Why Is Investing Interest In Adtech Down?

A recent Pitchbook article pointed out that investors seem to be shying away from investment in adtech companies. This is a big shift as a few years ago there was a lot of new investment in the space. I spend time with many investors in the adtech space and I fully agree with the assessment, but its not because they don’t want to invest, the firms I’ve worked with all have a desire to invest, however find major issues with nearly every company they assess. The article points to a couple key issues as the core cause of this shift, namely that publicly traded adtech companies have largely been disappointments and that that there is market saturation across the space. I fully agree with both or those items and in addition think the Google & Facebook duopoly plays on the minds of potential investors. However, in my conversations with possible investors, CEO’s raising money and others in the space, I think there are a few other significant factors that need to be pointed out and will need to be addressed.

Easy to get traction, hard to maintain. This sounds silly but it really confuses investors. Agencies are willing to experiment with many technologies. They will even spend $50,000-$100,000 for tests and trials of software. A start up can get a hand full of these and approach $1 million in revenue rather quickly. Investors see rapid growth, however, have no idea if these are test budgets or if they are sustainable customers. A company may even get 2 campaigns from a brand and now they think they have a sustainable customer, but it can change fast. In the past investors didn’t understand this dynamic, now that they do. As a result, investors are leery of initial revenue traction, they don’t trust it as an indicator of future success. That is because…

Adtech isn’t a subscription business. Nearly all investors are seeking subscription models these days. Yes, there are a few outliers, but those are rare instances. Adtech is largely NOT subscription. Marketing departments are cautious with their fixed costs as well as aware that many of their activities are episodic and can change quickly. Their goal is to maintain flexibility. As a result, you don’t see marketing departments sign long term deals for technology (beyond a few core software systems) and they are just a concerned about signing guarantees. If the company has anything to do with media, all you can hope for is a non-binding spend guarantee from a marketing department. Therefore, the combination of quick traction, with no long-term contract behind it results is a business that investors don’t know how to assess, how to determine the real potential of the company. That causes a close scrutiny of the company’s offering…however…

It is nearly impossible to tell adtech solutions apart. I have run an adtech company. I’ve acquired ad tech companies and I’ve consulted or reviewed dozens of adtech companies. I often struggle to tell the companies apart. Yes, it’s a crowded space. However, right now I see so many companies differentiating on such low-level details or on such nuanced features or my favorite — we perform better that I know if an investor doesn’t live in the market, they are lost. Those do not result in clear enough enough product differentiation required to get investors interest or involvement. If the difference requires massive knowledge of the space, it’s not good enough. If the differentiation is that the solution performs better, be prepared to share how that performance is sustainable and cannot be taken out by any other solution that performs. A company cannot spend too much time thinking about, building, clarifying messaging and communicating differentiation.

Even with the duopoly, digital advertising is a huge market; one worth investing into. I don’t see adtech going away and I don’t see it being just soaked up but the big players (but that’s another, larger topic). I think we will continue to see new innovations in the space. However I think we will continue to see skeptical investors and tough fund raising as long as some of the above factors are not addressed.