Outbrain Raises $200 Million in Funding Before IPO

Outbrain Secures $200 Million Funding Round

Outbrain, a company specializing in ad technology and known for its clickbait advertisements displayed beneath news articles, has recently obtained $200 million in funding. The company has not yet disclosed the valuation associated with this financial deal.

This investment is being made by The Baupost Group, a hedge fund headquartered in Boston. The funding arrives shortly after Outbrain submitted its initial public offering (IPO) filing last week.

Content Recommendation and Market Position

For those unfamiliar, Outbrain’s content recommendation widgets are frequently seen on prominent news platforms like CNN, Le Monde, and The Washington Post. These widgets primarily showcase sponsored links directing users to external websites.

According to co-CEO David Kostman, the company is “excited to announce this investment from The Baupost Group, who share our vision and commitment for our business, our team and our future prospects.”

Comparison to Taboola and IPO Plans

Outbrain is often benchmarked against its competitor, Taboola. Although a merger between the two companies was once considered, the plan was ultimately abandoned.

Taboola has already entered the public market through a merger with a special purpose acquisition company (SPAC), and its shares began trading last week.

Financial Performance

Outbrain’s IPO filing revealed a revenue of $767 million for the year 2020. Furthermore, the company generated $228 million in revenue during the first quarter of 2021 alone.

In 2020, Outbrain achieved a net income of $4.4 million. This figure increased to $10.7 million in net income during Q1 2021.

Future Outlook and Expansion

Co-CEO Yaron Galai stated, “We proudly lead the recommendation space we created. We have bold plans for the future to continue delivering critical innovation to our premium media partners worldwide and expanding our powerful open web global advertising platform.”

The advertising sector has demonstrated a strong recovery following the global health crisis, with a significant number of IPOs occurring in the first half of 2021. These conditions appear favorable for both Taboola and Outbrain as they prepare to become publicly traded companies.

Details of the Investment

Update: Outbrain has released an updated Form S-1 document providing further details regarding the investment.

The Baupost Group will invest $200 million in “senior subordinated secured notes.”

Convertible Notes and Valuation Protection

These secured notes are anticipated to convert into convertible notes following the IPO. The company’s prospectus indicates an intention to “exchange the Notes for the Convertible Notes upon the consummation of this offering.” The terms of this transaction are complex.

A minimum value is in place to protect The Baupost Group’s investment should the IPO performance be less than expected (specifically, a pre-money equity value of $2 billion or less). This value is also contingent on the IPO date.

If the IPO takes place before August 15, the convertible notes will be valued at $236 million. Should the IPO occur between August 15 and December 31, the investment will be worth $240 million to The Baupost Group.

Conversion to Common Stock and Interest Rates

A successful IPO will allow The Baupost Group to convert its convertible notes into common stock. The IPO prospectus details the conversion rate: “The initial conversion rate for the Convertible Notes per $1,000 principal amount of Convertible Notes will be a number of shares of common stock equivalent to a conversion price of 125% of the initial public offering price of our common stock.”

Should The Baupost Group choose to retain its convertible notes before converting them to shares and selling its stake, the fund will accrue interest at a rate of 2.95% annually, or a higher rate if the 5-year U.S. Treasury Rate exceeds 0.8%. The presence of a medium-term investor like The Baupost Group could contribute to the stabilization of Outbrain’s shares once trading begins on the public market.