Boom and pop. One is the sound of VC money pouring into the ad tech industry. The other is the sound a bubble makes when it bursts.
Ad tech has been notorious for heavyweight funding rounds and even larger, some might say bloated, valuations. And companies that were flying high before they went public – Rocket Fuel, Tremor Video, YuMe, Marin Software and Millennial Media are all examples – saw their stock prices, followed by investor confidence, dip precipitously after opening day.
Although there’s been a small but noteworthy uptick in the number of private equity firms buying ad tech companies, investor wallets overall aren’t as open as they used to be.
“There are a lot of VCs who have simply decided they’re no longer going to invest in ad tech,” said Brian Andersen, a partner at LUMA Partners, an investment bank that provides advisory services around M&A. “Ad tech is an overinvested category and most VCs who have a focus on digital media or marketing and haven’t realized gains from their investments feel hesitant to put more money in.”
When funding dries up, independent companies that aren’t in the black have four alternatives: IPO exit, acquisition, go out of business or become profitable, said Mike Wehrs, global CMO and head of US operations at Appster, an Australia-based app dev and consultation company. Wehrs also served as a principal at Ignition Partners Venture Capital in the early 2000s.
Undifferentiated tech, especially in the DSP space, makes it that much more difficult for investors, and brands, to know where to seed or spend their cash.
From the perspective of Oded Napchi, VP of product and marketing at online video content SSP Hiro Media, it might be more a case of being pushed off that cliff by the investors themselves. Hiro, a private company that aims to stay that way, raised $5 million from several private investors in 2012 and has achieved profitability since.
“At the end of the day, the VC world is what causes all of the bubbles. You have these insane valuations of companies that aren’t making any dollars,” Napchi said. “Spending $1 to make 10 cents is the easiest job in the world. Doing it the other way around is the challenge. If your company still isn’t profitable after raising hundreds of millions of dollars, it’s not a company.”
Of course, it’s “not a crime to accept funding,” said Jamie Hill, CEO and founder of adMarketplace, which through its various iterations only raised two small rounds from angels. The issue comes when a company doesn’t appear to have an organic growth plan.
“In general, if you’re raising tens of millions of dollars to grow fast, like Rocket Fuel, you might be a flash in the pan,” Hill said. “Their stock is down to a small percentage of its previous value. Tremor is the same way. And it’s because they didn’t have an organic growth plan in place. If you don’t vet your business model or you don’t know your niche, it’s not going to work.”
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Rocket Fuel, which raised $76.6 million before its exit, would seem to serve as a case study for that scenario. At the time, FUEL’s September 2013 IPO was touted by LUMA in a blog post as “the revitalization of ad tech.” The newly public company was valued at nearly $1 billion and its share price closed at $56.10 on day one of trading, nearly double the initial stock offering.
But Rocket Fuel failed to launch in the long term. The ad net was cagey when it came to providing guidance during its Q4 2014 earnings call. Recently departed CEO George John – he stepped down as chief in late March – told investors that Rocket Fuel is in the process of “evolving from maximum growth to more disciplined growth with profitability in mind” through reduced hiring, curtailed spending and a focus on signing more lucrative deals with media agencies.
Rocket Fuel already cast its chips with an exit, but other companies in the space are still casting around for their next move.
“A lot of the DSPs have grown up and are sizable businesses now. They’ve outgrown a lot of potential acquirers,” Andersen said. “They’re leaders in the space, the ones everyone knows, and they’re focused on making sure they can go public. As part of that story, they don’t necessarily need to be profitable, but they do need a story or at least clear a path to profitability.”
And some companies have that clarity. Supply-side platform and private player Pubmatic – there was a rumor last February that the company was preparing for an IPO – is profitable, with a run rate upward of $130 million. Rubicon has been doing well since its exit, with revenue on the rise and acquisitions like iSocket, Shiny Ads and, most recently, Chango under its belt.
Retargeter Criteo has been rosy with health since its 2013 IPO and revenues are up. And video DSP TubeMogul’s revenue has been going steadily up since the company went public in 2014, growing from $15.7 million in 2012 to $114.2 million in 2014.
“They were able to reach profitability and a lot of that was due to their business model,” Andersen said. “TubeMogul specifically has done a terrific job of transitioning to become a software business and their gross margins keep increasing as more and more of their revenue comes from their platform rather than their IO-based revenue. They were hit on their earnings call recently and they guided down, but they’re a healthy business.”
What constitutes that kind of health is a little different depending on whom you ask. For example, in Napchi’s view, there’s no need for most ad tech companies to spend money on marketing themselves.
“Why? Because we’re in a small market. In our case, all of the important stakeholders in the market are maybe 100 entities and we don’t need a huge marketing budget for this,” he said. “I can actually go and meet them face-to-face. Most other segments are also like this.”
But Adam Berke, president and CMO of AdRoll, which had raised nearly $90 million in VC cash since 2006, has a somewhat more leavened view. To win in programmatic you need scale, and “to achieve that scale you need runway,” which means “proper funding is essential,” he said.
“Early profitability can be achieved with a brochure-ware website and two sales people, but that isn’t the foundation of a sustainable technology company,” Berke said. “The winning combination in ad tech is investment in R&D, the resources – sales and marketing – to achieve customer scale and a sustainable business model. The only clear path to optimize those factors is through appropriately sized funding in order to make investments throughout the course of building a company and effectively measuring the ROI of those investments.”
In other words, the car needs fuel if it’s going to go anywhere, but there’s no need to flood the engine.
“Currently, there isn’t much evidence to suggest a trend of successful bootstrapped ad tech startups touting profitability,” Berke said.
