Between a pandemic, the emergence of new media business models and upcoming privacy changes in iOS, this might seem like a terrible time to get into digital advertising and marketing. Nevertheless, we spoke to top venture capitalists who said they still see investment opportunities.
When we surveyed adtech and martech VCs last summer, we focused on the impact of COVID-19. This time, we asked them to update us on whether deal flow has recovered (MathCapital’s Eric Franchi said the last two quarters have been some of the firm’s most active yet) and to look ahead at the possibility of additional regulation and the most promising new tools.
Regulation, they agreed, presents both a risk and an opportunity. For example, Christine Tsai of 500 Startups noted that as advertisers face more restrictions, “The easiest way for marketers to comply with these rules will likely be through software.” And of course, we asked about what they’re looking for in their next investment. You can read their full responses below.
Here’s who we surveyed:
- Eric Franchi, partner, MathCapital
- Scott Friend, partner, Bain Capital Ventures
- Christine Tsai, CEO and founding partner, 500 Startups
Digital advertising spend seems well on its way to recovering from the initial downturn during the pandemic. Are you seeing the same with adtech and martech deal flow?
Eric Franchi: Absolutely. Q3 and Q4 2020 were amongst the most active we’ve had in three years in terms of new investments and follow-ons. This seems to mirror the shape of many of our portfolio companies’ 2020 commercial results.
Scott Friend: There seems to be plenty of activity in adtech and martech, particularly across the commerce ecosystem with tools that support monetization for small merchants. Attentive (one of ours) continues to be a standout. I’m also seeing what appears to be a resurgence in digital OOH activity … maybe now’s its time?
How much time are you spending looking at adtech and martech startups right now? Are you more focused on one or the other?
Eric Franchi: We’re vertically oriented around advertising and marketing tech as a fund, so 90+% of our investment activity is focused on these sectors. I’d say we are equal weight at this time.
Scott Friend: We’ve been more focused on the commerce ecosystem more broadly, both at the enterprise level with companies such as Flow.io in cross-border and Mirakl in marketplace infrastructure and in the Shopify ecosystem with the plethora of interesting companies being formed and growing rapidly to support the needs, marketing and otherwise, of those hundreds of thousands of small sellers.
What are you looking for in your next investment in these sectors?
Eric Franchi: We always weight the founder(s) and team(s) disproportionally higher than anything. We’re leaning hard into what might fall under the broad umbrella of “outcome-based solutions” as we believe the enterprise customer of tomorrow will be more sophisticated in their approach than predecessors. In practice these might take the form of startups building for customized algorithms and omnichannel measurement/attribution.
Scott Friend: Always the same things — visionary team, potential to build a truly lasting business and ideally some early momentum or signs of customer love!
Christine Tsai:
- We’re interested in companies that can make consumer privacy and compliance solutions that integrate into the way digital marketing works.
- Software to help businesses create, optimize or run marketing in automated, data-driven ways.
- Software to personalize experiences in e-commerce.
Do you believe we will see increased regulation around user data and privacy? If so, what are the biggest opportunities and risks for startups?
Eric Franchi: Absolutely. It’s already here in the form of the GDPR, CCPA and coming changes from browsers and operating systems. The biggest opportunities are in building privacy- and consent-driven identity solutions and the supporting layer of infrastructure around data. The latter includes bringing more transparency and compliance around data used for marketing purposes.
Scott Friend: Any startup that isn’t well-versed in the existing data privacy regulations, both here in and Europe, will struggle. The best companies we see are not only ahead of the curve in terms of data privacy compliance, they are generally working closely with the regulators to ensure they stay on the right side of the rules.
Christine Tsai: Absolutely. Even without regulation, big changes are coming anyway, like how Apple is changing how IDFA works. This could represent a great opportunity for startups as data privacy rules roll out, because good record keeping and compliance will be a must for all marketing. The easiest way for marketers to comply with these rules will likely be through software.
Of course, risks on the flip side exist. Security will be ever more important for anyone handling user data. Serious breaches could cause anything from embarrassment to lawsuits and fines, or complete loss of confidence in the business.
Startups are key early adopters of adtech and martech. What are emerging tools and techniques that you’re seeing within your portfolio companies and others, that you think will become more mainstream in the future?
Eric Franchi: We’ve seen so many interesting new tools and platforms that we’ve invested in several. They include next purpose-built CRM platforms, software that helps make data out of CRM platforms actionable and platforms for identifying enterprise customers who demonstrate intent to buy.
Scott Friend: Automation, automation, automation: simple tools to automate repetitive workflows. Alloy is a good example on this front.
Christine Tsai: We’re seeing companies continue to look for and use tools that help them visualize and act on what’s happening across multiple marketing channels, as well as use low/no-code tools to quickly test and deploy custom campaigns and flows. We’ve invested in companies building in these areas as well.