One of the most valuable characteristics of venture investing is that sectors go in and out of favor. Certain sectors, no matter the investment climate, have perennial long-term value. At least, that is my view. And I hold that view strongly about the AdTech sector.
More than 60% of the enterprise value created by internet companies comes from companies whose business model is primarily the selling of ads. Since the internet is both a communications medium and a transactions platform, I believe it will always create massive value through advertising. The internet, unlike most traditional media, is inherently a performance-oriented medium and it delivers on the promise to make advertising and marketing more accountable and more efficient. Underlying the delivery of better ad performance, in a world filled with big, quantifiable data, is an ever-increasing slate of sophisticated technology operating on massive datasets in real time. If you advertise on the internet, and eventually, every brand and service in the world will, you need exposure to these technologies or you will underperform your competitors. The AdTech sector, fundamentally, is the delivery of these advanced advertising technologies to all advertisers.
In my previous posts on the evolution of online advertising, I painted a picture, like so many observers of the space, of a world where all impressions are traded on exchanges. That inevitable transition is happening at light speed now. More than 17% of display impressions on the web are traded on exchanges and the forecasts are bullish on this trend. In that world, online advertising looks much more like trading stocks than the buying of ads over lunch meetings. In 2008, we believed that significant value would be built in this exchange layer. It was this thesis that supported our Series B investment in AppNexus. That company continues its incredible run and is one of the largest global ad exchanges in the universe. We believe AppNexus will remain one of the most important companies on the internet.
While a huge amount of buying has moved to the exchanges, the level of sophistication of many advertisers taking advantage of these RTB platforms is still rudimentary. It turns out, just like outperforming the stock market year in and year out, it’s hard to do it well. The amount of data available to buyers is enormous. The number of parameters available in tuning and targeting your audience is almost limitless. And, most importantly, there are always better data scientists down the road doing a better job than you can at building proprietary targeting models. For all of these reasons, in our opinion, the second-most valuable layer in AdTech is the data-driven ad network layer. (Not to be confused with the inventory driven ad networks.) Data-driven ad networks employ either large proprietary data sets or proprietary targeting models on top of very large data sets. The sophistication of the data scientists within these companies delivers a sustainable performance advantage over their less well-equipped peers. Two examples of these companies in our portfolio are Dstillery (formerly Media6Degrees) and Bizo. Both Rocket Fuel and Criteo are two additional companies in the space. Rocket Fuel’s recent IPO fetched it a market cap of more than $1.7B and Criteo is now over $2B. Many are asking themselves, “Why?”
[As an aside, Zach Coelius, the CEO of Triggit, points out that these companies should no longer be called ad networks because they no longer amass large amounts of inventory. They are instead more accurately “algorithmic media buying” companies or “data-driven targeting” companies…not really sure, but they aren’t traditional ad networks.]
The reason these companies are so valuable is that buyers on the exchanges are dominated by performance-oriented marketers today. Their dollars seek the best performance. The data-driven ad network layer is increasingly a case of the haves and have-nots. The better you perform relative to your peers, the more ad dollars you receive. These four companies significantly out-perform their peers, and their incredible revenue growth (and enviable media margins) indicate this.
The reason these companies have bright long-term futures is that this layer is increasingly necessary, hard to replicate, and experiences tremendous network effects. In the early days of AdTech, some believed the traditional media buyers would be able to build their own technology stacks and deliver better performance and value than independent companies in the market. This has not turned out to be true. The best performance can be found elsewhere, largely within technology companies, and so that is where the dollars are flowing. This presents enormous long-term challenges for the incumbent media buyers and will continue to pressure them to flow more and more of their client’s dollars to the better performing AdTech companies.
I believe this layer will eventually see tens of billions of dollars of media buying flowing through it. Of course, the exchange layer benefits from all of this too. For these reasons, there will be additional public AdTech companies which will fetch multi-billion dollar valuations coming to market. AdTech is back. Except it never left.