Ad Tech: Get Big, Get Bought or Go Home


But I’ll know my song well before I start singin’
And it’s a hard, it’s a hard, it’s a hard, it’s a hard
It’s a hard rain’s a-gonna fall

–Dylan

It’s been a great, long run in ad tech–from startups through public offerings. Many great companies have been created– starting with DoubleClick and carrying on through Criteo and others.  The way that advertising is bought and sold has been fundamentally changed and changed again. And, in the process, huge amounts of enterprise value have been created.

But, in spite of all the great things that have been accomplished, I am now convinced that the party is coming to an end.  My advice to ad tech players, including my own investments, has been to get big, get bought or go home.

At his recent DMS 2015 conference in New York, Terry Kawaja made the same point using more graphic language.  Terry is a master showman and is well known as the creator of the LumaScapes–the market maps that show tiny logos from companies in clusters across the landscape. “There will be blood,” Terry said, as simulated blood flowed across the LumaScape. He estimated that only 5% of the companies shown on the LumaScape will achieve a happy ending.  Although this estimate sounds grim, it actually understates the damage because many ad tech startups that aspire to earn a place on a LumaScape haven’t yet cracked the big leagues. They will disappear without ever having been seen.

I am not a pessimist. If I was a pessimist, I would never have become an entrepreneur or early stage investor. I am an optimist. I believe in the startups and the power of the American dream. I believe that innovation wins.

But I am also a realist.  It is time for ad tech companies to look at themselves naked in the mirror and figure out where they will be when the bloodletting begins.

All of the people at these companies are earnest and motivated. They all think that they have a good product that can make a difference. And maybe they can. But ultimately that’s not enough.

At the highest level, there are too many companies that ad too little value. Although each says “we’ll just add a little bit of Javascript to your page” and “it’s low risk because we’ll do it on a rev share”. In the end there’s too much friction in the system.

The sheer number of companies trying to touch ad sales and serving is breaking the system. The various technologies are fighting with each other. Reports violently disagree about the number of ads served and where they are served.

Clients want to have the ability to put money into a funnel at the top of an advertising machine and have results come out the bottom. That’s how TV has always worked. They spend millions of dollars efficiently and they sell product. Everyone is happy. With digital advertising there are too many options, too many people touching the deal, too many people arguing about the bills, too many people saying that everyone else is a crook. It’s too hard for clients to spend money.

Ever since he took over the reins of the IAB, Randall Rothenberg has stressed that the obstacle to growing digital ad spending is fundamental one of logistics and supply chain. I am increasingly in agreement.

We are heading into an era of big platforms and big networks.  The family farm has largely yielded to industrial farms because of the economies of scale. Yes, there is an artisan counterflow, but most of the food sold in America comes from big agriculture. Autos come off of production lines. So do TVs. In the near future, digital advertising will too.

What this means practically, is that ad tech CEOs and their investors need to decide where they will fit in a consolidating marketplace. I have often asked entrepreneurs “are you a feature, a product, or a company?” Not surprisingly, they all want to be a company but many (most?) are really features or products.

The critical hurdles that “companies” must clear are the ability to achieve material mindshare, fund a sales force, sustainable growth, and ultimately have a path to significant revenue and material profitability. What’s material? At least $100 million of revenue and a combined growth rate and profit margin of 40%. A company that grows >20% per year and spins off more than $20 million of profit is a good company and can run for a long time.

If a company does not have the credible prospect of clearing those hurdles, they need to head for the doors. VCs have voted with their wallets. They are not funding ad tech companies right now. That will change eventually but not in time to help the current crop of startups.

And re-branding as “not ad tech” won’t help much. If it look like ad tech and smells like ad tech, it’s ad tech.

It’s time to get big, get bought or go home.