Adtech or agency business?

By January 19, 2010Advertising

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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  • I would also add that sales/transactions are concluded directly on the website (without company-side human interaction). For me that's the killer scalability/quality of earnings/operational leverage issue.

  • That is a high hurdle

  • Hi Nick,

    For “hard to replicate technology” would you say it needed to be patented too? Or is being hard to copy and replicate enough, in your view?


  • Patents are not that important, in my view. Just about worth having, but not the be all and end all that some people would have you believe.

  • garygoodman

    Hi Nick, As you can imagine I have thought about this quite a lot.

    On the multiples:
    The AdTech model is something both the Agency groups and the likes of Google all now recognise is part of the future of the media is bought and sold. As a result it is clearly in the interests of both types of acquirer to secure a position. In this competitive market then surely it will be the higher multiples that apply. Even if these multiples have a dilutory for the agency parents shareholders. 24/7 Real media acquisition by WPP is a good example of this and you will remember it was just after Google acquired doubleclick.

    On the patent / uniqueness of the Ad-Tech service I think this has a role but it the products appropriateness that really matters. If we assume a fragmented number of buyers and sellers don't want or need multiple platforms to work on it will be those who really understand their customer needs that will build an audience and at the end of the day it will be this that delivers real scale and real value.

  • Thanks Gary. I agree, dealing with fragmentation as you do is a big driver of multiples.

  • Based on 11 x market cap of Google over WPP, I would be 11 times more likely to assume the exit was to Google over WPP and concomitantly would base all decisions on that 11:1 formula.

    Conversely, I believe we are in the eye of the storm in terms of a paradigm shift in the way media is delivered consumed and monetised. Consider a scenario where the consumer begins to rapidly narrow his or her vision to a handful of destinations, because they've settled to a large degree on what they want so won't be 'searching' for it anymore. Buying choices and media consumption all start to be done socially by recommendation (fb, twitter, foursquare, trip advisor etc.) and let's be honest the so called targeted ads on any of those are so tacky and irrelevant they surely aren't sustainable. Then the answer is increased branded entertainment and social engagement with consumers and not advertising at all. Which would put Google on a downward curve and WPP on a steep uphill one…

    As I keep saying, all roads lead to Famebook. Should be starting to prove it fairly soon…

    All the best Nic. Looking forward to the new tagline choice…


  • Thanks Jan. Branded content will be an increasingly important part of the mix.