Luma Partners released its latest report analysing M&A and investment highlights in the marketing automation sector. The Drum spoke with its chief executive Terry Kawaja on some of the driving forces that he sees influencing change in the most dynamic sector of the market.
One look at the data on the deal activity during the third quarter could produce a number of different conclusions, according to Kawaja.
One is that there are some “spectacular, high-value deals” popping up, and the other is that “adtech is [a] dead theme”, a view that has been adopted by many public investors and venture capitalists, he explains.
A tale of two cities
“Pretty much anyone looking at the sector seems to have drawn this conclusion, and the bizarre thing is that both points of view are right,” says Kawaja.
“There are some worrying signs [in adtech] and issues that many companies in the sector will have to face. But coincidentally there are also new entrants into the space, and continual strategic deal activity [in deals with high valuations],” he goes on, describing the contrast as “a tale of two cities.”
This dichotomy has been demonstrated perfectly in the past week alone, with the aforementioned scepticism contrasted with recent M&A activity in the sector taking the guise of Salesforce purchasing Krux for $700m, and the Criteo acquisition of HookLogic.
Mobile performance is currently in vogue
On a related front, this week has also seen mobile data marketplace provider TapFwd secure $3m in funding with a round led by Partech Ventures, and featuring some of the online advertising industry’s foremost names, including: Jared Kopf (founder of AdRoll); Auren Hoffman (founder of LiveRamp), and Jonah Goodhart (founder of Moat).
Market observers highlight this with reference to the past quarter’s big ticket purchases in the sector, namely: the $1.4bn purchase of AppLovin; $900m purchase of Media.net, and the $11m investment in Beeswax.
Kawaja acknowledges that mobile, and in particular mobile performance marketing outfits are ‘hot’ with both acquirers and investors at present, adding that this is currently the result of a few factors.
“Obviously, there’s the shift to digital, meaning a shift to mobile, which is understood, and if we look at reports, 90% of people’s time in mobile is spent in apps, as opposed to web,” he says. “So that means for all the consumer time spent on mobile, folks that want to market their mobile apps will want to do so in that environment.”
Mobile marketing specialists are quick to highlight the difficulty in cross-referencing (ergo matching) the same consumer’s behaviour in an app and in a browser – this is despite it often being the same person on a single device.
“It’s a big and growing market, but that said, if you’re an app marketer there are very limited options [to promote your wares],” he adds.
Limited app promotion channels fuels profitability
The limitations with app discovery in the two major app stores of the industry (Apple’s App Store and Google Play) are well noted, given the amount of apps available, and the extremely scarce content curation opportunities in both shop fronts. Oftentimes, this is limited to search (giving rise to the term ‘app store optimisation’), and being chosen by both outfits' human curation teams.
Of course, the most high-profile advertising medium for app owners is Facebook (the vast majority of its revenues are derived from such advertisers), but as Kawaja points out, the market likes diversity.
“Other than Facebook, where else are you going to go? So that’s how you get companies like AppLovin that not many have heard of. It didn’t go around speaking at conferences, etc – because it didn’t matter,” he points out.
“Quite simply they had their customers, were very performance-orientated, and built a great technology. So it worked, and the best marketing you can do for your company is to have your tech work for your clients.”
Another common theme running through the above-raised deals was APAC – a theme that was raised by Kawaja in a previous conversation with The Drum.
Apple and Google’s encroachments into mobile?
However, the major online media players are also keen to cash-in on this demand, with Google making several product announcements in this space in recent months, most notably the extension of its Universal App Campaigns offering at this year’s Dmexco conference.
Equally so, undeterred by the failure of its iAd offering to meet initial expectations, Apple is also trialling its Search Ads offering in the App Store at present in the US. As always with the iPhone manufacturer, the details of the beta trial are a closely guarded secret, but the basic premise of the offering is to give app marketers an advertising option similar to Google’s own flagship paid-for search product.
In light of this dynamic, The Drum quizzed Kawaja for his opinion on whether or not this would negatively affect the valuation of mobile app promotion platforms?
“It’s no wonder that they are doing that, and exploring it from a revenue standpoint because they’ve witnessed the sharp increase in mobile app marketing spend. I’m not sure it will dampen interests [in companies such as AppLovin] as marketers will always want an alternative,” he says. “At this point of the dominance of the digital duopoly [ie Google and Facebook] marketers are wary of this concentration, and very much inclined to find other channels that work for them.”
