Retailers and consumer brands are losing tens of millions of dollars each year in wasted advertising spending because of fraudulent clicks on online ads, according to research conducted by MdotLabs Inc., a startup firm that provides Internet-hosted software for identifying and blocking illegitimate sources of traffic hitting web ads.

MdotLabs, based in Madison, WI, uses proprietary software that places JavaScript code on web sites to monitor traffic clicking online ads. The JavaScript code sends data on that traffic to MdotLabs, where its risk management software determines whether traffic hitting online ads was generated by humans browsing a web site or by botnets and “click-farms” that use automated systems to send fraudulent traffic to online ads, says Paul Barford, the firm’s chief scientist and co-founder. The software is also designed to block fraudulent traffic.

After it conducted a recent study of 10 online advertising networks that span hundreds of ad-carrying publishing sites and that charge advertisers by page views, MdotLabs estimated that those networks alone account for about 15 billion invalid ad impressions per month. “We estimate the cost to advertisers for this fraudulent traffic to be on the order of $180 million annually,” Dr. Barford says.

MdotLabs grew out of Broadcast Interactive Media, a digital ad network, a company that was founded by MdotLabs CEO Timur Yarnall, who co-founded MdotLabs with Barford. The company charges fees based on cost-per-thousand ad impressions. For agencies that offer the company’s service to their clients, MdotLabs offers its technology on a fixed-fee basis starting at $2,000 per month, Yarnall says.

MdotLabs, which operates with a staff of 14, recently received $1.25 million in venture capital in an initial round of funding led by investment firms Chicago Ventures and Great Oaks Venture Capital. Other investors include Ray Zemon, founder of ShopBop.com, an online apparel site owned by Amazon.com Inc., No. 1 in the Internet Retailer Top 500.

“MdotLabs, helps advertisers and publisher networks identify and avoid invalid traffic which is now costing the online ad ecosystem billions of dollars every year in wasted ad spending,” says Andrew Boszhardt Jr., founder and managing partner of Great Oaks Ventures. “Timur and Paul and the MdotLabs team have developed campaign security analytics that provide highly accurate and timely detection of invalid impression and click activity for both online and mobile traffic. We see almost no limit to its growth and potential to dominate the fraud protection market.”