Adtech or agency business?

By January 19, 2010 9 Comments

I am considering this question with regard to a company we are looking at, and it is an important one because it talks to scalability and the ability to generate VC-sized returns.  The acid test is whether the business is more likely to be acquired by Google or WPP, which is another way of asking whether it will be valued on an EBITDA multiple or a gravity defying revenue multiple.

The proto-typical WPP acquisition is for £20-30m at maybe 7-12x EBITDA, usually with a substantial portion of that contingent on good performance in the year or so post acquisition.  Google on the other hand bought DoubleClick for $3.1bn which was around 3x revenues and Feedburner for $100m which I believe was at an even greater revenue multiple.

In some cases it is obvious – DoubleClick is patently a technology business set up to process billions of transactions per second and it was valued accordingly, and at the other end creative digital agencies whose success stems from the brilliance of a small number of individuals (note that these businesses are often great for the founders, who retain 100% ownership up until they sell at the above values).

However, many businesses fall between these two extremes and some of them can be great venture backed successes.  Our portfolio company was a case in point where the success of the company was as much about the people as it was about the technology. 

Below is a list out some of the indicators that a business is more likely to go on to be rated as an adtech company.

  • Hard to replicate technology – if the company’s technology feature’s heavily in its pitch that is a good sign
  • Fast growth (c100% pa) – an indicator that the company is getting operational leverage from its technology
  • Network based barriers to entry – a large network of active partners is a big driver of value
  • Automation – media exchanges from Right Media through to Google/Doubleclick’s new exchange have exploited automation to turn broking industries into adtech industries

Timing is also crucial – as with just about all markets.  On the technology side, what is hard to replicate today can rapidly become a commodity – OpenAds is trying to disrupt Doubleclick by commoditising ad-serving software. On the media side, publisher industires can rapidly become more concentrated – this happened to PPC affliates, the publishers partners of affiliate networks, and the networks saw their valuations drop as a result (Tradedoubler, the leading European affiliate network has broadened out to become an agency business is trading at around 25% of its summer 2007 high).

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