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The good, the bad and the ugly of digital advertising

First, let’s first look at the bad ...

November 2015

The Bad: fragmentation

Beyond the typically noted industry concerns (e.g. fraud, viewabilty, privacy, ad blocking, etc.) there is a more fundamental issue at stake: fragmentation. By our count, there are over 2,500 companies on the various LUMAscapes. 2,500! That’s an astounding number of companies competing for customer engagement; competing for capital, and ultimately competing for strategic exits.

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The Ugly: supply/demand imbalance

There are 2,500 potential target companies, but only about 200 strategic buyers and, like a game of musical chairs, there won’t be room for all when the music stops. Additionally, in our view, the supply/demand imbalance is even worse that it may look. In our internal coverage prioritization at LUMA we focus our time/efforts on the 50 most active strategic buyers. On the supply side, we counted only 150 companies of the 2,500 that we think have a realistic chance of achieving an exit of over $100 million. Our conclusion is that there will be blood as we realise what could be over a 90% failure rate.

The Good: secular growth, improving business models, growing pool of buyers

Secular growth - the trend is our friend. The market for technology applications that help the optimisation of marketing spend has never been better. Consumer attention is increasingly focused on digital channels and the digital Ad market is growing at over a 35% compounded rate (2012-2016) as spend continues to shift to digital. Non search digital is growing at over 50% while automated, or programmatic, buying is growing at well over 100%.

solutions button on a keyboardImproving business models. Rapid adoption of these programmatic solutions - both work flow and monetisation automation - have brought both operating leverage and predictability to what was long considered a discretionary spend category. This trend is driving business models from media towards SaaS software with a resulting bump to valuation. It is both these more technology oriented business models and the size of the total addressable market that is attracting strategic buyers.

Growing pool of buyers. What was once a small category of industry players had developed into a robust pool of strategic buyers – well capitalised companies from a variety of industries have a need for right-time application of applicable data. The companies that have best perfected these capabilities are in the AdTech and MarTech sectors. Well beyond the usual suspects, we are seeing growing interest from new entrants: including enterprise software, data, consumer internet, eCommerce, and Telco, to name a few. This is a phenomenon that is sure to create quality exit opportunities for differentiated startups.

In summary, the digital marketing sector looks poised for binary outcomes. The vast majority of startups will fail or capitulate, while a small minority of technology-centered players will reap the benefits of a growing market and robust strategic interest.

LUMA’s business of fashioning strategic matches (as opposed to running speculative sell-side processes) is perfectly poised for the latter, with the recently closed News Corp / Unruly transaction serving as a good example of this approach.

If you have any questions on this article please contact us.

About LUMA Partners

LUMA Partners provides strategic advice to companies at the intersection of media, marketing and technology. We are passionate about entrepreneurs, excited about the innovation taking place and thrive on disruption.

LUMA Partners takes a differentiated approach to investment banking. Our experience has taught us, the typical broad auction sell-side process simply doesn’t work for leading companies in the dynamic digital media industry. “Selling” a company results in adverse selection that can taint or sub-optimize the result for entrepreneurs and their investors.

Our approach is different.  We work “up-funnel” with decision-makers at the strategic buyers to provide objective advice regarding strategy and target selection – which we are able to do because of our deep market expertise and since we are not burdened with “inventory.” In other words, we help companies get bought. This approach results in more logical strategic matches that are a better outcome for all parties, and using this approach, LUMA recently partnered with Taylor Wessing in advising Unruly on its successful $176m sale to News Corporation.

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Mark Greenbaum

Mark Greenbaum is a seasoned M&A expert who has spent his entire career providing strategic advice to technology companies.

"The market for technology applications that help the optimization of marketing spend has never been better. "