It’s rather poetic to see the phrase “to thine own self be true” suspended above every speaker at an ad tech and mar tech event, where founders are confronted with the harsh reality of their deal-making prospects in the current climate.
The annual MadTechMoney event in London from investment firm First Party Capital is always fittingly apropos.
During the event’s sessions, speakers from OMAC Investments, Wilson Sonsini, Azerion and Dentsu, to name a few, were pretty up-front about one of the market’s not-so-secret secrets — investors are playing it safe. They’re worried about higher capital costs, economic roller coasters, ad spending slowdowns and all the uncertainty caused by Google’s third-party addressability switch.
“We’ve come out a crazy post pandemic bounce back period where term sheets were flying around and subsequently there wasn’t much time to agree to them, to a period that’s the complete opposite to that startup-friendly market,” said Matthew Newcomb, regional director for North America and APAC at Azerion.
But the reality check didn’t stop there for founders. Even when an investor is feeling a bit adventurous, it’s still not a walk in the park, the speakers said. Often, their valuations don’t match up with the companies they’re eyeing to buy.
“I sit in a bunch of VC offices at the moment and if it’s [the investment opportunity is] not profitable or has no clear path to profitability then investors won’t look at it,” said Dylan Collins, chairman of OMAC Investments. “Anyone who started a company before 2022 is probably structurally disadvantaged if they’ve raised capital in terms of planning for what’s going to happen next year.”
To put it simply, it’s a challenging period for entrepreneurs on the hunt for investments, and even more so for those looking for an exit strategy.
The figures discussed at the event made this abundantly clear.
Consider the first half of this year, for example. The number of deals for global tech, media and marketing companies increased by 2% compared to the same period the previous year, but dropped by a substantial 23% in comparison to the first six months of 2021, according to analysts at Cannacord Genuity.
In other words, even though there’s growth in dealmaking within this sector, valuations are still taking a beating. It’s been a repeating story this year: companies putting themselves out there for potential buyers, only to have nothing come out of it (case in point: Criteo).
Nevertheless, there are still deals to be made, as Omnicom showed with its eye-bulging $835 million purchase of Flywheel earlier this week.
“The market is tough but no one puts money into a fund to track a long term deposit rating and try and beat it,” said Charles Ping, managing director at Winterberry Group. “So deals will be done but [investors] are taking a more conservative view of risk and, particularly in the private equity sector given its view of the high cost of external debt.”
This is quite a departure from the boom era that marked numerous deals from 2020 to 2022. At that point, even unprofitable businesses with growth potential could secure funding. Now, it’s safe to say that it’s much harder for a loss-making venture to look appealing. This point was driven home repeatedly during the event, and some candid insights were shared.
“It’s hard to convince people internally that you need to deploy capital,” said Paul Kang, head of alternative investments at Dentsu’s Amplifi Global. “It’s not just a case of saying, ‘This deal aligns with our strategy and is going to yield value for the group.’ Actually, it has to be transformational.”
When it comes to the discussions Mathieu Roche, co-founder and CEO of ad tech company ID5, has been having with investors, the word “stability” seems to be popping up quite a bit. They’re delving deep into his company’s financial structure and path to profitability, which is making him ponder the future. Is ID5 ready to stand on its own financially, or does it need more funding? If it’s the latter, well, that’s going to involve significant research to find that cash and some realistic conversations about the terms of any potential deal.
The silver lining, if there is one, is founders can see a path toward emerging from this period leaner, healthier and more focused — if they emerge at all. Roche, for example, is already considering the possibility of hiring a chief financial officer and potentially a seasoned CEO to help establish a clear line of sight to a liquidity event. Crises can lead to reassessments and soul searching.
Roche, like so many of his contemporaries, is recalibrating the business by doubling down on its strengths versus chasing unproven growth avenues. There is little choice.
The hard part is figuring out how to recalibrate, as Kevin Flood, a general partner at FirstPartyCapital, explained during the MadTechMoney event. He talked about the challenges of knowing how to get into a position where they can raise seed funding at a time when venture capital funding is arguably more international than it ever has been.
The dilemma they face is whether to make substantial investments in talent and customer acquisition within a large market like the U.S., believing that the potential rewards outweigh the risks. Alternatively, they could opt to wait until they’re pulled into those markets organically, although this could potentially expose them to increased competition.
Get these decisions right, and the likes of Roche have a good shot at coming out the other side of this mess even stronger. This especially holds true for entrepreneurs just starting their journey — because let’s face it, building a business is a far more doable task than flipping it nowadays.
“There’s no IPO window, there are relatively few big M&A deals getting done and the valuations are nowhere near what they were in 2021,” said Daniel Glazer, a managing partner based at the London office of Wilson Sonsini.
However, It’s not all doom and gloom for those later-stage startups. There’s a glimmer of hope on the horizon. They just need to hang on until the second half of next year. That’s when several of the speakers at the event said they anticipate the IPO window to swing back open, and that could be a godsend for some founders. Especially with the U.K. planning to ditch those eligibility requirements that used to discourage early-stage businesses from listing.
And for those execs who aren’t keen on that path, private equity investors could be another option worth considering. After all, all that fund money and dry power needs to be deployed. Otherwise, it’s just sitting there, eroding its purchasing power as inflation continues to rise.
“More and more private equity investors are looking at assets and are thinking, ‘Can this be a good synergistic addition to my portfolio?’ Or they want a piece of that mad tech opportunity,” said Shruthi Chindalur, an investor and advisor to ad tech and mar tech companies. “Apart from the top 15 private equity investors who are focused on ad tech and mar tech there are at least another 15 or 16 who want to play in those areas.”
It’s no surprise, then, that the prevailing sentiment for deal-making in the coming year is one of cautious optimism, at least for now.
