For about the past year my partners have been pushing me to write up some thoughts on AdTech investing. “We’re not AdTech investors,” I’d push back, “we just have a bunch of companies in the portfolio that are working in and around online advertising.” And for a while that worked pretty well. Most of our AdTech investments would be labeled “glue” (they were all connecting or intermediary technologies – just applied to online advertising). Then Jason came up with the name “Adhesive” which seemed to stick (that was bad, wasn’t it) and after a few months procrastinating I ended up writing up our thoughts on AdTech investing and posted them today over on the Foundry blog. And while I really don’t consider myself and “AdTech” investor, I suppose that thee who protests too much…
We’ve written extensively about our thematic investment approach and a handful of our active themes, most recently our Distribution theme which we’ve been working on for several years but had yet to formalize and discuss publicly.
Over the past few quarters, we’ve been thinking more about the online advertising investments that we’ve made over the last three years, which include AdMeld, Lijit, Trada, Medialets, Mandelbrot Project, Triggit and Integrate. While this is about 20% of our active portfolio, we’ve never considered AdTech a theme. Instead, we have included these companies in our Glue theme since each company is an intermediary technology – although in each case applied to AdTech.
While this underlying “glue” to our AdTech investing has served us well, we’ve decided to formalize this and introduce a new theme (or really sub-theme) that we are calling Adhesive, which for us is the guiding set of principles behind our investments in online advertising. To be clear, we’re not breaking out online advertising as a theme of its own – we still think of it as a subset of our Glue investing. Like all of our themes, Adhesive isn’t meant to be a rigid description of our investment in a discipline, but rather a guide to our thinking and a set of overarching concepts that drive our investment in a particular area.
The landscape of online advertising is a confusing one. Many people have seen the well traveled “Display Advertising Technology Landscape” slide prepared by Terry Kawaja (originally of SGA Savvian and now his own firm, Luma Partners) that is essentially a mess of company logos, somewhat loosely arranged by the broad categories which most easily label what each is doing. You’ll notice a handful of Foundry companies on the slide below, along with all of the major online agencies and platforms as well as hundreds of other companies that you’ve probably never heard of. Online advertising is a cluttered landscape and, from an investment perspective, picking out those companies that we believe have real potential vs. those that are simply interesting (or not so interesting) point solutions can be a challenge.
There are several key attributes we look for in our search for great Adhesive companies. They are:
- Scale. Scale is key to many of the companies we invest in across the portfolio, but scale in Adhesive is at once more massive and more important. As such it is one of the first filters we apply when looking at potential advertising investments. In a business that makes money pennies at a time, you need to have the ability to quickly generate a lot of pennies.
- Inertia. Related to scale is the ability of a company to quickly gain uptake in the online advertising ecosystem. The ability of Adhesive companies to insert themselves into the data stream, which existing marketplace players will enable and encourage this, and exactly who the ultimate beneficiaries are (not to mention who is being disintermediated) are key components to a company’s ability to gain rapid market share and scale.
- Margin Dynamics. Everyone who plays in and around AdTech understands the concept of gross vs net revenue. And while many Adhesive businesses trade margin for scale, we pay close attention to the ultimate margin dynamics of the businesses in AdTech in which we look to invest. We’re particularly sensitive to customer concentration issues related to margin – aggregating demand from a small number of sources, for example, which may lead to significant margin pressure.
- Performance. While a large amount of online advertising continues to be purchased on an impression basis, we believe that ultimately the success of advertising campaigns – and as a result the technologies that are implemented to enable those campaigns – is measured in terms of performance. Everyone contributing to the chain of events that result in an ad being served is ultimately at the mercy of the effectiveness of their product.
- Technology Innovation. The pace of technology innovation in AdTech is startling and the ability of a company to stay ahead of this innovation curve is an important consideration in how we think about Adhesive companies. Many of the companies in which we’ve invested were pioneering new technologies into this market and as a result became market leaders in their segments. But even these initial leaders need to have the ability to continually innovate and push their products and markets forward. Today’s latest technology in AdTech is tomorrow’s legacy — often without a path to whatever is next. We try hard to find companies with the staying power to remain in front of the market.
In a future post we’ll talk in more detail about how some of our existing Adhesive investments have met the challenges above, and some of the more specific attributes of their businesses which originally drew us to them.