An investors view of the adtech industry – what makes winners?

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Our Adtech Stars column features contributions and insight from thought leaders in the adtech community.

This time we feature an article by Malcolm Kpedekpo, Partner at Panoramic Growth Equity. Malcolm is an experienced investor focused on providing growth capital to UK SMEs. Malcolm sits on the board of search retargeting firm Captify, who recently raised £8m of series B funding.

Is there an industry that has divided opinion among investors more than adtech?  To call this sector fast growing is something of an understatement.  In the early days there was talk of adtech companies trying to get onto the Lumascape but now the much more pertinent question is how does an ad tech business stand out on there?  The market may now be politely described as overcrowded.

Many small, entrepreneurial technology companies have sprung up, securing direct clients or small test budgets from media agencies. But the common consensus is that their position is unsustainable in the long run, despite the growth in the market, as both brands and agencies are looking to consolidate their suppliers and provide a more streamlined offering themselves.

Coupled with this, we have recently seen significant M & A and IPO activity in this sector.  According to data from Results International, there were 135 M & A transactions in the adtech space in 2014 compared to 61 in 2013. There were 8 flotations within the sector in both 2013 and 2014 which, it is fair to say, have enjoyed mixed success: TubeMogul, Rubicon and Criteo have all shown strong gains while stocks such as Rightster, Rocketfuel and Tremor have fallen significantly below their listing price.

But all this makes adtech a fascinating market from an investor’s perspective.  It offers enormous growth potential, strong M & A and IPO activity, and a range of innovative technology companies.  But not all can be winners.  So, as an investor, what is it that makes an adtech business stand out from the crowd as a strong contender for investment, a future winner?

First – barriers to entry.  These are critical for ensuring that large well funded competitors don’t just copy what their small competition is doing, taking away their USP and knocking them out the market with brute force.  A “winning” adtech business needs to have an edge that will take competitors time and money to replicate?

Scalability is also critical.   We ask the question “can this business ultimately develop to achieve a multi-million pound turnover”?  Since we are talking about businesses that rely on innovation, we also ask when technological advantage will really show through and where the inflexion point lies in terms of turning early losses into significant profitability?

We’ve already established that the space is crowded and therefore, differentiation is key.  Are you just another ‘me too’ business?  We are not looking for imitators, just another Rocket Fuel, AppNexus, or Criteo.  We look for innovators and with that comes a strong USP.  Is the product technology outperforming the market and can it consistently achieve a better ROI for advertisers when compared against other forms of digital advertising?

Growth is important and this means more than just an ambition to be bigger. We look for some tangible proof of current growth and importantly some evidence that this is a trajectory on which a business is set to continue. Test budgets have their place, but we need to see they are now part of a robust monthly plan as well as increasing margins.

And finally, one of the most important elements of any business is the people involved in the business. We will assess how capable the management team is of operating in a fast moving industry and steering a business past the main roadblocks that invariably emerge on the path to growth. It is really important that management understand the risks as well as the opportunities and have a sense of the wider market that they operate in.

If a business can score well against each of these criteria, they are undoubtedly a strong contender for investment.  Backing the right business provides strong exit potential and this in turn means healthy returns for an investor, as well as the business owner or management team.  2015 will invariably see a shake out of winners and losers in the market but there is no question that strong investment opportunities exist within the adtech space, attracting interest from the US as well as the UK and Europe.

An investors view of the adtech industry – what makes winners? was last modified: July 3rd, 2015 by Adtech Stars