2016 marked a bad year for adtech start-ups as funding activity crashed to its lowest point in five years. Financers are becoming increasingly concerned that the fizz has fallen out of the market, reducing the likelihood of investments being made, particularly as the Facebook-Google duopoly continues to use financial and technical clout to dominate the digital advertising industry. But does this signify the beginning of the end for adtech companies as they struggle to compete with the Silicon Valley giants or can we expect an adtech renaissance in the near future?
According to data collated by CBInsights, the number of global adtech venture financing deals will reach 343 by year-end, which is a 17% drop compared with the 414 deals in 2015. The data also showed a 33% drop in the volume of funding in the past year, from $3.2 billion to an estimated $2.2 billion. Further, only 69 adtech deals were completed in the fourth quarter of 2016 to date, which is the lowest number in any quarter since 2012.
The main factor which has led to this dearth of activity is nervousness as to the place of adtech start-ups given Facebook and Google’s increasing dominance of the ad market. Each has developed or bought a market-leading product across all sectors of the advertising supply chain, allowing true end-to-end management of advertising. Combine this with the vast amount of personal data that they have collected and the result is a proposition that few (if any) can truly challenge; certainly not a small adtech start-up. According to recent research, in 2016 Facebook and Google accounted for 75% of all new online ad spending and, in the US in Q1, they received 85 cents of every new dollar spent on digital. However, this trend has is not limited to 2016 alone as Venture Capital activity in the sector has decreased steadily since early 2015. According to Suranga Chandratillake, a partner at venture firm Balderton Capital, another factor which has impacted investment in adtech companies is the increasing competition and saturation of the market which has caused revenues to fluctuate and increased the difficulties associated with monetising new products.
However, it’s not all doom and gloom. Although the figures show that activity has decreased, this was an inevitable consequence following the flurry of activity in 2013 and 2014 during which many companies went public too early when the market for their solutions was still nascent. What we are now seeing is a period of consolidation and the funding will return to start-ups as they are forced to innovate in order to target audiences and customers beyond Google and Facebook. According to Brian O’Kelley, CEO of AppNexus, it is currently a more attractive option for marketers to buy inventory on Facebook rather than on the open internet. However, O’Kelley argues that adtech companies will be able to obtain good results on the open internet through thoughtful inventory curation, the application of machine learning and by focussing on e-commerce.
Further, adtech start-ups still have a place at the cutting edge of innovation; their scale and agility means they can focus on niche expertise that aims to enhance the ad sales/purchase process. For a start-up that does create an exciting new targeting solution, machine learning algorithm or ad-fraud detection tool, the Facebook-Google duopoly can offer a potentially lucrative exit strategy as these goliaths look to retain competitive advantage over one another. Just look to DoubleClick, Applied Semantics, Adometry, LiveRail and Atlas to name a few.
However, it is not all rosy for Facebook and Google. Advertising buyers continue to be nervous of over-reliance on a single provider. There is certainly still room for adtech start-ups with exciting talent and excellent technology, particularly as buyers increasingly look to procure adtech directly rather than through agency relationships. As budgets continue to be squeezed, innovative solutions need to be found to maximise bang-for-buck and nimble start-ups are perfectly placed to embrace these challenges faster than Facebook and Google.
It is clear that the adtech industry is going through a challenging period which is likely to continue in the near future as Facebook and Google continue to exert their dominance of this sector. However, as companies are forced to innovate and clients are nervous about putting all of their eggs in one basket, there are still opportunities for start-ups in the adtech market. Investment is less free-flowing as investors become more discerning but a good team with a good product can still thrive albeit with a little more hard work.