Q2 2024 CEO LETTER
Chapter 2, 2024
I often view these MD&A updates as chapters in a book, a narrative that unfolds over time. This ‘book’ has six sections, starting in 2019, each year containing four chapters (quarters). When we launched this company in the shell of its predecessor, Freckle, the world began to shelter in place as COVID-19 inflected. Starting a nascent business during that time was challenging. We really had no business being a public company at that stage, but with the world closed and capital non-existent, we decided to put our heads down and build the product. Those first few years were capital-intensive and hard, and I am glad to have those years behind us. Business is never ‘easy,’ but evolving from concept to product to validation to now scale - all of these stages require very different tactics. I read the Berkshire, Dimon, Amazon, and other CEO letters each quarter and model this essay around those. I have always appreciated the opinions of those CEOs, who have a better vantage point than the media and have always found more knowledge in these letters than what is typically found in a research report or media article. As it relates to this industry and privacy, I would like to think that I sit on a perch that provides more visibility than most, so these quarterly letters are meant to share with you what I see. Take what you will from these thoughts and views; they are not all facts, and some are just opinions. Hopefully, they will allow you to understand this market better and make more informed choices regarding your investment in Reklaim and other companies you may be looking at.
My father, a Toronto lawyer who loved stocks (and sports), introduced me to the capital markets at an early age. My father was responsible for taking me to my training and tournaments. During those early mornings over the breakfast table, the Globe & Mail was divided, with me in the sports section and him in the business section. As time passed, or maybe because the sports section of the G&M was thin, I started reading the Business section. This evolved from reading my father's subscription to The Investment Reporter and Investors Weekly and heated debates regarding what we liked (he liked Inner Pipeline, I liked Stella Jones). My father is gone now, but this trend of reading papers has stayed with me - first, at school, where I would start my day at the library reading the WSJ, FT, and Globe, and then today, where the same routine persists. Why am I providing this historical context?
Because while an entrepreneur, I look at Reklaim in the same way you do. An investment that is competing with every other stock or bond you can invest in. You choose to be invested in Reklaim, and the magic of the capital markets is its liquidity; should you change your mind, or Reklaim not provide you with the expected return, you can sell it and move on. I don’t agree with a lot of the traditional thinking of the public markets and only focus on what I can control - the business. I avoid fluffy promotions and IR teams spreading liquidity chum to create a false frenzy. If this is what you desire from Reklaim, you will be disappointed. I believe in capitalism and that investors have an uncanny ability to find value. If you continue to build value, you will continue to build investors. We will not grow at all costs; that’s ego. We will grow as quickly as possible based on the capital we have access to. We aim to build a consistently profitable company with a high growth rate. It is through this lens that you should look at Reklaim.
As we conclude Chapter 2 and work our way through Chapter 3, 2024, I encourage investors to look at previous chapters to stay informed of the more prominent themes in the market that are impacting the company today and in the future. Understanding the macro listed below will help you better understand where we fit.
You have many choices as an investor; we appreciate you considering Reklaim. We hope not to disappoint.
N
The Market
Q2 earnings of the major advertising Holdco’s suggest that the market continues to grow at a consistent single digit pace. These holding companies are a good proxy for the overall health of the advertising market as they allocate the majority of advertising investments for companies and represent a subsection of Reklaim's clients. Publicis (one of the four core advertising agency Holdco’s) recently raised guidance for the year and is expected to grow at approximately 5.6% for 2024. Omnicom announced a similar growth of 5.2%. IPG saw 1.5% growth, with GroupM declining by .05% due to account losses. Reklaim expects to grow at a faster rate than the market, but with the overall market growing it makes our ability to grow and steal share less challenging.
There are some signs of advertising spend slowing. A poll of 125 sellers in the industry conducted by Reklaim suggests that 63% believe it to be slowing vs 28% suggesting spend to be steady. Only 9% believe it to be growing. I believe spending will be more cautious in the back half of the year but that weakness will be more category-specific vs. market-specific.
The vendor/platform side of the industry is seeing an acceleration of consolidation. The industry has long suffered from too many undifferentiated platforms and this is now righting itself. Agencies are looking to reduce the number of partners they use to reduce complexity. This has stimulated several mergers amongst firms looking to increase scale to reduce their chances of being culled. For many sections of the industry, the music has begun to slow, and everyone is scrambling for a chair, hoping not to be eliminated from the game. The impact for Reklaim around this consolidation is negligible. We depend on platforms for distribution, but our footprint focuses on dominant players who are not consolidating but continue to steal share from the increasingly desperate long tail.
Oracle
One interesting development we had predicted for quite some time did manifest this past quarter when Oracle removed itself from the data market in June. Oracle, which has a $350m data business, decided to close up this division entirely. Not sell it. Not spin it out. Shut it down. We have long predicted that data companies need a consumer interface to manage opt-in and opt-out and remain compliant in the face of accelerating and litigious new privacy legislation. In July, it became known that Oracle had reached a consumer privacy settlement of $115m. The $350m Oracle dumped into the market will quickly find a new home, but this departure will be the first of many in this space. Reklaim, which does not have these compliance issues, stands to benefit from this acceleration.
