Where Has All the VC Gone?

 

The drumbeat about the dearth of VC funding for AdTech has been growing louder recently.  Alternatively, MarTech funding has been growing rapidly and continues to accelerate.  So why has AdTech underperformed and why is MarTech so attractive to VCs?

The challenges of AdTech for VCs?

  1. No Exits.  AdTech companies cannot exit, so why invest?
  2. No Growth. Google, Facebook and a few other monsters are sucking all the revenue growth so everyone else is fighting over scraps.
  3. No Innovation. The only companies looking for funding are “me too” DSPs, SSPs and the like.

Each argument has merit if you narrowly define “AdTech” as technology companies who make money off of media spend:

No Exits.  With few exceptions, the IPO market has not been kind to AdTech. The exceptions, TradeDesk, Criteo and YuMe, are overshadowed by the dire stock performance of Rocket Fuel, Rubicon, and TubeMogul (before its sale to Adobe last November). But this not really a fair analysis. The interesting exits have come from the M&A side: NeuStar, Sizmik, Smaato, StickyAds, AddThis, ConvertMedia, ReachLocal, etc.  But since most of these deals are private, the exact terms, particularly the originally invested equity, are difficult to find.  Suffice it to say, VCs are generally not drooling.

No Growth: It’s difficult to argue this point. Depending upon who’s counting, Google and Facebook accounted for 75 percent or more of all new online ad spending. Whatever number is correct, these two companies are capturing a disproportionate share of new digital ad spend. The other 3,000+ AdTech companies are fighting over the remaining 25%~35% at most.

No Innovation:  Here is the interesting area. Hundreds and hundreds of AdTech firms were funded from 2009~2013. With few exceptions, they were all variations on similar themes:

  • Automate the selling of media (SSP’s, exchanges, publisher tools, networks, etc.)
  • Automate the buying of media (DSP’s, exchanges, trade desks, creative optimization, measurement, etc.)
  • Data (DMP’s, data aggregators, offline/online conversion, etc.)

Again, the revenue model for all these companies is based upon a percent of media spend or, in a few cases, a CPM charge.

The challenge for most of these companies is in proving they add value. For almost all the technologies developed within AdTech, scale trumps innovation.  Once one company achieves a minimal level of scale within a technology segment, the incremental value of a better black box is usually trumped by the reach opportunities of scale.  Second, where hundreds of AdTech companies have focused on optimization technology in one shape or form, it turned out the better data was what won. Facebook’s success is based upon the best data.  It has far from perfect data, but it is the richest, broadest, and certainly deepest data available.

Also, let’s not forget that the AdTech community has wounded itself by burying its technology inside of black boxes with promises of “better performance” but with almost no ability to compare one solution to another.  Hence, high churn, higher customer acquisition costs, and declining margins.

It’s no wonder that the VC money has been steadily migrating away from AdTech.  According to Results International , “The number of AdTech deals completed is down slightly year-on-year, a 10.4% decrease from 67 transactions in H1 2015 to 60 in H1 this year. The total value of those deals fell from $7.6bn in H1 last year to $3.7bn in H1 2016. The H1 2015 figures were skewed by Verizon’s $4.4bn acquisition of AOL in June 2015.”

By comparison, “the number of MarTech deals rose from 132 in H1 2015 to 158 in H1 this year – an increase of almost 20%. MarTech deal value rose from $1.5bn in H1 last year to $7.8bn in H1 2016. However, this year’s figures are skewed by a number of acquisitions in excess of $1bn: Demandware by Salesforce ($2.8bn), Marketo ($1.6bn) and Cvent ($1.7bn) by Vista Equity Partners, and Sitecore by EQT ($1.1bn).”

Why is MarTech winning?  Besides being shiny and new, the business model of most MarTech companies is a true SaaS model.  In order to sell SaaS, companies need to provide a way to measure ROI and deliver real value to customers.  Also, the customer base is different.  AdTech’s business model, built of media spend and buried in black boxes couldn’t be more different.

MarTech is generally sold directly to the enterprise, as opposed to fickle agencies.  While these sales cycles may be longer, customer loyalty is real and, maybe most importantly, enterprises are willing to share the right data and measurements to create a partnership, whereas agencies either don’t possess, or choose to withhold such data as a negotiating club (“No, you didn’t really perform well…”).

According to Lola Alford  from Thumbtack Technology the MarTech segment set records in global venture capital funding in the second quarter of 2016 at more than $5.05 billion. That’s already 72 percent of the $7 billion MarTech firms netted over all of 2015.  A large portion of that funding, some $3.5 billion, was invested in May alone. In comparison, VC-backed FinTech funding in Q2 reached only $2.5 billion, down 49 percent from Q1 funding for this year and down 52 percent from Q2 of 2015, according to data from KPMG and CB Insights.

So what does this all mean?

  1. Raising VC money for traditional media-driven AdTech is extremely hard.  It can be done, but valuations are down and only the strong, with unique offerings, are raising money.
  2. AdTech companies that are selling a true SaaS model will do much better with VCs.  In general, this means companies selling directly to enterprises are better positioned, but the SaaS model is also well accepted by publishers, so PubTech tools (header bidding, SSPs, data capture, user engagement, etc.) are proving more adept at proving long-term value.
  3. MarTech should continue to win for the next few years. All B2B technology companies are well served to think through their business model.  When you sell something, whether a recurring revenue or a one time software sale, you have to prove to the buyer your ROI which forces you to deconstruct your technology and how that value is created.  Burying software costs within a larger media budget is helpful in winning a deal, but severely challenging when trying to keep a customer.

 

 

 

Author: Jonathon Shaevitz

Jonathon Shaevitz is the CEO of Industry Index.

Posted in Financial.