Is the ad tech funding crash a big deal?

Pippa Chambers
By Pippa Chambers | 11 January 2017

We've seen the decrease of filling in the once cash-rich ad tech pie and we're all too aware of the dominance of Google and Facebook in the digital ad space, but with fresh research stating that funding for this once booming and lucrative sector is at a five year-low, what does this mean in the long run?

According to research by CBInsights, it found that globally the number of ad tech deals dropped 17% year on year in 2016 to 343 deals, down from from 414 in 2015. Funding also declined by 33% year on year to US$2.2billion in 2016, from US$3.3bn in 2015.

Despite the drops in funding, actual ad spend is up, particularly for kingpins Google and Facebook. Forecasts by OC&C Strategy Consultants say both will account for 71% of the UK’s overall online display ad spend by 2020, up from 53% now.

The same research house also analysed the acquisition activity of the largest US internet companies by revenue and found there's also a slow down in the merger and acquisition (M&A) pace. Google has had more than 105 deals recorded since 2012, but it's activity has fallen from 35 disclosed acquisitions in 2014 to under 20 in both 2015 and 2016.

Traditionally the venture capitalist model involves waiting until a company has launched on the stock market before investing, but if not not enough companies are even making it to the stock market, with some going under before they can even break through, it's no surprise the VC community is being disrupted. While the money is there, VCs may be unsure how to invest it and are looking for new investment models.

More agencies competing with vendors

Consultant at Sydney-based digital consultancy Louder, Andrew Hughes, says entering the ad tech market now would require significant funds and resource for potentially a very low return and that 'fintech and data intelligence solutions' have larger potential upsides and market scale.

“Companies who have not made it by now will struggle to compete with those who have gone before, yet truly innovative projects or products will still be funded,” Hughes says.

“There are limited exits now for companies and therefore investors. You look at Oracle, IBM, Google, Adobe, Salesforce, Microsoft; they are close to completing the marketing 'stack' and the major components are there for most.”

Hughes says agency groups are now starting to compete with vendors for the technology provider status and if you look at the big IPOs like The Trade Desk and (soon) AppNexus, these are based on years of hard yards with large agency groups.

As a side note, it's thought it will be a lot easier for AppNexus to go public in 2017 after the success of The Trade Desk IPO. 

Despite research saying there's a big dip in funding and the M&A pace is slowing, managing director at Integral Ad Science Australia and New Zealand, James Diamond, says it's not a cause for concern and if a good business has a solution to a big problem they will get funding.

“The fall in ad tech funding is probably a sign that the industry is maturing whereas the slowdown in M&A is probably a sign of caution,” Diamond says.

“Over the last decade we have seen hundreds of ad tech startups building solutions to address issues in the digital ad world and while we still have some big issues to solve, a lot of progress has been made. So it's possible that there is simply not as many ad tech startups looking for funding now because there are already established players working on the biggest problems in digital.”
 
He says unless someone comes up with something really radical, the industry will focus on driving adoption of existing technologies from existing players rather than funding new players. He adds that having said that, funding tends to be part of a larger cycle and it would be a brave to assume the current slump is a long term trend given ad tech's history of innovation.

Caution prevails

On M&As, Diamond thinks this will pick up in 2017/18 as the big players try to build out their full stack offering.

“But they will be more cautious in deciding who to buy as they try to weed out unsustainable business models and try to identify who is really adding value to the buy/sell process. Given how complex the ad tech ecosystem is, it might be a slow process,” Diamond says.

Senior research analyst at University of South Australia, Nico Neumann, says we shouldn't forget all the challenges and scandals last year, as a possible factor.

“Numerous metric issues and misreporting (Facebook, Nielsen, Twitter), the ANA transparency report and ongoing ad fraud issues, in particular in the programmatic space. These events in combination with a saturated market do not make up a very lucrative target industry for investors. Personally, I was even a bit surprised about the level of funds that still went into ad tech in 2016,” Neumann says.

GroupM's Sydney-based director of tech operations, Timothy Whitfield, says he follows a portfolio of about 250 companies and at least weekly there is one that receives some type of funding. This ranges from Round C funding which seems to be smaller amounts and comes without any press, to IPO funding which normally dominates several periodicals.

“Google and Facebook are, however, prolific,” Whitfield says.

