Investment in Ad Tech Grows Increasingly Scarce, With Forrester Predicting a 75% Drop in Venture Capital

A recent report by Forrester Research claims venture capital investment for ad-tech and mar-tech startups will drop from $7.2 billion in 2018 to $1.8 billion next year as advertisers remain wary of the consequences of GDPR violation in addition to the domination of large platform players.

Since 2010, such startups in the space have proven attractive to investors eager to replicate the return-on-investment enjoyed by early backers of companies such as Facebook and Google, but VC appetite for ad tech has cooled.

This has been driven by a myriad of reasons according to sources contacted by Adweek. The dominance of the industry’s largest platforms—aka “the duopoly” and, increasingly, Amazon—accounts for more than 50 percent of online ad spend, plus the rising tide of privacy legislation. This is prompting caution from investors.

According to Carlton Doty, author of the report and vp of emerging technology at Forrester, this is part of a wider market rationalization that includes consolidation as larger companies, such as telcos, turn to ad tech as a means of diversifying their revenue streams.

However, Doty went on to describe the cessation in this innovation cycle as a potential opportunity for marketers to take a break from sorting through the flood of different products in the market. “The name of the game here is consolidation, rationalization and integration,” he told the Wall Street Journal.

Part of the concern among investors is the consolidation of ad spend on platforms such as Facebook and Google. Jay Friedman, president of Goodway Group, explained to Adweek that the historic opaque business models of many ad-tech companies have prompted media buyers to be more prudent.

“We started cutting out exchanges years ago because they were just doing bad stuff,” he told Adweek when discussing his attitude toward ad tech consolidation. “We started looking at a few metrics like fraud rates, and that’s where you start cutting back.”

However, all is not lost, according to sources, with some claiming that offering attribution services—meaning brands can better attribute ROI to their ad spend— will win over investors.

Ciaran O’Kane, CEO of WiredCorp, said that such examples are part of a “necessary clean-up of the space.”

Meanwhile, speaking with Adweek prior to the publication of the report, Terry Kawaja, CEO of investment bank LUMA Partners, said startups offering services such as identity management or helping to digitize formerly analog media channels, such as radio or TV, will emerge as new favorites.

“You have to look at the sustainability of the tech, and that’s where you place your money,” he said.

O’Kane added, “However, you only have to look at recent things like Adform looking to raise $100 million [via way of an IPO] to show that there is some appetite for fundraising.”