"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 Sloan Gaon, CEO at PulsePoint.
Many pundits have squawked that consolidation is inevitable in the ad tech space.
This would be true in many markets. In the car-sharing marketplace, for example, Uber consolidated its operations with Didi Chuxing in China.
But with ad tech, the market forces act very differently. Instead of consolidation, I believe the LUMAscape will be obliterated in ways we haven't seen since the dot-com bust in 2000.
Today there are some 3,000 companies in the LUMAscape. There were more than 400 deals made in the ad tech space in 2015, with total deal value topping $14 billion. With the capital markets all but drying up in ad tech, most of these companies will be unable to find funding or suitable M&A mates.
Companies in the media space can often extend their runway through media arbitrage, but they face limited chances for survival if they don’t have sufficient scale, growth that outpaces the market, a bankable team and a product that is differentiated and has already grabbed market share.
It’s no mistake that I haven’t even mentioned the “P” word – profitable. Few ad tech startups ever reach profitability. The lack of profitability, combined with these other factors, will leave a long line of dead ad tech companies on the side of the road.
To survive, ad tech CEOs first need to buckle down the hatches. They must extend the cash runway as much as possible, and to do this they need to cut any nonpositive margin costs from the system. This includes marketing, sales people who aren't cost effective and anyone on the organizational chart where it is difficult to identify the revenue value they bring to the office every day.
Ad tech CEOs must do competitive and SWOT analyses and be honest with themselves. How do they compare with the rest of the industry? Are they a part of the value chain or the supply chain? If the answer is supply chain, they must figure out how to pivot their business immediately to the value chain.
Since sales is one of the most challenging parts of any business, ad tech CEOs should try to create partnerships with companies that sell to their desired customers. They might do a revenue share or a referral fee but whatever they do, ad tech CEOs should ideally be able to reach their potential customers in a way that is scalable and cost effective.
Armageddon is a strong description to use, but for those of us with gray hair and the history to see the cyclical nature of industries and capital allocation, we know that this is the likely reality of the marketplace.
While this is always difficult for the VCs that have funded these companies, it is even more difficult for the CEOs and team members. With that being said, this market disruption will bring lots of opportunities for strong companies with strong balance sheets to not only weather this storm but also acquire assets at attractive valuations.