Making contrarian bets in adtech

It has become fashionable of late to see adtech as a dirty word in the world of technology investment. With the growing threat of online ad blocking and the much-debated issue of click-fraud, many investors struggle to see the upside of backing businesses involved with the seemingly murky world of advertisement technology. Combined with the lower exit multiples seen over recent months, it is understandable that adtech businesses are feeling the squeeze when trying to raise venture capital funding in the U.K. and U.S.

And yet, the market opportunity is undeniably big — and still growing. Market commentators expect global digital advertising to grow by more than 10 percent in 2016 — to almost $160 billion (compared to less than 5 percent growth for the $500 billion global ad market). Agencies now expect digital ad spend to surpass TV ad budgets at some point in the next 18 months.

A lot of money is going into digital advertising — so why aren’t VCs on both sides of the Atlantic flocking to get involved in this market again? I want to make the case that now is precisely the time for venture investors to break away from the herd and think about making that contrarian bet on adtech.

New media requires new formats

The digital media market is growing at a rapid pace, and — crucially for investors — there is still significant growth potential. Ad dollars per time consumed per medium is still low for digital media compared to radio and TV. Advertising has not yet caught up with the increased time spent online.

Mary Meeker’s 2016 Internet Report shows that Americans spend 25 percent of their time on media via their mobile, and yet only 12 percent of all advertising is on mobile. By comparison, they spend 4 percent of their time reading print media, which makes up 16 percent of advertising spend. This creates a major opportunity for entrepreneurs and investor alike.

The more innovative adtech players are utilizing increasingly diverse sets of data to deliver new forms of advertising.

The vast majority of digital ad spend has historically been focused on direct response adverts because of the potential for rapid iteration and superior methods of measurability compared to offline media. The development of similar tools for branding advertising means we are at the beginning of the journey for increased spend of branding dollars via digital channels. We should expect to see a marked shift of spend from traditional TV into digital, particularly as TV and video become increasingly indistinguishable.

Indeed, Google just announced DoubleClick Dynamic Ad Insertion to give TV broadcasters more control over ad experiences across screens. The difference between TV advertising and digital media advertising (currently an additional $30 billion is spent on TV advertising) will disappear faster than it will take George R. R. Martin to complete the next tome of A Song of Fire and Ice.

This growth continues in spite of the poor quality of advertising in the digital media space. Lazy banner ads irritate consumers. But ads don’t have to be annoying. The TV ad format, where advertisers pay more than $4 million per 30-second slot at the Super Bowl, has become a compelling art form in itself with (at least some) engaging and memorable narratives.

Indeed, we believe that mobile and video ad formats are yet to be cracked. And that’s before we even think about VR/AR. Better advertising will accelerate the growth of the market as each new platform creates new opportunities for innovative advertisers.

Rewarding recurring revenue

Despite such a large and growing market, VCs continue to move away from adtech, which has been characterized as an industry with a campaign-driven business model with high levels of fraud and poor margins, leading to ever-lowering exit multiples.

Smart adtech entrepreneurs are adapting accordingly, dropping the adtech label to reposition themselves as “data” businesses. Indeed, greater ingestion of data enables adtech players to experiment with more attractive recurring revenue models by controlling access to real-time data and analytics.

The more innovative adtech players are utilizing increasingly diverse sets of data to deliver new forms of advertising. Take the example of location-based technologies that enable omni-channel marketing solutions as brands recognize they require a “single customer view” that combines a customer’s online and offline behavior. U.S. location-targeted mobile ad spend is expected to be worth $11.3 billion in 2016 and growing to $26.7 billion by 2020. This sector is attracting significant VC dollars, including into xAd, PlaceIQ and Blis.

It is possible to take this argument further. By ingesting data sets from other sectors (such as transportation and financial services), a virtuous circle can be created whereby data-led insights from advertising can inform business models in other sectors, and vice versa. If you can see where and how people are moving around a city, an airport, a tube station or a shopping center, you can better plan these infrastructures and better plan advertising.

Advertising is simply the tip of the iceberg for this new breed of adtech data businesses, for whom advertising is often just the first sector to which they’re applying the technology.

Where there is strong and interesting data, there are possibilities to use this data in wonderful ways. We are undoubtedly at the beginning of the journey of working out what could happen next for these businesses — and I for one am confident VCs will start taking this sector more seriously again.