’t optimize to drive the compensation up. So our market is every site-to-site click, Internet-wide. We want to be the platform by which those are bought, sold, and priced.”

VigLink calculates that if every click eligible to generate an affiliate fee were actually tracked and monetized, it would bring publishers at least a billion dollars a year in new revenues. And that’s just the money currently left on the table when existing links aren’t affiliate-enabled. There’s another potential windfall from content that isn’t yet linked, but could be. To go after that revenue, VigLink introduced an automatic link-insertion tool this spring. It can automatically turn appropriate words in a Web page into links leading to merchants with affiliate programs. Roup says this feature was a direct response to customer requests. “Within three or four months of signing up, publishers were coming back to us and saying ‘This is great, how can we do more?’” he says.

Of course, many Web pages are already riddled with double-underlined links generated by ad software from in-text ad networks like Kontera, Infolinks, or Affinity. And many readers steer away from these links, which can generate unwelcome pop-up boxes or lead to irrelevant commercial sites. Roup says VigLink’s technology isn’t intended to cheapen Web content or interfere with editorial decisions (and the links on VigLink-activated pages look just like normal ones—no double underlines). But he acknowledges that the technology isn’t right for every Web publisher; it appeals mainly to those who are already in the business of monetizing eyeballs.

“I don’t expect that Wikipedia will adopt this product anytime soon,” Roup says. “Their brand is about non-commercialism. I think, though, that commercially motivated content is more prevalent than people might initially imagine. Ask yourself why the New York Times has an automotive section. It’s not because car enthusiasts are so excited to read those car reviews. It’s because there are carmakers excited to advertise alongside them.”

Publishers have “different levels of concern” about how advertising and editorial content are intertwined, Roup continues. “Some are so concerned that they won’t be interested in our product, and that’s totally fine. But there is the countervailing pressure, which is that paying journalists to write content is expensive. If we can create a new revenue stream that allows a publication on the margin to survive that wouldn’t have survived, I would say that is a positive force.”

In April, VigLink collected $5.4 million in Series B funding from Emergence Capital, First Round Capital, and Google Ventures, bringing its total venture pot to $7.3 million. The Series B money came close on the heels of a $1.1 million Series A round in August 2010 that allowed the company to purchase a Chicago-based competitor called DrivingRevenue.

But whether VigLink will be able to continue to build its business in San Francisco is an open question. That’s because there’s one big fly in the ointment of the performance marketing business: the sales tax question.

In essence, VigLink and other companies that make money on affiliate commissions are caught in a battle between big online merchants like Amazon and state legislatures around the country. States pounded by the recession are looking for any way they can find to increase revenues, and one of them is to pass laws imposing sales taxes on the purchases state residents make from out-of-state e-retailers. Rhode Island, New York, North Carolina, South Carolina, Illinois, and Colorado have already done this, and there’s a bill moving through the California State Assembly that would add the Golden State to the list.

Part of the argument the states make is that even if an e-retailer is located outside a state’s borders, its payments to local affiliates establish a “nexus” or a legal basis for state taxation. Amazon, in an effort to nullify this argument, has responded by cutting off payments to affiliates in the states with Internet taxes, which ostensibly eliminates its nexus in those states.

If more states look to Internet sales taxes to help mend their budget woes, and if other e-retailers such as Overstock.com respond as Amazon has, it could obviously slow affiliate commissions to a trickle. Indeed, VigLink has already suffered a direct blow: after Illinois passed its own law, the startup had to shut down its Chicago office and move all of the former DrivingRevenue employees (including the company’s entire sales team) to Indiana. The company had no choice: “We send Amazon lots of traffic and we get paid through their system, and their reaction was that they needed to cut off any affiliate that has a business presence in Illinois,” says Roup.

If the House-approved California law makes it through the state Senate and is signed by Governor Jerry Brown, VigLink and quite a few other companies might have to leave the state if they want to keep doing business with Amazon and the other big online merchants. Roup says he isn’t sure yet where the company might end up—when I suggested Las Vegas, he didn’t offer any pushback. “We’ve discussed a number of options, and we’re confident we have a business model in any case,” Roup says. “But it certainly would be a big problem. In Illinois, it caused us to move jobs out of the state, and that’s a possibility we would consider here.”

Roup says he understands both camps’ positions. The states “absolutely need to do something about revenues,” he says, while Amazon is “behaving rationally for their own business.” In states where consumers know they’ll have to pay sales tax, they buy less from e-retailers; for Amazon and other online merchants, Roup says, the hit they’d face from that dropoff in business is probably bigger than the hit they take by ending affiliate commissions and the incoming traffic these commissions generate.

But Roup says he’s hopeful that that the sales tax issue will eventually be settled at the federal level. If there were a single, harmonized sales tax regime across the country, it would free online merchants and their affiliates from the state-by-state cat-and-mouse game created by the nexus laws. Amazon CEO Jeff Bezos has indicated that he would prefer this solution, and Illinois Senator Dick Durbin has said he will propose such legislation in Congress.

In the meantime, VigLink still has plenty of its Series B money left, is hiring aggressively, and is “growing fast in customers and revenues,” according to Roup. If the company can get a reprieve from the sales tax mess, he thinks it might have a shot at real Google-scale growth, especially as it learns more about which types of affiliate links are the most lucrative. “Measuring how well a link is performing; doing more with the good ones and removing the bad ones; the decision on where to link—all of those things can improve over time with data,” Roup says. “I don’t want to put words in Google’s mouth, but I asserted that this business has the potential of an AdSense or an Adwords—and they invested.”

Wade Roush is a contributing editor at Xconomy. Follow @wroush

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