“When I ask any one of the 250 companies who are their biggest competitors they invariably say Google, Facebook or both,” Whitfield says.

He went on to explain that inside the Google ad tech stack there are about seven main products such as DoubleClick Campaign Manager, and if you count the other products including its X-Device, Bid Management and Website Analytics features, there are almost 150 products – which is where Google is overlapping with other ad tech providers.

He agrees that the types of M&A have also changed over the last three years, but says there are still a large number of smaller M&A opportunities.

“I would classify a small M&A is something greater than US$100 million and these continue to proliferate at about the same rate as before. However, the market is now laser focused on the larger opportunities,” Whitfield says.

He mentioned past deals such as Verizon purchasing AOL which bought Adap.TV - a massive strategic investment underpinned by the power of shared data; Salesforce buying Krux for US$700m - another large investment stitched together by the power of advertisers' CRM data. And more recently, Adobe buying TubeMogul - “an amazing acquisition which connects a strong DMP with a powerful DSP”.

“These are the types of M&A which are now “in vogue”,” the GroupM director says.

Mitigating bubbles

Managing director at AOL Australia, Mitch Waters, says the slowing down in M&A activity isn’t negative and it’s an indicator that potential investors now have a greater understanding of the ad tech sector. 

“We went through a period where ad tech companies were receiving funding simply because they were in the ad tech space – that time is behind us,” Waters says.

“Today those companies with strong and legitimate technology offerings will still find strong funding. Those without will receive little interest. This is an incredibly positive phase in the industry as it helps mitigate 'bubbles' from forming

He says the industry’s greatest challenge is still the Facebook and Google duopoly situation.

“It will take some passionate visionaries who actually want to make the ecosystem stronger and more open, to look beyond the big dollars offered through a Facebook or Google acquisition,” Waters says.

No more interesting acquisitions in the market

Vice president of product strategy at Videology, Chris Mooney argues that while Google and Facebook are undoubtedly dominating digital ad spend, he's not sure he agrees this is the primary reason for the changes we’re seeing in ad tech funding.

He says investors are instead being far more selective in their choices and supporting companies that have both a clear value proposition and a sustainable business model.

“Data driven cross channel solutions that deliver clear outcomes for brands will continue to be successful and I think it’s healthy for the VCs to demand greater accountability,” Mooney says.

Neumann says he would “not interpret too much into the number of deals the big guys conduct” as they are very strategic in their buyouts. He says if the number goes down, then there's perhaps no interesting acquisitions in the market.

“It's certainly not a lack of funding resources in case of Google and Facebook. Moreover, I believe we have seen some significant deals last year,” he says.

The only large acquisition that didn’t fall into the same pattern as the Adobe, Salesforce, Verizon-style deals was Vector Capital buying Sizmek for US$200m, as some say there wasn’t a strong strategic alignment. However, there are rumours that Vector plans to grow Sizmek and sell it for up to US$500m in two to three years.

Hughes adds that interesting acquisitions that haven't been mentioned so much, like BCC's acquisition by Media Ocean, are most likely to affect local agencies and advertisers and the move towards 'programmatic everything' will certainly lead to more acquisitions in this space to facilitate the automation at both the supply and demand ends of the availability, booking, delivery, reporting payment and auditing spectrums.

He says it's not just Facebook and Google that are a cause for concern with 'the clips of the ticket' by all of the tech providers now being noticed by both demand and supply side, and as such, it is a harder market to introduce new fees into.

“I expect to see more niche acquisitions such as Integral Ad Science, Moat or White Ops by audit and third party verification providers such as Nielsen or WPP,” he says.

“There is a maturity curve and an adoption curve that need to converge. All the acquisitions have to be used by customers to return on the investment. There will always be a period of consolidation before another leap.”

Marketers' ad tech woes

While there may be rising concerns for ad tech vendors about the current and future state of the ecosystem, this also only serves to add another layer of angst for the modern day increasingly tech savvy marketer.

Speaking to AdExchanger, VP and principal analyst at Forrester Joe Stanhope, previously said the tech landscape for marketing is an unhealthy technology ecosystem and that it exacerbates a lot of the problems marketers face.

“It keeps on getting bigger and bigger and more complex and commoditised. And that’s doing marketers a disservice when it’s so difficult to understand the market and select appropriate vendors,” he said.

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