With No Exit In Sight, Ad Tech Gets Lean Through Layoffs

Ad Tech LayoffsAd-tech companies shed hundreds of employees from their payrolls in recent weeks. Turn, PubMatic, Collective and Centro all laid off workers, adding to the toll of Rocket Fuel’s large job cuts earlier this year.

The cited reasons vary but often boil down to simple survival as ad tech companies position themselves for profitability in a tough market. They are feeling the pressure from advertisers to deliver value. At the same time, investors want payouts but successful IPOs are scarce and potential acquisition targets abound.

The layoffs appear to be a natural response to an oversaturated ad tech market, said Elgin Thompson, managing director at M&A firm Digital Capital Advisors.

“There are too many companies feeding on the advertisers’ trough,” Thompson said. “It’s a sector that’s overbuilt and has to get fixed. There are companies that are going to go out of business.”

One reason why there are too many ad tech companies: It’s easy to gain a perch but harder to scale, said RBC Markets analyst Rohit Kulkarni.

“In advertising, the first million [dollars] is easy to get,” Kulkarni said. “But many of these companies are realizing that it’s much harder to get the next $50 million than the first $50 million. That says a lot about the underlying business model and value proposition [of ad tech].”

The idea that ad tech companies take a percentage of media without offering enough value in return has caught on among advertising agencies, ad tech’s biggest users. Some of the current unease in the market comes from agencies “flexing muscle” on behalf of clients, Thompson said, putting those ad tech models and margins under pressure.

Ad tech companies are not only getting squeezed by advertisers, their investors are realizing there’s no way to get out. The market for IPOs is horrible.

“A lot of venture capital came in starting in 2007 and really kicked in in 2009 to 2011,” said Darren Herman, digital ad exec at Mozilla.

Most of that capital went to hiring.

“If you do simple math,” Herman said, “some of that capital is now running out, and the growth trajectory you were on in 2009 to 2011 is not there in 2014 to 2015."

Besides an IPO, companies can try to get acquired. But this strategy has a hitch.

“Everything is for sale right now,” Thompson said.

Plus, two of the biggest buyers, AOL and Yahoo, are “effectively closed for M&A,” Thompson said, thanks to Verizon’s acquisition of AOL and Yahoo’s activist investors angling to sell the core business.

With competitors all around and no way to get out, ad tech companies are exercising their only option: cutting costs.

By right-sizing their companies, these ad tech CEOs can make their firms remain solvent much longer without additional investments, while making themselves more attractive to potential acquirers.

But the current belt-tightening in ad tech may not hurt everyone. In an oversaturated market, there will be winners and losers.

“The companies in my portfolio are all hiring pretty aggressively,” said Jerry Neumann, a venture capitalist with seed investments in companies that include Yieldbot, The Trade Desk, Metamarkets, 33Across, Magnetic and PlaceIQ.

He believes overall employment in ad tech will rise – good news for those suddenly on a job hunt.

2 Comments

  1. Agreed with the article's assessment, and this coming year we may finally get some visibility into companies that are here for the longer haul, and those (as Marty Kihn from Gartner so aptly put it) that are little more than entrepreneurial enrichment schemes. It's about time.

    Reply
  2. On the lack of IPO and liquidity possibilities, the landscape has recently changed significantly.
    The SEC's RegA+ rules enable mid sized companies to raise up to $50mill in equity capital by conducting a Simple Public Offering for about $300k out of pocket, then list on the OTCQB or OTCQX, with low cost reporting and annual audits.
    This is a blog post with more detail. http://goo.gl/yq0KOe
    This is what my business does, so I have a conflict of interes!

    Reply

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