Of course, for all the high valuations of the likes of AppLovin, are the less fortunate exits of more distressed outfits, a phenomenon (in part) prompted by scarcity among venture capitalists, and one Kawaja’s investment outfit has termed as ‘capitulation sales’.
Kawaja articulates the point further: “When you have a successful acquisition, or exit, everyone crows about it, but it doesn’t always work that way. When companies capitulate, or fold, or absolutely – like Mode Media did a couple of weeks ago – people will talk about it, but in general when companies fail, they tend to do it quietly. You don’t tend to see the failure as much as the success.”
Oftentimes this can also take place via way of a ‘company merger’, where the supposed failure tends to fade quietly into the background, which is why it’s part of the duel trend that often goes unspoken about publicly.
‘Vendor lists’ are starting to be rationalised
Many sources indicate that with many adtech startups approaching the end of their ‘five-year cycle’ (ie when their initial raise begins to dry up, and additional financing becomes difficult to come by), and the market becomes increasingly flowed with ‘point solutions’, that this is when companies begin to exit for an amount below the value they can offer.
“When there’s lots of point solutions on the market, and you start to ask everyone from marketers to agencies whether or not people are expanding or contracting their vendor list, you’ll often see that it’s latter,” adds Kawaja. “And if a company is haemorrhaging a lot of cash then it often encourages a lot of investors to shut it down.”
The ‘software model’ is increasingly attractive than the ‘media model’
Luma Partners’ most recent report on the sector also points to some of the larger deals in martech (many of which were at a higher valuation that in the adtech space), with Kawaja pointing out “that there will continue to be M&A in both”. Although, he does go on to highlight how “the greater multiples” of martech (where companies earn revenue on software licencing) will continue to attract greater investment compared to adtech outfits (where companies typically earn their money from media).
“You’ll start to see greater multiples from the software model than from media, but that’s for obvious reasons,” he says, adding that the latter type of company is more exposed to seasonality where media spend peaks and dips throughout the year.
“We’ve seen significant shifts in budget in amongst adtech firms, as the I/O [insertion order]-based media companies shift to programmatic,” he says, highlighting 2014 as the watershed year for the ascendency of this profile of outfit.
For Kawaja, this is only natural as advertisers (under pressure from chief marketing officers (CMOs) and procurement departments) increasingly invest in software that helps them to both prove, as well as improve, the efficiency of their media budgets.
“If the [ad spend] market’s growing at 20%, and the programmatic market is growing at 50%, then go do the math,” he adds.
The actual shift to programmatic, and what it takes for a successful initial public offering (IPO)
Kawaja notes how “there’s a big chunk of folks out there that are largely on the other side of that curve, and they’re the I/O-based companies”, highlighting the difficult time faced by many publicly-listed adtech outfits(see chart), adding that many were “maligned by the public markets”.
“There’s two groups of adtech companies; the I/O-based ones, and the [actual] programmatic companies,” he opines, when quizzed on the relative success of the recent launch of The Trade Desk (valued at over $1bn in the initial aftermath of its launch).
To achieve such a successful launch, any adtech company contemplating an IPO must demonstrate a number of things: scale; growth, and profitability. “The Trade Desk certainly passed that test,” he says, pointing out that the question over the formula for a successful adtech launch “has now been answered”.
When quizzed on what can help marketers delineate between an I/O-based adtech outfit, and truly programmatic one, Kawaja says that the former records the cost of media in their earnings, whereas the latter does not.
“This makes their [ie the latter] gross margins look more like a software business, than a media business, that’s a huge differentiator. For a CMO that wants to shift to programmatic and be on the right side of the trend line, they want to be on that side, not the former,” he says.
Commenting on The Trade Desk’s launch, Kawaja adds: “The combination with those three was definitely enough to show the market that those guys were doing something different … almost all the I/O-based companies have initiatives to grow their programmatic capability. It’s not like nobody can’t see the trend line.”
Given the recent success of The Trade Desk’s IPO, massive speculation is gathering pace over whether AppNexus (which filed an S1 at the same time as The Trade Desk) will do likewise, with some saying that such a move could take place by the close of 2016.
Kawaja points to the similarities between The Trdae Desk (pre-IPO) and the current financial health of AppNexus,
“Clearly, AppNexus has just been waiting for the market to turn around, and The Trade Desk was a very positive turnaround,” he says. “It’s a very different business, and maybe it will come some time next year, but that’s purely speculation.”