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Sunday, December 21, 2014 |  Madison, WI: 31.0° F  Light Snow Fog/Mist
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Madison's MdotLabs could make a fortune by ferreting out fake clicks
Fighting web fraud
on
Chief scientist Barford (left) confers with CEO Yarnall, who recently opened the company's Palo Alto office.

Timur Yarnall describes it as a "near-death experience."

This was mid-2012, when the Madison entrepreneur worried he would lose his company, Broadcast Interactive Media, to web fraud. The episode both scared and angered him, and he took the lessons to heart in launching a fraud-fighting company. Today he and his partner, UW-Madison computer science professor Paul Barford, seem smartly situated to lead the counterattack against online scammers.

Their company, MdotLabs, has the kind of "upside" financial potential that makes tech watchers dizzy with dollar signs, but more on that later.

That scammers gin up fake page impressions to fleece advertisers has long been known by digital insiders. But increasingly the tarnished reality of certain web analytics is gaining broader view. In March, the Wall Street Journal reported a truly head-turning story -- that scammers fake an estimated 36% of all web traffic. This "Crisis in Online Ads," as the paper headlined the story, involves automated "botnets" and viruses drumming up bogus page views. The New York Times followed up in early May, reporting that over half of purported online video ads are "unviewable."

It's all about money, of course -- a projected $121 billion in the booming worldwide online advertising market in 2014. "Fraudsters think it's the Wild West," says David Gee, a UW-Madison lecturer in digital marketing. "A tectonic shift is happening. Money is pouring into digital advertising, and the fraudsters want to capitalize on it."

Yarnall and Barford entered the fray with MdotLabs in June 2013. MdotLabs licenses proprietary software (using JavaScript code for monitoring) that it says benefits web publishers and marketers by separating real clicks with real eyes from faux clicks with no eyes.

The company shares space with Broadcast Interactive Media in the Hovde Building at 122 W. Washington Ave. It employs 11 and has raised $1.25 million in seed capital, including stakes from Chicago and New York investors. Yarnall, who was raised in Southern California, also has an office in Palo Alto, which puts him close to Silicon Valley funders and the big tech companies as he plots a national expansion.

"Their timing is absolutely fantastic," says Gee as he describes the rush of "charlatans and imposters" to online advertising.

"It's kind of like aluminum-siding sales," agrees Alan Mutter, who teaches media economics at the University of California-Berkeley and writes on the topic for his Newsosaur website. "There have always been black-hat players in online advertising, along with the white hats and gray hats."

Yarnall's own experience is instructive.

Chastened, but stronger

As a mechanical engineering student at Stanford, he co-founded and later sold a general web-publishing platform called Clickability. Yarnall launched Broadcast Interactive Media, which provides online platforms and support services for local media, in 2003 and moved it to Madison in 2005 because he liked the tech scene here. BIM is, he says, very successful: 42 employees, $10 million-plus in annual revenue, no debt and a network of 110 sites that includes the biggest markets in the country. Those sites, he came to realize, "could be really attractive to advertisers."

So BIM started its own ad network, fleshed it out with seemingly simpatico social-media and domain-search sites, and partnered with Google AdExchange to sell its inventory based upon the traffic, or clicks, generated on the sites. Then -- bam! -- Broadcast Interactive Media had its near-death experience.

As Yarnall tells it, Google notified BIM it had detected "invalid activity" on its network. Lots of faked page impressions, in other words. "They didn't tell us where," he recalls. "It could have been any of our hundreds of partners. They just took back a big chunk of revenue without telling us how it happened."

This touched off "many rounds of legal letters and threats of litigation" from his advertising affiliates, who were furious over their stopped payments. Yarnall feared bankruptcy. But with Barford's forensic IT skills, BIM identified the scammers, cut off their money and, while chastened by the experience, ended up even stronger. Now Broadcast Interactive Media had a powerful asset for spinning off a new fraud-fighting company.

"Anytime someone can develop a heavy technology solution to a complex problem that has large market opportunities, that interests us, and that's what these guys have done," says John Philosophos, whose Great Oaks Venture Fund is one of the startup's seed-stage investors.

Philosophos sees online ad sales fraud as "a massive problem," but also puts his finger on MdotLabs' challenge: The industry may not be ready for reform. For some, scammery is simply a cost of business. And paying for it might even seem easier and cheaper than subscribing for MdotLabs' validated data. Besides, he muses, are the ad agencies prepared to tell their national brands how much money they've wasted paying for robot-generated page views?

Buying page views

Barford, 50, admits to a passion for cleaning up the scams. His specialty is Internet security. A tenured prof in the UW's well-regarded computer science program, he founded and sold Nemean Networks, whose patented processes sniff out computer malware and other system intrusions. Now he pursues another phantom in the digital ocean.

It only takes a few keystrokes for Barford to pull up the online netherworld when he types in "purchase web traffic" on his browser. He gives me a tour, pointing out a site where he can buy visitors for as low as a dollar per thousand. It's even geo-targeted. So he clicks on U.S. traffic. "This is miraculous!" he says with faux excitement. "All I have to do is fill out this page. I can buy up to 400,000 visits to my site by just typing in my URL. I go to 'check out' and pay $384. By the way, what a deal -- it's 25% off today!"

Barford is laughing as he says this. And when I ask him the obvious question, his answer surprises me: "It's completely legal." There are other, shadier practices as well. He's doubtful that big corporate advertisers -- think Procter & Gamble, L'Oreal or Ford -- will want to continue paying for these "visitors".

Barford's

This is a problem, says Stuart Larkins, whose Chicago Ventures is another seed-stage investor in MdotLabs. He thinks the pressure for reform will come from the big brands demanding more effective ad placements, especially when their costs begin to rise in the burgeoning online market.

Showing his true SoCal roots, Yarnall thinks MdotLabs is perfectly situated to cash in: "We saw this wave coming from a long way away, and we turned our surfboard in the right direction. I think we caught the wave at the right time."

Less than a year old, MdotLabs has five paying customers and another 15 to 20 in the pipeline. Both Yarnall and Barford expect the workforce to double by year's end. Hiring will continue to be focused on Madison because of its deep pool of computer science graduates. And at some point soon, the company will commence a "Series A" fundraising round to expand even more.

Zach Brandon, president of the tech-minded Greater Madison Chamber of Commerce, says MdotLabs is a local startup to watch. He sees it as a game-changer in a lucrative industry. He compares MdotLabs' potential to that of Exact Sciences, the local biotech company that is piloting a noninvasive test for colorectal cancer. He even compares its potential competitive position to Epic's with electronic health records.

"I think MdotLabs could be not just a success story," says the chamber chief, "but the creator of a new employment base in Dane County."

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