We last surveyed VCs about their advertising and marketing investment strategies back in January — which is to say, in a completely different world, before the coronavirus pandemic began to wreak havoc on the global economy.
While there don’t appear to be any comprehensive numbers yet about the effect on digital advertising (which is, after all, still playing out), early data and anecdotes suggest a rapid decline, with some categories of ad spend disappearing entirely.
And as we noted in our previous survey, Crunchbase data shows that adtech had already fallen at a roughly 10% compounded annual growth rate over the last five years.
So what does the landscape look like now, and where are the remaining opportunities? To find out, we’ve compiled updated answers from two investors who participated in the previous survey and brought in three new perspectives:
- Eric Franchi, operating partner, MathCapital
- Christine Tsai, CEO and founding partner, 500 Startups
- John Elton, partner, Greycroft
- Pär-Jörgen (PJ) Pärson, general partner, Northzone
- Michael Brown, founder and managing partner, Bowery Capital
For the most part, they acknowledged the landscape’s challenges — not just the pandemic, but the general maturity of the industry — while also pointing to opportunities in areas like machine learning. As Elton put it succinctly, “Marketing and advertising are not going away.”
Eric Franchi, MathCapital
How much time are you spending looking at marketing tech or adtech startups right now? Are you more focused on one or the other?
Adtech and martech are our main categories as a fund. We selectively invest in categories that might benefit from it (think DTC brands or media) or be of benefit to it (think next-generation CRM or HR tech). But 90%+ of our focus is adtech and martech.
What are you looking for in your next investment?
As always — team first. We look for founding teams with talent, vision and grit. We keep a fairly wide berth in terms of products and categories but we are spending much of our time focused on two themes: the post-privacy era in marketing (i.e. new, cookieless, compliant forms of identity and infrastructure) and future of digital media (i.e. video, OTT, audio, etc.).
How has COVID-19 impacted the adtech and martech investing landscape? Are there still opportunities?
Dealflow is down somewhat, but we are still seeing great opportunities. We have several investments in the pipeline for Q2. The challenges right now are similar to other sectors: spending time getting to know teams and calibrating expectations for growth in a Zoom-only (for now) world.
What kind of advice are you giving to your portfolio companies?
Right now, two months post-lockdown, most adjustments have been made to budgets and plans, teams (and customers) are adjusted to being fully remote and things have somewhat stabilized. Now is the time to get teams focused on sales and marketing. It’s a unique and rare time to outflank larger, slower-moving competitors and adapt to the market.
Christine Tsai, 500 Startups
What are you looking for in your next investment?
We’re interested to see how companies can adapt to increased privacy regulation like CCPA and GDPR and offer innovative advertising products that also give consumers the privacy and control over their data that many now crave.
How much consolidation do you expect to see in the martech landscape over the next 12 months?
In a downturn it can of course be harder for companies that have less resources to compete, and lower valuations can mean attractive M&A targets (assuming a price can be agreed [on]!). So the chances for some consolidation are high in a lot of industries if challenges from COVID-19 continue, martech being no different. The wild card could be regulation, as the marquee Silicon Valley companies have been attracting the government’s attention.
John Elton, Greycroft
How much time are you spending looking at marketing tech or adtech startups right now? Are you more focused on one or the other?
Some, but limited. The issue in martech and adtech is that both are now mature categories.
What are you looking for in your next investment?
There are still some areas that are doing very well. SEMrush is a great example of a company that is doing very well in the category. The challenge in martech/adtech is that they are mature sectors. Only the next technology breakthrough will provide fertile ground for the next wave of innovation, just as mobile and internet breakthroughs gave rise to today’s giants.
Perhaps machine learning is that type of breakthrough, so we are looking at companies that use machine learning to dramatically improve what is possible in the space. The issue there is the scaled players are also very good at machine learning, so it may not be a technology that provides the same opportunity as prior disruptions.
How has COVID-19 impacted the adtech and martech investing landscape? Are there still opportunities?
I’ll leave the serious and heartbreaking human consequences out of this response, but yes, it has impacted everything so, of course, adtech and martech are being impacted. Advertising is cyclical, perhaps hyper cyclical, as it’s the first thing people cut back on, but every sector is impacted one way or another.
The quick reaction was that you saw a separation from the strong and weak companies. Companies that were already weak and perhaps had issues coming into COVID had serious issues immediately. While stronger companies have had a more muted impact and are looking at ways of using this environment to go on the offensive. Some companies just had bad luck, though, and were at the end of an M&A or fundraise that was going well and COVID hit at the worst time.
The good news is the space is large and there are many fundamental problems that are not solved. If you ask a CMO if it easy for them to reach their customers in an effective manner, zero will say yes.
How much consolidation do you expect to see in the martech landscape over the next 12 months?
There are countervailing forces. On one side many companies are pulling back and focusing inward and then some strong companies are looking to take advantage. There will obviously be more pressure from some companies that need to find an exit.
Overall, I would expect volumes to decline and bid ask spreads to widen shorter term. Then when people on both sides come to terms with the new reality, things will start to pick up again and the bid ask spread will tighten and deals will happen.
What kind of advice are you giving to your portfolio companies?
We are long-term investors, so the fundamental advice of focusing on building large enduring companies doesn’t change. The entrepreneurs we partner with are very aware of the current market and are making changes to adjust. While there are serious decisions that are being made in the short term, it is important to keep your eyes on the horizon. We will get through this period and we will have much better days ahead. Marketing and advertising are not going away.
PJ Pärson, Northzone
How much time are you spending looking at marketing tech or adtech startups right now? Are you more focused on one or the other?
I spend more time on marketing tech than I do on adtech. To be honest, I’m not sure we’ll see any interesting innovation in the advertising tech in the near future.
