Ad Tech’s Walking Dead Startups

Walking-dead companies are venture-funded companies that are sort of stumbling along revenue-wise, making enough money to stay afloat or surviving on their financing by having a relatively low burn rate. They’re not going to have a super successful exit anytime in the future. They may be very exciting, innovative companies, but they have a hard time getting VCs pumped up. Venture funds tend to place a lot of bets and hope that they get big wins from a small percentage of them. Like any investment vehicle, a VC’s portfolio has its mix of winners and losers, although the typical VC portfolio tends to be less diversified in terms of its industry focus. When I heard Jon Soberg of Blumberg Capital — it is a backer of Legolas, HootSuite, and DoubleVerify, among others — use the phrase “the walking dead,” it felt extremely appropriate. A lot of companies in the digital display landscape are running out of capital after three or four years and several rounds of financing  — and most of them will exit at low or zero multiple of valuation. Then again, smart investors like Grotech Ventures find a Living Social to invest in every now and again, and that is the kind of deal that can propel the value of an entire portfolio.

On the contrary. I think the valuations of LinkedIn, Facebook and Living Social have the VC community excited, maybe even overexcited, to be honest. The recent Buddy Media announcement is just one example, raising $54 million to plump up its valuation to $500 million, and there are sure to more such valuations coming soon. I think what VCs aren’t too excited about is the amount of companies within the display landscape that are going to flame out or exit at fire sale prices. Unfortunately, according to Luma Partners banker Terence Kawaja, over half of the 35 deals in the last year didn’t produce a return on capital, and he expects that number to increase over time.

If their funds make a decent return on investment, then they aren’t doing anything wrong! It may seem like that to company insiders working for some of the less fortunate companies, but VCs are not in business to keep ad tech executives in panel discussions at cocktail-soaked industry conferences. They are in business to build companies to sell them or put them into a public offering. I think certain well-heeled VCs may be making the venture capital business a lot harder by over-inflating the valuations of some of the larger companies in our business, but I think that’s due to the flight of money from increasingly unstable capital markets to other investment vehicles. There is a lot of cash on the sidelines right now, and venture funds are starting to look like a surprising safe haven. While that should scare the average investor, it makes for a very fun, frothy environment for ad technology!

I would give them a 1x-3x valuation, similar to a successful digital media agency — and only if they were showing strong profitability and something unique about their process which was repeatable. The problem with the current landscape is that the excitement has been driven in large part by many of the companies that I have just described — companies with more hype than real technology with a unique IP.

I think investors have to watch out for a rapidly collapsing landscape, due to the social factor. You have an entire ecosystem built around audience targeting using third-party data. The problem? The companies with better and deeper first-party data have a lot more audience — like 750 million profiles for Facebook alone — than all of the companies in our landscape put together. And Facebook, LinkedIn and Google have just started to define their display advertising strategy. If audience targeting is as easy as it seems to be now, via Facebook, then what is the real value of many of those little logos in the Kawaja map?