Three things to consider before investing in Ad Tech

People aren’t putting money in ad tech, and the players are playing a bloody game. Yet ad tech revenue is projected to reach $100 billion in five years.

May 25, 2015

Amid a talent and investor drought and growing challenges with fraud and ad-blockers, ad tech is in an unusual place. People aren’t putting money in ad tech, and the players are playing a bloody game. Yet ad tech revenue is projected to reach $100 billion in five years.

Despite this enormous growth potential, investors are wary of ad-tech companies. The market is very fragmented, with more than 2,000 companies across several industries. What’s more, public companies are trading low, and even established names such as Yahoo and IACare shutting down their ad-tech products.

There are a lot of shadowy things going on in the industry, but these growth projections suggest that there should be more investment. But how do you choose the winners? The answer is you weed out the companies hurting the industry and find the ones that have the potential to hit home runs.

Don’t Fall for the Games and Gimmicks

Today’s advertisers are getting more selective. Just look at the tug-of-war between publishers and advertisers over viewability. In addition, buy-side and sell-side ad companies are going to face some serious challenges, and the only way to overcome them is to get back to basics.

But what exactly does that mean?

For the sell side, it means great site or app design, high-quality content and amazing user experience. Consider Google and Facebook. They became advertising giants because they built products that users couldn’t get enough of. By focusing on consumers, they were able to build platforms that demanded great ad spend.

On the buy side, it’s all about transparency. There are millions of gimmicks and games in digital advertising, and plenty of buy-side companies want to exploit this. But the most sustainable growth will come from companies that value honesty and transparency.

These might feel like basic concepts, but there are a lot of companies in ad tech ignoring these principles. Consumers are not falling for the games, and investors shouldn’t either.

Points to Consider Before Investing

When ad-tech companies nail these basic principles, they will be rewarded. While Internet originals, marketing agencies, media organizations, and public ad-tech companies have been the main bidders historically, more and more companies are looking to acquire ad-tech startups.

New entrants from the telecommunications, e-commerce, tech services, and customer relationship management industries are craving a piece of thead-tech pie. It’s a mixed market with obvious challenges — but also great potential.

Smart investors always educate themselves on industries before diving in, and ad tech is no different. There are a lot of flashy startups promising big returns, but investors need a real understanding of the issues at play. Here are three points to consider before investing in ad tech:

1. Dig deep into partner logos

Every major ad-tech company worth its salt has flashy partner logos on its site, but these often mean nothing. On the buy side, the companies might have secured experimental budgets from partners. And on the sell side, deals are often done through guarantees.

For example, Outbrain last year announced it would pay Time Inc. $100 million to be the exclusive content discovery widget on the publisher’s sites. These kinds of deals are flashy, but are they scalable? With so many more large companies getting into ad tech (e.g. Pinterest, Amazon, Oracle, Adobe), it’s unlikely a startup can outspend its competition in the race for growth.

2. Understand business models

Ad-tech companies rarely get paid for their tech. Rather, revenue comes from a portion of the media dollars trafficked through them.

Startups quickly grow a sales force that equals three or four salespeople for every engineer. Growing a sales company is expensive because you have to pay for hiring and commissions. Revenue sharing could indicate that the company’s growth might not be sustainable.

3. Look for ads that serve users

No matter the medium, people want ads that blend in with the content they’re consuming. As a result, there has been a rise in native ads, from sponsored posts on Facebook and Promoted Tweets on Twitter to sponsored content on traditional sites such as Politico and ABC News.

Banner and pre-roll ads have their place, but today’s users won’t tolerate disruptive experiences. They don’t necessarily mind ads if they fit in with the rest of the content on a platform. So watch for companies looking for new ways to integrate native ads. These companies understand the need for a better user experience.

If you’ve browsed the Internet in the past year, you’ve probably noticed the explosion of digital advertising. Like all industries, it has some challenges. But if you remember the basics, pay attention to the business models, and understand a few trends, ad tech is a great place to find the next gem.

Thanks to techcrunch


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