The Market For Ad-Tech Startups Is As Inhospitable As Ever

hagai-talData-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 Hagai Tal, CEO at Taptica.

At the beginning of last year, ad tech saw a market correction. After several years of overvaluation, investors had finally sobered up.

By late 2016, the outlook for ad tech had grown stronger, thanks largely to M&A deals. Following the historic boom-bust pattern that’s defined the technology space for decades, you might think that a new crop of ad-tech startups would now have their chance.

But if you’re thinking of launching an ad-tech startup, I would offer three words of advice: Don’t do it.

The Barrier To Entry Is Higher Than It’s Ever Been – And Only Getting Higher

There was a time when ad-tech companies could make handsome profits by adding data associated with new users. But that was several years ago, when it was still possible for a startup to come out of nowhere with only a story about how their technology is a game-changer.

Today, technology is just the starting point. Whether trying to enter on the demand side or the supply side, a viable business means having data at scale and sophisticated connectivity. That’s the crux of an industry driven by big data – those who enter the market late are behind because each iteration of technology reflects insights and application from real-world data.

On the demand side, that means a startup needs to be able to offer advertisers – a group that’s grown increasingly sophisticated – value on Day One. On the supply side, the situation is even more challenging for new startups because the competition is Google and Facebook.

M&As Are Happening, But There’s A Limited Number Of Lifeboats

The average marketing stack already has 17 vendors. But with the rise of APIs making it easier for advertisers to integrate their data sets, there’s a very strong case for marketers to acquire the tech they want and discard whatever they don’t.

That means two things. First, a lot of great companies are worth more broken down into pieces than they’d be worth as a whole. Second, the buyers will eventually acquire what they need, and when they do, there won’t be any lifeboats left.

The deals that remain in that kind of environment won’t favor new technology startups because, at the moment, there’s little demand for strategic acquisitions. Instead, acquisitions will mostly be driven by financial considerations for the foreseeable future. That means startups that have already proven themselves viable in the market, because they’ve achieved revenue, will have an edge over newer startups that claim to have more innovative technology. In other words, it’s show me the money, or we’ll show you the door.

Only Companies With Great Margins Can Compete

High margins have always been the surest sign of strong technology, because ultimately, technology is about adding value. If the technology looks great but the margins are uninspiring, it means the market doesn’t really value whatever innovation a startup claims to offer. And in ad tech, margins have a special significance, because those with the best tech inevitably take a position in the market for media, since that’s where the money is.

Sophisticated advertisers with a lot of experience in digital drive today’s market. In years past, those advertisers were open to experimenting with technology because digital advertising was relatively new. Today, that’s not the case. The market demands results. Advertisers are no longer willing to bet on the old formula of blasting out a campaign and optimizing as they go. Instead, companies need to start at an optimized level and get smarter fast. The firms that can do that are rewarded with high margins.

But there’s another way to think about high margins in the competitive landscape. While digital is maturing, it is also characterized by a lot of disruption. Every six months, things change. An established firm with high margins not only has the money to invest in innovation that will keep it current; it also enjoys a resource that you can’t put a number on. That resource is the firm’s business and the insights that come from working closely with clients.

The more closely tied to the market a startup is, the more its products reflect actual market needs. If you think about the path to market for technology, this puts a new startup at a terrible disadvantage, because whatever they start planning today won’t reach the market for another two years. By then, the market will have changed, and the startup will find itself selling a product nobody wants.

If a startup can’t clear the incredibly high barrier to entry and its technology can’t generate exciting margins, it should stay out of ad tech.

Follow Taptica (@Taptica) and AdExchanger (@adexchanger) on Twitter.

1 Comment

  1. Eric Picard

    I've started several ad tech companies. I agree with you that we are entering a new phase, but I believe your description is bleaker than reality. The market is extremely cyclical, and the basic facts of start ups or as you describe, there's nothing new there. Starting companies in financial troughs is always A challenge. But historically some of the biggest companies in the world war started in financial troughs.

    The new reality at least for right now is that companies will need to be able to bootstrap. And they will need to get profitable quickly, which is of course exactly what bootstrapping requires.

    Any technology company in any sector that is venture funded will be expected to at least have 80% gross margin's. That part has been the rule of thumb for decades.

    Reply

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