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Critics may love to accuse Outbrain Inc. and Taboola of degrading publishers’ websites with tacky content, but the Israeli companies have investors’ attention because readers are clicking away

If you've come across stories like "13 Things Your Hairstylists Won't Tell You" and, the "Top 10 Most Terrifying Shark Attacks!" when surfing the Internet, then you're already familiar with what may be the next big initial public offering out of Israel.

Critics may love to accuse Outbrain Inc. and Taboola of degrading publishers' websites with tacky content, but the Israeli companies have investors' attention because readers are clicking away. They served up articles, videos and lists (or 'listicles' in the industry's vernacular) that were viewed by more than one billion people worldwide in December, according to comScore Inc.

Now Outbrain is planning an IPO in the U.S. at a valuation of about $1-billion, and Taboola is in the final stages of a pre-IPO funding round, according to people familiar with the companies' plans. While Outbrain hasn't indicated its deal is imminent, the offering is one of the most anticipated – if not the most anticipated – IPO out of Israel this year.

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The two rival startups, whose algorithms spit out a mix of free and sponsored stories that appear at the bottom of online articles, have grown by winning over publishers seeking to boost readership and ad revenue as Facebook Inc. and Twitter Inc. remake the media landscape.

"It's really necessary in an age where Google and Facebook and Twitter are becoming increasingly careful about how they direct traffic for free," Ian Sigalow, a partner at Greycroft Partners, a venture capital firm that has invested in rival ad tech companies, said by phone from New York. "It's hugely scalable, it's going to make a lot of money."

$3.4-billion Outbrain and Taboola make their recommendation algorithms free to web publishers like Time.com or CNN.com, who use them to promote their own stories.

The startups make money by charging outside parties – publishers looking to buy more traffic, or companies marketing products – to have their links included in the algorithm's index of recommended articles. If a reader clicks on a link that takes them off the host publisher's site, Outbrain and Taboola get paid, and they split that revenue with the publisher.

Taboola and Outbrain are the dominant distributors of so– called sponsored content, or ads designed to mimic news stories, a niche of the advertisement industry that's forecast to reach $3.4-billion in revenue by 2018, according to Business Intelligence.

Variable Sales

To go public, Outbrain will have to distinguish itself from the last wave of ad tech IPOs, many of which did not end well for investors, said Sundeep Chanana, a partner at Waller Capital Partners LLC, a New York-based investment bank focused on technology and media companies.

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Rocket Fuel Inc., a digital-advertising firm that went public at $29 a share in 2013 and sold equity again in 2014 at $61 a share, now trades at $12.34. Millenial Media Inc., a mobile ad company, has tumbled almost 90 per cent from its IPO price.

The ad tech industry is still nascent and sales are highly variable because they're based on clicks, something stock investors don't like, Chanana said.

Taking ad tech firms public "is like trying to fit a square peg in a round hole," he said.

Taboola generated more than $200-million in revenue in 2014, compared with less than $10-million in 2008, according to founder and chief executive officer Adam Singolda. Outbrain's revenue is 25 to 30 per cent higher than that, according to a person familiar with the company's sales. Outbrain CEO Yaron Galai declined to comment on current revenue and the company's IPO plans.

Goldman, JPMorgan Outbrain, founded in 2006, filed confidentially with U.S. regulators to go public in the first quarter of 2015, according to people familiar with the matter who declined to be identified because the information isn't public. It hired Goldman Sachs Group Inc. and JPMorgan Chase & Co. to manage the offering, and may seek a valuation of about $1-billion, the people said.

Taboola raised more than $100-million in a funding round arranged by Credit Suisse Group AG that will be finalized in the coming weeks, a person familiar with the matter said.

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Beyond Outbrain, the Israeli IPO pipeline looks thin. Approximately six companies, mostly biotech firms, are planning offerings worth about $60-million this year, following a record $1.6-billion in 2014, data compiled by Bloomberg show.

Outbrain and Taboola have come under fire from technology and media critics who say the content they recommend is low-brow clickbait and that readers will grow bored and stop clicking.

'Eroding Trust'

"The business model is revenue now for a tiny erosion in trust that won't hurt until later," Jay Rosen, a journalism professor at New York University, said in an interview. "There is no fix for that."

While both companies acknowledge the quality concerns, they espouse opposing philosophies on how to deal with it.

Outbrain co-founder Galai, a softspoken 43-year-old on his fourth Internet startup, has staked Outbrain's success on policing the quality of content he recommends. He prunes his stable of advertisers for violating Outbrain's content guidelines, something that cost him 25 per cent of revenue in 2012, he said. He complains that less scrupulous competitors are giving the industry a bad name.

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"Everytime we make one of these cuts, it's a party" for the competition, he said in an interview at Outbrain's New York headquarters. "I want users to know exactly what they're seeing and what they might be clicking on, and click only if that has merit."

Kim Kardashian

Singolda, a musician's son who spent seven years in the encryption unit of the Israeli army, has a more laissez-faire approach. He outsources the decision to publishers with a feature called "Taboola Choice," and lets readers give negative feedback on stories to refine future suggestions.

"You may think Kim Kardashian is low quality, others think it's okay," he said in an interview at Taboola's New York headquarters. "We became editors' best friends, because instead of telling them what's good or bad, we empower them to make decisions."

Questions about sustainability haven't stopped larger companies like Yahoo! Inc. and AOL Inc. from getting into the recommendation business.

Competition to win publisher contracts is so intense it's forcing some industry players to promote more low-quality links or reduce their revenue cut in order to win publisher contracts by guaranteeing higher ad revenue up front, said Reggie Renner, the founder of a rival startup called ZergNet that allows publishers to boost traffic by recommending each others stories.

The competition was fierce enough that IAC/InteractiveCorp shut down its own content-recommendation unit, nRelate, in December. IAC spokeswoman Valerie Combs declined to comment.

"Guarantees are king right now," Renner said by phone from Indianapolis. "They all want to raise as much money as they can to outbid everybody, to win the distribution and try to put the other guys out of business."

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