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Amazon Advertising is Spawning a New Ecosystem

Amazon has grown so big, and into so many industries, that it’s easy to forget that, at the online retailer’s core, is a giant sales engine powered by one of the world’s biggest advertising markets.

Even more astonishing is the ability of that sales engine to create its own evolving ecosystem of new business sectors, much as YouTube has done for online-video influencers the past decade. Amazon Marketing Services provides brands with a set of tools to push their products. But those tools can quickly become inadequate for a company with dozens or hundreds of brands to manage. Throw in Amazon’s vast scale, tight margins, and second-by-second price competition, and it can quickly become overwhelming.

Thus, the creation of a new group of automation software services designed for brands needing scale and speed to adequately compete. One of those new companies is Seattle-based Downstream, which just announced a $1.925 million seed-funding round.

“Amazon’s advertising has really been exploding, but there’s a complete lack of tools to help,” said founder and CEO Connor Folley, like his co-founder & CTO Salim Hamed a former Amazon employee. “Amazon is a complete black box for most brands. You can’t take an algorithm out to lunch.”

Folley said Downstream already has lined up hundreds of clients (including some quite large ones in consumer packaged goods) since its launch last October. The company is already cash-flow positive, he said, a testament to the appetite brands have for help in this increasingly important sector. Downstream will use the seed funding to hire additional engineers to further beef up its product amid growing competition and increasing feature demands.

There’s plenty of opportunity here.

Amazon advertising revenues topped $1 billion in its last quarter, a substantial part of the $2.2 billion in “other” revenues it reported. That segment of the company was up 32 percent. Amazon, in almost stealth fashion, has become one of the world’s five biggest sites for online advertising.

And it’s a fairly crazy space in which to compete.

Company products are sold not just by Amazon itself but also by thousands of third-party storefronts on the site (about half of Amazon sales are fulfilled by the company on behalf of those sellers). Amazon also sells its own generics and in-house brands that compete with many companies. And then there are all those other online retailers, including Walmart/Jet, Best Buy, Target and specialty sellers of many kinds.

Prices can shift on a second-by-second basis, as deals pop up and are matched by other outlets. One way to compete with all those other options, both internal and across the web, is through paid search ads that pop up when a customer is looking to buy.

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Connor Folley, CEO of Downstream

“It’s just a battlefield all day long,” Folley said. “They’ve really thrown headcount at it. It’s a problem that demands to be solved by software.”

Much as Amazon has done in constructing an outsourced network of smaller logistics companies, it has encouraged entrepreneurial former employees to create tools that can improve on and extend its own marketing tools. Downstream is using artificial intelligence tools to power a software platform that automates the search-ad creation process.

And while product sales is huge business, Downstream investor Semil Shah says the bigger value, given Amazon’s brutally thin margins, may actually be the data about the transaction: who bought what, what else they bought, what message motivated them to buy, what else they looked at buying, etc.

“The fact that Amazon’s scale would theoretically empower itself to make more money from product search versus selling actual products is at first unbelievable to consider, but after the thought sinks in, it becomes obvious,” said Shah, a Silicon Valley venture capitalist and founder of Haystack.

“When you think of search, people always think of Google, and rightfully so,” Shah said. “But with mobile and other containers that we operate in, like Slack or email, we end up searching a lot more through Yelp on the phone than maybe Google. And when you think about all the different types of searches, you think about product search. Intent to buy is pretty high if you’re searching there. Amazon is gaining an advantage and a pretty defensible one.”

Downstream’s marketing software-as-a-service platform provides automated tools that collect and aggregate that intent-to-buy information, while providing strategic insights to help navigate Amazon’s ecosystem, Folley said.

Other Downstream investors include Founders’ Co-op, Joe Montana’s Liquid2 Ventures, Techstars Ventures, Unlock Venture Partners, and 9Mile Labs.