Why this Philly investor is wary of adtech — for now, at least

Before I returned to the investing world, when I was on the other side of the startup-investor relationship and optimizing business processes for a New York City adtech company, I learned exactly how many venture capitalists felt about the industry. When I told one Midas List Silicon Valley venture capitalist that I was in adtech, the first thing he told me was, “Get out.”
This VC’s opinion is not a one-off. Most other VCs I know generally avoid or limit their investing in adtech companies, despite the industry’s projected growth into a more than $100 billion market by 2020.
Adtech companies “have a lot of frothy values and haven’t delivered the kind of multiples that reflect those values,” one investor told the Wall Street Journal in 2015.
I see a lot of potential in this industry but also pressing obstacles holding back true progress. (That’s why I wasn’t surprised to hear of another adtech company, Philly’s own 50onRed, embroiled in controversy.) I should say that I am involved with some adtech companies and I’m optimistic about their success — but I’ll get to that in a moment.
First, here’s a look at the problems that have left many in the advertising world frustrated.

• At the heart of it, there are too many middlemen — in 2015, MediaVillage estimated that as much as 75 percent of the dollars an advertiser spends are going toward vendor fees rather than actual ads. Just look at this graphic that shows the industry landscape to get an idea of how complex it is.
• To make things worse, some of these vendors don’t present clients with the true fees they are taking.
• Ad fraud, the practice of serving ads to non-human traffic, known as bots, remains a major issue. For every $3 spent on ads, $1 is going toward ad fraud, according to a 2015 AdAge report.
• Advertisers are also often paying for non-viewable ads, which appear below the fold (meaning that a user has to scroll to see them) or for too short a duration.
• Many publishers are struggling dealing with users who have ad blockers turned on. These users have translated to billions in lost revenue for them.

Public investors have also generally backed off from investing in adtech.
In the public markets, Google and Facebook have thrived, but few independent adtech companies have enjoyed sustained success after going public. Criteo, which specializes in ad retargeting, is currently up nearly 50 percent from its IPO price, but RocketFuel, Tremor Video and Marin Software are all zombie companies treading water only a few years after going public. Given this performance by their peer group, today’s large, independent, privately-held adtech companies understand now is not the time investors will be most receptive to an IPO. AppNexus, the New York City giant that has raised nearly $300 million in private funding (and has an office in Conshohocken), leads this category of companies.
But wait, I did say I see potential in the adtech industry. It does have redeeming characteristics and I still consider investing in adtech companies. Here’s why.

• It has some of the smartest people you will meet in all of technology — folks who understand how to navigate around a complex and rapidly changing ecosystem.
• The number of tools released every year to make ad buying more efficient and effective is amazing.
• Many adtech companies see real revenue, even at an early stage.
• Also, don’t forget about the potential $100 billion market by the end of the decade.

Still, for many investors, the bad outweighs the good.
As for me, I am confident about the longterm future of the industry. The evolution of adtech reminds me of that of the financial markets. The NYSE and NASDAQ are a lot more efficient now than they were even a decade ago. Adtech will mirror this — it will just take time.
For example, with the rise of attribution solutions, a scoring system used to grade each of the customer interactions that ultimately lead to a purchase, advertisers are starting to focus on outcomes rather than clicks. This focus will eventually weed out those companies that are not delivering return on investment (ROI) for their clients. I believe the partner companies I’m currently involved with have this focus on maximizing ROI, and I advise venture investors to keep this in mind if they look to invest in adtech.