Ad-tech or market-tech; call it what you will; the programmatic advertising and targeting industry has become a hugely complicated morass of 4,000 products, many with overlapping functionality and unclear benefits for end customers. As a result, rarely has a sector so disruptive cost investors so much money. Facebook and Google claim “winner take all” dominance of all-important mobile ad revenue, leaving hundreds of independents fighting for scraps.
Innovation has given way to scale, resilience, and clarity of vision as the determinants of success. We believe this will drive dozens of market-tech companies to acquire, merge, or sell in an overdue wave of industry consolidation. We recently advised on one such transaction; the merger of Wayin and EngageSciences, and we see many more such deals on the horizon.
Market-tech vendors are too small, and overlap in functionality
The top market-tech categories are Sales Automation (220 vendors), Social Media Marketing (186), Display Advertising (180), Campaign/Lead Management (161) and Content Marketing (160). Aside the sheer number of vendors in each category, vendors are also broadening across segments. As a result, many vendors now either do the same things, or at least claim so. As vendors cross segments, specific functions become commoditised; commoditisation drives consolidation.
Prospects for exceptional growth are low
Power and money is concentrating in the hands of Facebook, Google, Adobe and a very few others. Even large programmatic ad players like Twitter and AOL are struggling for growth as a result. It’s no surprise AOL was acquired by Verizon, which then bought Millennial Media, and sale rumours dog Twitter. If these competitors find it challenging, smaller companies find it near impossible. Even one-time darlings with differentiated core technology struggle; Rocket Fuel is down 90% since its 2013 IPO, and Millennial fell 90% from its IPO before Verizon acquired it for $250m last year.
Investors are narrowing their focus to back the winners
In 2014, 380 companies received $1.7B in funding; market-tech was still “hot.” So far in 2016 only 80 companies have been funded, and 2016 funding will fall to $1B. Investors are focusing on their few larger successes, and avoiding investing in the segment broadly. We believe only 10% of market-tech companies will get meaningful funding in the next 2-3 years. The other 90% include both “good” companies that simply cannot win, and many “me-too” vendors who have no reason to exist. By cutting and concentrating funding, investors are forcing the “good” companies to consider cash sales, mergers, and recapitalisations to maintain a future, and the “me too” vendors to die quietly.
Many companies are funded to the next round, not profitability
A large number of market-tech companies raised enough money in 2013-15 to scale to their next expected funding round, in 2016-17. Now many of those funding rounds are delayed, smaller, or not happening. This is pervasive across tech generally, but market-tech faces the double whammy of much harder growth, and a harsher funding environment. For them it’s not just a storm, it’s El Niño.
Large customers want large vendors
The lifeblood of market-tech is ingestion and analysis of customer and behaviour data, and creating actions (campaigns, content etc.) based on this data. Because it is both integral to, and integrated with, how companies engage with their customers generally, companies want to have all this functionality in one platform. Training staff to handle multiple different products, and getting products to work well together, are headaches best avoided. This pushes the industry to provide broader, more integrated products. As a result, it is naturally driving companies to combine and integrate their products to give prospects “one view, one system, one dashboard”. Also, large customers understandably want to know their vendor has the resources to continue improving the products; the bigger the vendor the more they are likely to attract large deals to maintain growth.
Consolidation has already started
Quietly but now persistently, consolidation has already started. Since the beginning of 2014, there have been 62 deals worth over $100m, including Verizon/AOL for over $4 billion. Most recently Marketo is rumoured to be up for sale with a $1.5 billion market cap, and we are sure many mid-size players both public and private will follow suit.
It’s always easier to predict from history. In this case, the trend is clear, inexorable, and growing. Market-tech companies need to position themselves now to maximise value in this consolidation wave, as once it’s over, M&A is surely going to become much more difficult to do.
Posted by Victor Basta @MaExits