TL;DR: The common belief among investors that ‘adtech is dead’ is probably related to the bad sentiment created by ad networks and servers that generated profit from an arbitrage in media trading. A new generation of companies offering marketing optimization and analytics technologies, as well as mobile marketing, cross-devices, AR and VR technologies is rising, attracting investors back to this once-notorious industry.
At the beginning of this year, we published our monthly SUN100 table ranking the highest valued Israeli startups. The companies ranked were those who achieved the highest valuation from our algorithm and thorough valuation process. This January, out of the top ten, four were adtech companies, two were storage tech companies, and the rest were from various fields such as video management, automotive, and semiconductor.
Our table won some thorough discussion in the media but also found some criticism. The most prominent voice was Michael Eisenberg, a managing partner at Aleph VC who thought that ranking four adtech in the top ten was unjustified. Following the tendency of investors to back away from investing in adtech, Eisenberg also went so far as to predict that one of the four companies- either IronSource, Kenshoo, Outbrain or Taboola- will be “at best a shadow of its former self by the end of 2016. The company might be sold for a song, out of business or shrink after many layoffs”.
We’re happy to say that as of the end of October 2016, not only are all four still with us, but they are thriving and still ranked in our top 10 list of private Israeli tech firms.
Zirra’s SUN100 highest valuated startups – January 2016
Zirra’s SUN100 highest valuated startups – September 2016
A Taboola typical ad
Aleph is not alone in keeping a distance from adtech. Some Silicon Valley-based VC’s vehemently oppose any investment in the field, most vocal being Andreessen Horowitz, which has avoided ad tech on the grounds of unpredictability, lack of transparency, and fraud.
Zirraӳ algorithm does not follow trends, and it does not develop overly general sentiments towards entire markets. Instead, it estimates the valuation of companies through a series of 85 factors, with market momentum just one of the many factors. Our algorithm uses estimated revenues, together with traffic, user engagement, consumer reviews, customer acquisitions, Google mentions, HR status, and press coverage, together with data from open databases such as LinkedIn, Glassdoor, and Bloomberg to assess companies’ success.
Interest over time for Outbrain, Taboola, Kenshoo and IronSource as demonstrated at Google Trends
2016 isn’t over yet though, and Eisenberg’s prophecy can still be fulfilled. But the common sentiment towards adtech is starting to change, and these winds of change brought some good news to an industry that in 2015 was thought to be as good as dead.
A new generation is rising of companies offering marketing optimization and analytics technologies, as well as mobile marketing, cross-devices, AR and VR technologies, attracting investors back to this once-notorious industry. The word Adtech, intuitively connected with fraudulent traffic and other negative web trends, is replaced now by the term Marketing tech, which is oriented more towards analytics AI based optimization.
“No Adtech for Me, Please””
The adtech industry has definitely reached a dire situation. Just look around: I bet some of your friends who used to work there had to change careers. In my own social network I can think of one founder who moved to the drones business, and another one, who raised a total of $40M for his adtech company, has landed in the growing VR content industry. Two more friends who held marketing roles are now looking for a new job “outside of the adtech world, if possible”, in their own words.
Taboola’s Employment Count According to Linkedin
On the other hand, we are witnessing some rebirth of adtech investments, an unstoppable wave of M&A’s and two IPOs on the table: Appnexus and The Trade Desk. As Justin Choi mentioned just a a few days ago at TechCrunch, adtech isn’t dead, it just has a lot of dead weight.
In order to have a better discussion on adtech than “it is going to die”, one has to distinguish between the old and new schools of adtech. The old school is an entire industry of media companies with a slight technological edge that were eventually almost wiped out from the face of the earth. Most of them belonged to the same categories: ad networks, ad servers or software distributors. They all traded traffic, knowing some of it was fake, and didn’t do a lot to stop it. After all, even fraudulent traffic still traffic that can be shown to investors when planning an IPO.
*Outbrain’s Employment Count According to Linkedin
Blame it on the Ad Networks
The American Association of National Advertisers claims that overall, about 2 of every 3 clicks on ads are fraudulent. Bots are responsible for a quarter of total video ads watched,for 10% of banner exposure, and are estimated to affect as much as half of the total traffic bought by advertisers.
