What Does It Mean That Advertising Technology Has Lost Favor Even As Electronic Media Grows

The business most focused on using technology and data to sell advertising in the digital age has a fatal flaw: it requires too much personal sales effort to advertisers for venture capitalists to be interested.

In the phlegmatic but pointed vocabulary of the financial markets, that model produces 'poor exit multiples,' which is another way of saying that investors can not get enough of a financial bang for their buck to make it worth their while.

This would be mildly interesting if the implications were limited to the subset of people who care about the specifics of this market. But the broader question it raises is whether the business of reaching consumers through digital and data-driven means faces constraints that are not merely tangible, but intangible as well. JL

Mike Shields reports in the Wall Street Journal:

Ad tech encompasses a range of companies aiming to make online advertising more automated and scientific. (But) making money in ad tech still requires a lot of manpower for most companies.
It’s a tough time to be raising money if you have the words “ad” and “tech” close together in your business plan.
Executives in the advertising technology sector and venture capitalists who are versed in the space say the climate for fundraising has shifted from one where dollars were flowing freely to one where getting additional funding is getting tough.
“It’s almost evaporated,” said Venky Ganesan, managing director at Menlo Partners. “These companies are struggling to even get meetings.”
Mark Patricof, chief executive and co-founder at the venture firm Mesa Group, said he’s been turning down ad tech firms looking for capital “on a regular basis.”
This is especially proving true for companies that have been around for several years, and for ad tech firms that either don’t present a clearly differentiated offering or rely heavily on sales and operations employees to grow their business rather than automated software, said both Messrs. Patricof and Ganesan.
Ad tech is often used as a catchall term that encompasses a range of companies aiming to make online advertising more automated and scientific. Some firms simply sell ads for thousands of websites using Web technology, while others have built Wall Street-like ad exchanges through which machines buy ads without human involvement. Still other ad tech companies promise sophisticated ad-targeting using data and powerful algorithms.
Of the many ad tech companies that have launched over the last half decade, few have demonstrated the rapid growth that many early-stage investors had hoped for.
“They have a lot of frothy values, and haven’t delivered the kind of multiples that reflect those values,” Mr. Patricof said.
Billions have poured into ad tech companies in recent years, but that’s rapidly changing.
“The investment community moves in waves, and ad tech is certainly not at a peak right now,” said Joe Medved, partner at SoftBank Capital. “Ad tech has become synonymous with relatively low margin, campaign-driven models, which yields poor exit multiples.”
Ashu Garg, general partner of Foundation Capital, said investors like ad tech companies that grow much like classic “SAAS” or “software as a service” companies–i.e. businesses that can expand their customer bases exponentially via self-service software rather than having to sign on new customers one by one with the help of expensive sales people.

“A lot of companies in this sector are  hand-selling media, and every single insertion order requires a glass of wine,” said Mr. Garg.

Many ad tech companies have tried to beef up their SAAS chops with investments and acquisitions. But in the meantime, what you end up with are lots of companies that are generating revenue in the $30 million to $50 million range but their cost structure is such that they are either losing money or growing slowly, said Mr. Garg.

“Ad tech is full of the living dead,” he said.

Still, Mr. Garg is hopeful about the long term viability of stronger players in the business. He pointed to TubeMogul, which his company has invested in, and Criteo, which has enjoyed a decent run in the public marketplace, unlike most ad tech firms which have gone the IPO route.

TubeMogul, which is focused on helping advertisers buy Web video ads, has demonstrated it can scale its business without having to increase its headcount, argued Mr. Garg. Meanwhile, Criteo, which specializes in helping marketers target consumers who have recently been shopping for products online, has topped recent revenue expectations and is actually profitable.

Terence Kawaja, chief executive at Luma Partners, says the ad tech market has bifurcated between haves and have-nots. Raising money is proving “impossible for undifferentiated companies but still strong for the better names.” Mr. Kawaja, like many ad tech observers, has predicted lots of consolidation in this industry.

Indeed, there will always be hot ad tech companies that are irresistible to investors — and more funding deals are inevitable.
The gloomy mood in some corners of the ad tech world is best captured by a report issued last week by the investment research firm Arete Research Services LLP titled: “Ad Tech: Forced to Grow Up.”
The report claims that few ad tech companies have truly become SAAS leaders. “Managed services still account for the majority of revenues in the ad-tech world,” it reads. Meaning, making money in ad tech still requires a lot of manpower for most companies.
Not everyone is as negative in their assessments. In fact, Mr. Medved said it may actually be the perfect time for media companies to go bargain shopping–and maybe buy up some good ad tech firms whose valuations have been hurt by the general problems in the industry.
“I’d argue its a good time to invest while many funds are sitting out of the space,” he said.  ”Valuations are reasonable and the shift to digital will continue.”