What are you looking for in your next investment?
The problem with today’s media landscape is that it’s incredibly concentrated to a few actors who drain all margins to them, which is a very poor value exchange for the other players. There have been a few regulatory changes including GDPR that it has introduced a new set of frictions designed to protect the consumer, but the legislator didn’t realise that what they actually did was to further help the Googles and the Facebooks of the world at the expense of the publishers.
The more pertinent point, in my opinion, is that publishers that were very unwilling to embrace new marketing tech concepts are now much more likely to do deals. They engage particularly in the field of data privacy and data management, that is connected to their media funnel. This is where I would like to dive into more for our next investments.
How has COVID-19 impacted the adtech and martech investing landscape? Are there still opportunities?
I would argue that this crisis has affected this market positively, but I won’t say it’s particular to adtech or martech. In the same way as other digital services have played relatively well in the context of COVID, this pandemic has increased digital consumption, and customer acquisition cost has plummeted. On the other end, advertising revenues have not increased as much as you would hope for the industry, so the demand from the investors will decrease. On the other hand, subscriber revenues have increased.
Overall, the startups with strong traction will still have access to capital markets, while those that still need to prove their metrics will struggle, particularly ad-financed business models.
How much consolidation do you expect to see in the martech landscape over the next 12 months?
There’s like almost a natural law in everything that has to do with martech and adtech. If you have an agency model, very few companies create any lasting value. If you create a real tech proposition, the way to stay ahead of the game is to acquire smaller companies that have mastered a new form of communication, being it like influencer marketing or, email marketing. That is an ongoing never-ending trend.
What kind of advice are you giving to your portfolio companies?
We have the acute phase of the COVID behind us, and we are now able to assess whether customers can cope with the crisis or not. As the world has been fast-forwarded two years, the companies with a digital offering will need to capitalize on this moment. They need to make sure that they don’t lose momentum. You could easily see a capital market [becoming] much tougher and greedy in the years to come, due to unemployment and poor government financing positions. If I were a founder I would make sure to keep a steady eye on my cash balances and make sure that that I’m not speeding ahead of myself in terms of spending.
It seems investors are now returning to the fundamentals, and they have a lot to choose between given the market conditions. Naturally, they tend to shy away from capital-intensive, unproven models.
Michael Brown, Bowery Capital
How much time are you spending looking at marketing tech or adtech startups right now? Are you more focused on one or the other?
To set some context I would say as a firm we really got our start in and around the marketing technology stack. Core to our original thesis were the transformations happening at the marketing technology layer and our investments in companies like MOAT, Vungle and Sailthru really supported that. That said, the market has materially changed primarily due to the proliferation of emerging vendors. I think Scott Brinker’s latest report puts the industry at 8,000 companies out there today. Every CMO I speak with is getting pitched multiple times a day. There are countless competitors in every area of spend. CMOs have also gone through a wave of digital transformation and have spent a good amount of money in recent years on upgrading their legacy tech stack.
With that in mind, we actually are not that bullish on the marketing technology ecosystem and have gotten more and more narrow in our considerations. I’d say it represents about 30-40% of our deal flow, but roughly 10% of the deals we end up doing. In short, we think that there are a lot of headwinds in a general sense.
What are you looking for in your next investment?
To stay with the marketing technology landscape we are looking for a few things. First, we still think there is a lot of opportunity around a few key themes. First, the orchestration layer. Second, the bridge between online and offline. Third, some of advancements in ML and how it will impact the actual staff and automation of a marketing organization. Beyond this, we are looking for real students of these ecosystems and industries. Have they done the work to truly understand the buyer persona? Is their vision grounded in the reality and practice of the industry right now? The questions go on but you get the idea.
Finally, we care a lot at Bowery Capital about commercialization and go to market and so spend a fair amount of time with founders trying to consider the go to market motion and how the first few years of a company will play out (and weave this into our investment decision).
How has COVID-19 impacted the adtech and martech investing landscape? Are there still opportunities?
I would say there are more opportunities based on a number of trends. First, digital transformation journeys are accelerating at a lot of companies. To do this effectively, they need to buy software. That includes marketing tech software. Second, COVID-19 has presented a near captive audience and completely changed the dynamic of work life. A CMO now needs to consider different tools in their toolkit which presents opportunities as they try and market in different ways. Also consider many of these companies are exploding in growth (think consumer apps like Spotify or TikTok or media subscriptions like the NY Times or The Dispatch) which makes the infrastructure layer more and more important.
All in, our portfolio companies that sat at the marketing technology layer are growing faster than they ever were and we still think there is a lot of opportunity.
How much consolidation do you expect to see in the martech landscape over the next 12 months?
I don’t think that there is going to be much consolidation despite the number of companies in the category. We monitor and track the big 3 and their gaps. To be honest they’ve already got most of what they need. I think you will see businesses like Salesforce, Oracle and Adobe make selective acquisitions small and large to build out some of their portfolio gaps, but I wouldn’t expect a lot of consolidation in the next 12 months.
Marketing technology, like most other business software layers, benefits from such a large market that you can have a large number of winners. None of these segments are winner take all.
What kind of advice are you giving to your portfolio companies?
Beyond the obvious things like conserving cash and surviving this cycle and recovery, we are telling our founders a couple key things.
First, pay attention to the mental health of you and your employees. Now more than ever this is super important. Second, we are talking a lot about figuring out the leading indicators from a sales or marketing standpoint that will lead to success. It’s a tough market and you need to really think about things more granularly as pipeline, quota, compensation and other elements are going to be totally out of whack. Third, we are spending a bunch of time on playing offense and leaning in to what is working. When a recovery happens (our firm view), we want to be helpful in positioning these founders for success.