“Data-Driven Thinking” is written by members of the media community and contains fresh ideas on the digital revolution in media.
Today’s column is written by Auren Hoffman, CEO at SafeGraph.
We are going to see a bunch of classic ad tech firms get funded by Chinese money in the next two years. This will result in a renaissance for ad tech and another wave of very nimble competitors.
If you haven’t noticed, there are a lot of recent and rumored exits of traditional ad tech companies to Chinese firms. Most recently, Miteno Communication Technology, a Chinese tech conglomerate, acquired Media.net for $900 million. AppLovin is rumored to be in play with at least one Chinese bidder for more than $1 billion. Even Terry Kawaja from LUMA Partners is taking trips to China scouting for acquirers.
These companies that are being acquired are not the typical startups with crazy growth and no profits. The companies that these Chinese firms are buying are good businesses: They grow fast, but not insanely fast, and are incredibly profitable. These ad tech firms are being bought on multiples of earnings, not revenue.
Earnings Arbitrage
The Chinese buyers are also valued on earnings. If the acquired ad tech company is ultimately only a small percentage of earnings, the value might get tucked into the full entity. So if a Chinese buyer is getting valued at 20 times its earnings, it could buy a US ad tech company at 15 times its earnings and get immediate shareholder benefit. Of course, this assumes that the Chinese market stays robust, and no one can predict how long that will continue.
If you are an ad tech entrepreneur and you are running a very profitable business, these next one to two years will be the golden times for you. You will literally have people knocking on your door asking you to sell. There are already rumors of ad tech firms having more than more acquisition offer from Chinese entities.
To be clear, you will still need to have a good company to be acquired. It will need to be significantly profitable and should be growing. But the buyers will be looking mostly for financial synergies, not business synergies. A large number of the eventual buyers will have little or no advertising or marketing exposure.
The sweet acquisition targets are companies with $10 million to $100 million in earnings. Those companies are large enough to make the transaction worthwhile but small enough where they don’t significantly change the earnings profile of the acquiring firm.
Prediction: Chinese Money Will Move To Venture
As more of these acquisitions happen – I expect we will see another 10 happen in the next six to 12 months – we will see more Chinese money funding these companies as they rise.
Ad tech, which is currently out of favor with US venture capitalists, will be very much in favor with Chinese VCs. Expect many a US ad tech entrepreneur to be on the flight to Beijing or Shanghai with pitch deck in hand. These VCs will bring in lots of money and also act as conduits for future sales. They will be really important and sought after because they will help make the right intros when it comes time for M&A. We won’t see many A rounds done this way, but expect to see the majority of the growth capital in ad tech come from China.
This is really good for traditional ad tech companies that are raising capital in the next one to two years. Of course, all the new money going into ad tech could create new competition, which might hurt the profits of these ad tech firms. That may, in turn, depress exit valuations.
But, at least in the short term, expect to see really cool things happening in ad tech. This new influx in investment should spur both significant innovation and global expansion in ad tech.
Follow Auren Hoffman (@auren) and AdExchanger (@adexchanger) on Twitter.
