Roger Chabra is a partner at Rho Ventures, a venture capital firm with heavy investment in the Canadian ad tech sector. Among Rho Ventures’ beneficiaries are success stories like Chango (a demand-side programmatic buying tech provider), AisleLabs (an in-store marketing platform) and Frank & Oak (a menswear e-tailer — check out our feature from the print edition).
We asked Chabra to share some insight on where the Canadian ad tech sector is heading, and what marketers, entrepreneurs and investors can expect.
Over the past five years, ad tech has been one of the most exciting investment opportunities for venture capitalists. The sheer size and growth of the online advertising market (nearly $43 billion in the U.S. alone in 2013, according to the IAB) has enticed investors on both sides of the border to cut cheques to companies all along the value chain.
VCs were excited about the potential for innovation and quick revenue. Hundreds of new startups were funded, and a very fragmented landscape emerged.
But suddenly, the flow of private capital has dried up. Ad tech startups that are just getting going, or have raised a small round or two, are finding it difficult to raise the follow-on financing to sustain their vision.
The long talked-about ad tech consolidation is well underway. In recent weeks, it’s reached a frenzied pace: every week seems to bring another acquisition announcement or IPO filing.
What’s driving consolidation? It’s happening because the customers of ad tech startups – the advertisers, particularly the larger ones – don’t want to work with multiple vendors and platforms. They want their desktop display, video, mobile and social insertion orders all on one platform.
And ad tech companies are realizing the huge scale that’s needed to get to profitability. Larger companies like Rocket Fuel or Criteo, despite having substantial revenues, are either barely profitable or not profitable. They’re starting to see that the only viable path forward is as part of a larger organization. It’s a race to scale – to become the vendor of choice for large ad buys, and to finally achieve profitability.
Canadian players aren’t immune to this wave of consolidation. We’ve seen some Canadian companies find good outcomes in acquisition, like SiteScout (now owned by Centro) and AdParlor (by Adknowledge). There is certainly no shortage of exciting Canadian startups in the advertising space: Companies like Addictive Mobility, AisleLabs, Chango, Datacratic and Polar Mobile continue to push the boundaries.
So what does this industry consolidation mean for them? What prospects and options do they have?
Despite the general funding slowdown, I believe there are still pockets of investment opportunity in Canadian ad tech. Subsectors such as native advertising and mobile retail advertising offer new entrants the chance to build a strongly differentiated product and address a market need. Here, promising Canadian companies will be able to buck the trend, and VCs will continue to provide funding. The winners in those spaces are still unclear.
In more mature sectors and value chains, like desktop display, smaller ad tech players need to focus on M&A – or else they risk being left behind.
As for those companies that are further along and have more traction, they need to focus on raising substantial funding rounds and/or acquiring or merging with synergistic companies. The market for later-stage ad tech financing is still quite active. Here, money continues to flow into companies that have achieved substantial revenue run rates (in many cases above $100 million) and have a short-term path to IPO liquidity and profitability. Recent U.S. examples include AdRoll ($70 million in recent funding) and Turn ($80 million in recent funding). Many later-stage U.S. ad tech companies are also looking for shortcuts to reach scale, like combining forces with rivals.
Consolidation brings with it a different set of challenges and opportunities. It promises to be an interesting and exciting time ahead for Canadian ad tech.