Google-Facebook Dominance Hurts Ad Tech Firms, Speeding Consolidation

Online advertising companies have struggled for several years as Google and Facebook solidified their grip on digital dollars, slowing revenue for the others.

Now, many ad tech companies and their investors are throwing up their hands.

Venture capital money going into ad tech start-ups is falling sharply, helping push a wave of consolidation. Financing reached a high of $2.92 billion in 2015, but this year, it is on pace to be less than half that, according to CB Insights, a financial research firm.

The number of independent ad tech companies has fallen 21 percent since 2013, to 185 as of the second quarter of 2018, according to LUMA Partners, which analyzes digital media and marketing.

And the pace of contraction has been quickening considerably. This summer has seen a flurry of activity, with AT&T buying the online ad exchange company AppNexus in June, and the private equity firm Vista Equity Partners acquiring a majority stake in Integral Ad Science the same month. In early July, the Interpublic Group acquired the data aggregator Acxiom’s marketing division for $2.3 billion.

“While all industries go through a maturation curve, this one faces a particular need for consolidation,” said Terry Kawaja, the chief executive of LUMA Partners. “So many of these companies were not profitable.”

Although many consumers have never heard of ad tech firms, people’s online activity is influenced every day by these companies as they battle for a share of ad impressions on phones, tablets and laptops. The “Mad Men” style of advertising workers has been replaced by the “math men” of ad tech start-ups, which specialize in gathering data on consumer preferences.

Advertising, the economic juice behind the internet, has long been an attractive area for start-ups. During the last 10 years, the ease of forming companies and the availability of cheap venture capital led to a flood of ad tech start-ups, pushing boundaries on where and how ads were delivered. They introduced technologies like the automation of ad buying — called programmatic advertising — and header bidding, in which many ad exchanges bid on publishers’ space simultaneously.

Overall spending for online ads continues to rise, to more than $88 billion last year, according to the Interactive Advertising Bureau, a trade group. But more than 90 percent of that growth last year went to Google or Facebook.

Ari Paparo, chief executive of the ad tech start-up Beeswax, said he had noticed a distinct decline in venture capital funding for ad tech firms just in the last two years. “The private market is influenced by the public market, and you saw so many fail as publicly traded entities,” he said.

There were 260 deals between ad tech companies and venture capital firms in 2014 but only 122 in 2017, according to PitchBook. In the first half of 2018, there have been 53 deals.

Not all smaller players are giving up. Kevin Hunt, senior vice president of global marketing for the ad platform SpotX, is betting that his company’s focus on video advertising will set it apart.

“It’s important for companies who are in this space to be technically flexible, to make sure they have built a solid foundation that allows them to move as technology moves,” he said.

Eric Franchi, one of the founders and a former executive at the digital advertising company Undertone, isn’t giving up on ad tech. After the software company Perion acquired Undertone in 2015, Mr. Franchi teamed up with Joe Zawadzki, the chief executive of MediaMath, to fund an ad tech-focused venture-capital fund called MathCapital that helps the little guys.

“We want the best entrepreneurs that want to build ad tech companies to come to us,” Mr. Franchi said. “Over time, hopefully we can be a force for good in the space to help these companies get started.”

And even after Ben Barokas sold his company Admeld to Google in 2011, he decided to stay in the ad tech industry, creating a content compensation platform called Sourcepoint.

“I think certainly Facebook and Google are hoovering up the vast majority of growth,” he said. “That said, I believe in independent content creation. Those who invest appropriately are going to also win and attract advertising dollars.”