The total damage caused by click fraud is estimated at $8B yearly, ten times more than the damage done by adblockers. Ad fraud is a mighty industry, generating billions of dollars, that has come at the expense of advertisers.
Kenshoo’s Employment Count According to Linkedin
Even Facebook had to acknowledge this soon after acquiring SSP video campaign management platform LiveRail for about $400M.
Last year Facebook announced to most of its advertising partners that they will no longer be able to manage their campaigns over LiveRail. Facebook could not help managing the fraud in the system and guarantee a bot-free video campaign service. LiveRail couldn’t take care of it, nor could thousands of ad networks that were working with it. Facebook also closed its Facebook Exchange network and threw away its DSP.
Facebook also abandoned its open SSD, DSP and ad server activity and is focusing now on its Audience network, on the attribution product Atlas, and in general acting more and more as a publisher, which is actually what Facebook really was in the first place.
Appnexus also had to clean its network, and had stopped working with as much as two-thirds of networks who couldn’t guarantee to put an end to ad-bots-n-fraud. No one can claim that Facebook and Appnexus are not successful adtech companies. They’ve just wanted to do business in a clean and honest environment.
IronSource’s Employment Count According to Linkedin
The New School
Adtech is not dead, because as the market lost its confidence in nontransparent traffic, it grew in thirst for traffic it can count on. Companies like Criteo, The Trade Desk, IronSource, Taboola, and Outbrain have access to advertising inventory connected with valuable audiences, they have unique data that helps advertisers reach better audience, and they have a unique technology that allows them to provide all this.
But VC money is also pouring in. Rather than investing in SSPs, DSPs and ad exchanges, investors are picking more innovative technologies such as marketing analytics, mar-tech, mobile marketing, AR and VR solutions, cross-device and AI. Advertisers are still looking for smart ways to manage their campaigns and data, and Facebook and Google are hardly the whole picture.
According to VentureBeat total tech investment will increase from $2.87 billion in the first quarter of 2015 to $3.8 billion in Q1 of this year.
Here in Israel, an ad tech Mecca that saw so many adtech companies growing and then dying, a new wave of mar-tech companies broke. Last month, Datorama, a marketing analytics company, raised $32 million and Optimove, a customer marketing, and retention platform announced that it has raised $20 million.
Throughout 2016, many other sophisticated adtech raised their own funds: Leanplum, a mobile marketing platform, nabbed $29M earlier this month, together with mParticle, a mobile marketing and data startup that closed a $17.5M round.
More new and successful adtech startups that got funded earlier this year are Drawbridge, a cross-device tech company that landed $25M; Kahuna, a smart push notifications engine which raised $45M; and mobile marketing automation platform Appboy closed a $20M round.
The recent year was also fertile in term of M&A deals: According to Omer Kaplan, CMO, and co-founder at IronSource, the list of adtech companies just got more diversified due to rising need for a better understanding of user behavior, acquiring user data, and gaining better marketing abilities across more platforms such as mobile, social networks, and cloud. That’s why Oracle, Walmart, and Verizon bought dozens of adtech companies recently, explained Kaplan.
The Return to the Stock Exchange
One of the big signs of a dying adtech market is the stock exchange. If almost every adtech company, aside from Google and Facebook, is down, and walks like a duck – then it’s a duck.
It seems like no adtech company escaped the widespread gloomy trend. To name just a few: Matomy, Crossrider, Taptica, Rocket Fuel, Sizmek and Tremor Video. But they all belong to the first generation of adtech.
Two 2nd generation adtech companies are already warming up on the sidelines. Ad exchange Appnexus has had to shed some dead weight by restructuring and laying off employees, but after raising $30M and filing an S-1 document earlier this year the company is running on a healthier track.
Another expected adtech IPO, The Trade Desk, has yet to be seen in terms of success, but the company has proved viable, with growth north of 100% last year and maintained profitability since 2013. Other adtech companies rumored to be preparing for a long-term road show before IPO are Moat and Videology.
Main photo: Taboola’s HQ, New York City. Credit: Taboola