Adtech funding drops amid Facebook-Google duopoly

Funding activity for advertising technology start-ups has crashed to its lowest point in five years, underlining the struggle faced by the ad sector as Google and Facebookbecome dominant.

Adtech, an umbrella term for companies that automate and facilitate the buying and selling of digital advertising, rose to prominence over the past five years, but appears now to be on the decline.

The number of global adtech venture financing deals will touch 343 by year-end, a 17 per cent drop compared to 414 deals in 2015, according to data collated for the Financial Times by CBInsights.

The data also showed a 33 per cent drop in the volume of funding in the past year, from $3.2bn to an estimated $2.2bn — comparable to 2013 volumes.

On a quarterly basis, only 69 adtech deals were completed in the fourth quarter of 2016 to date, the lowest it has been in any quarter since 2012.

The business has been upended primarily by the rapidly growing duopoly of Facebook and Google.

While the start-up ecosystem depends on brokering ad buying through open exchanges, Google and Facebook are building walled gardens where they own large chunks of the supply chain and can tap their treasure troves of personal data.

Jason Kint, chief executive of Digital Content Next, a trade association representing publishers including the New York Times and the Financial Times, says the rest of the adtech industry actually shrank by 3 per cent in the first half of 2016, explicitly at the expense of the two Californian giants.

Even if you manage to build a sustainable advantage for a few years, how do you scale to compete with Google or Facebook? That’s why traditional adtech does feel dead from a venture perspective

The numbers bear out the explosive growth of Google and Facebook’s share of the ad market.

Last year, they jointly accounted for 75 per cent of all new online ad spending, according to the Internet Trends report published in June by Mary Meeker of Kleiner Perkins Caufield & Byers, the US venture capital fund.

In the US, 85 cents of every new dollar spent on digital went to the two companies in the first quarter of 2016.

“Adtech’s struggle as a sector is absolutely to do with the dominance of Facebook and Google,” said Suranga Chandratillake, a partner at venture firm Balderton Capital who sits on the board of mobile adtech firm Adludio. “Ultimately advertising is about selling attention, and if most of that attention is focused on Google and Facebook, then naturally they can monetise it.”

Venture Capital’s activity in the sector has been trending downward steadily since early 2015. Last year, US VC firms invested roughly $860m in ad tech firms, the lowest amount since 2010, according to venture capital and private equity data company PitchBook. As of August, 2016 was on track to be the lowest adtech funding year since 2005.

According to Mr Chandratillake, adtech is a victim of its own success — the automation algorithms are so “bloody efficient”, that it is hard to differentiate between technologies.

“Gains in adtech are increasingly marginal because companies are constantly copying each other. Lots of adtech start-ups go from zero to $30m of revenue and back down to zero again. As a VC that’s hard to back,” he said.

“Even if you manage to build a sustainable advantage for a few years, how do you scale to compete with Google or Facebook? That’s why traditional adtech does feel dead from a venture perspective.”

As adtech start-ups are forced to target audiences and customers beyond Google and Facebook, investors believe innovation will creep back and the funding winter will cease.

“There has been an era of really dramatic investment in adtech which was probably always a bit unsustainable. We are in a period of consolidation,” said Fergus Jarvis, partner at strategy consultancy OC & C who advises private equity firms on adtech acquisitions. “The businesses are starting to reach scale and maturity.”