I got this one wrong. After years of back and forth, Google has decided not to deprecate cookies. I was shocked that with all of the product and engineering talent at Google, they could not figure this out. I never believed they would remove them 100%, but move from the 1% today to 10%, then 30% - kicking the expiry date down the road. A complete retreat was different from what I expected. Details are vague, but most believe that Google will mimic Apple’s tracking notification strategy in cookies. If you recall, Apple introduced Advanced Ad Tracking, which asks users ‘Do You Allow App To Track You On Other Apps?’ When introduced, 88% of consumers said no to this prompt, which decimated Facebook's and others' earnings who relied on this signal for targeting. You can expect a similar result if this type of notification is expanded to websites by Google’s Chrome browser. In this scenario, Google is still achieving its desired goal of removing cookies but can point to cookie removal as a consumer choice vs. a Google choice, thereby avoiding the focus of regulators. Quite clever.
Cookies or not, the impact of this decision on Reklaim is minimal and does not impact our ability to drive revenue. Cookies are a proxy for privacy, and while the cookie narrative may be ending, the privacy narrative is not. No cookies in the market may have sped up some demand for Reklaim data, but I suspect it would have been neutralized by some of our partners' direct exposure to the cookie. Today, we are growing and operating in a cookie world, so it would be romantic to assume that the demand for Reklaim would double overnight should cookies disappear. Cookies or not - we continue to grow as the market transitions to one that requires consumer participation. The positive of the cookie fixation ending is companies can turn their attention to those things that are actually impacting their business now, namely privacy.
Privacy Updates in the USA
Privacy is the core tailwind for Reklaim. As privacy expands, more companies are required to use data that has consumer inclusion, this is the opportunity for Reklaim. The $700b data market is very much in transition, moving from one of arbitrage with no consumer participation to one that is increasingly requiring it. The impact is tangible. Large Data Management Platforms (DMPs) and Demand Side Platforms (DMPs are used to buy advertising programmatically) are removing data reclassified as ‘sensitive,’ creating a gap in the market that Reklaim is filling. We covered this acceleration in detail in last quarter's MD&A under the trend of ‘exclusion.’
In the USA, 19 states have passed new privacy legislation requiring greater consumer inclusion and protection, and 17 states have proposed new legislation. Many of these state laws are slated to take effect in 2024, with others taking place in 2025, signaling a new era of consumer data protection in the USA.
It is essential to recognize that these comprehensive privacy bills are only some of the privacy changes taking place at the state level. Various states are also implementing laws targeting specific industries and types of data such as Washington state's "My Health My Data Act" focuses on health data protection.
Data Security & Breaches
There is an accelerating trend in data security that intersects with where Reklaim operates. In the first half of 2024, there were over 1b breach victims, a 409% increase over the same time last year. This trend is accelerating and not slowing down. Company data has historically been housed in large data centers where data is stored centrally. Centralized data where millions of accounts are stored have created vulnerable honey pots for hackers who can break in once and secure millions of profiles. This antiquated way of storing data impacts all of you. Many of you were exposed to high-profile hacks this last quarter, including AT&T, Ticketmaster, United Health, and Cricket Wireless; this data is now available for sale on the dark web and will act as the foundation for every spam email, txt, and phishing attack on you for years to come.
Unfortunately, it's going to get worse.
Most data security is no match for the sophistication of hackers and the more deadly combination of hackers + AI. Most passwords can be cracked within 60 seconds. We have long believed that one of the negatives of AI is that data hacks and phishing will accelerate to the point where all of your data will be available on the dark web, sold, and used to impersonate and scam you.
The costs to organizations of a data hack are estimated to be over six million. The cost to the individual is more. Long after fines have been paid by corporations for their lackluster security practices, the consumer is left with a perpetual wave of spam, phishing and extortion as the data lives forever on the dark web. For this reason, how we store data needs to change. Data needs to be stored at the consumer level in an identity wallet. Not only does this add encryption at the user level, but it's a deterrent to hackers who would need to hack each wallet vs the more extensive databases listed above.
AI
There will be AI companies, and then there will be everyone else.
In previous chapters, I have discussed the pending collision of AI and privacy. Above, the risk to data security with the expansion of AI.
At its core, AI requires data in order to train. That data is yours. Reklaim was created to give you more control and flexibility regarding your data. We are now seeing an arm’s race in the market where larger firms such as OpenAI and others are scraping as much data as they can before legislation is enabled that will prohibit this collection. This is eerily similar to the tactics of social networks, which aimed to gain enormous scale (and power) to defend themselves against the government better. Publishers, desperate for revenue, are taking the short-sighted approach and selling their historical catalogs for pennies on the dollar as they have no answer for these scrapers.
For Reklaim, our entire Q3 product roadmap is in AI. An important distinction here is that we are not looking at AI as a productivity tool—we already have done that—but instead, can you create an AI product that generates actual revenue to complement your existing product?
Our first iteration of our AI product is the world’s first personal privacy assistant. Built on the most progressive platforms in the AI space, including Meta’s LLaMA, Groq, and others. This bot, which you can access a beta version here, will in time allow you to determine if you have been in a data breach, how you can secure your data if you are in a breach, how to join a class action, implement a VPN and answer any questions as it relates to the security of your data. While live today, over the coming quarters this bot will add functionality and expand to other platforms and geographies. Additionally, it will begin to merge with the core Reklaim product.