{"id":30444,"date":"2021-04-12T13:41:35","date_gmt":"2021-04-12T12:41:35","guid":{"rendered":"https:\/\/videoweek.com\/?p=30444"},"modified":"2021-04-12T13:41:35","modified_gmt":"2021-04-12T12:41:35","slug":"why-europe-is-at-the-heart-of-the-ad-tech-boom","status":"publish","type":"post","link":"https:\/\/videoweek.com\/2021\/04\/12\/why-europe-is-at-the-heart-of-the-ad-tech-boom\/","title":{"rendered":"Why Europe is at the Heart of the Ad Tech Boom"},"content":{"rendered":"

\"\"<\/a>It feels like every other day there\u2019s another story about an ad tech company completing a funding round, preparing for an IPO, or being acquired for a bumper price. After a few lean years during which a pessimistic cloud hung over the industry, the ad tech party is now back in full swing.<\/p>\n

However, what\u2019s notable about the current ad tech boom is the success we\u2019re seeing from European ad tech in particular.<\/p>\n

In part, this is due to the interest in the identity space, driven by Google\u2019s decision to kill off third-party cookies in Chrome and Apple\u2019s restriction on its IDFA identifier.<\/p>\n

The European Union\u2019s privacy push encouraged the development of identity solutions in Europe before Apple and Google started cracking down on identifiers.<\/p>\n

\u201cRegulation such as GDPR has made Europe a hot bed for privacy-first ad tech and data innovation,\u201d said Rich Ashton, managing partner of FirstPartyCapital, a European investment fund specialising in ad tech, martech, and digital media companies.<\/p>\n

European companies like ID5, InfoSum, and Zeotap were already working to help the ad industry adapt to GDPR, meaning they had a head start over US counterparts when Google and Apple started restricting identifiers.<\/p>\n

And European data protection rules encourage US-based multinationals to work with European businesses. Michael Schultheiss, a venture capital investor in ad tech, said that user data protection laws encourage businesses to have a physical presence and physical storage of user data in Europe, to save sending it across the Atlantic.<\/p>\n

This has countered the usual narrative that the EU\u2019s relatively tight regulations over privacy and the internet in general stifles innovation. In this case, regulation has actually created the conditions for companies to be created that are ahead of the curve.<\/p>\n

But regulation isn\u2019t the only factor driving Europe\u2019s ad tech boom.<\/p>\n

Pandemic has levelled the playing field<\/b><\/p>\n

Eric Franchi, partner at MathCapital, a US ad-tech focussed venture capital firm, says the pandemic has lowered the barriers between the US and EU, making geography less of a factor when considering investments in ad tech,<\/p>\n

\u201cPrior to 2020, I would have said geography was a significant factor, and that proximity to customers for an ad tech or martech company really mattered\u201d said Franchi. \u201cBut then COVID hit and forced us to reevaluate how business works. Everyone is forced to make decisions remotely via Zoom, whether that\u2019s vetting external providers or coordinating decisions within their teams. It levelled the playing field.\u201d<\/p>\n

\u201cHow that changes once things start to open up again is worth keeping an eye on,\u201d Franchi added. \u201cBut I think it\u2019s certainly been a factor over the past year.\u201d<\/p>\n

Kevin Flood, CEO of native advertising server PowerLinks and a partner in FirstPartyCapital, said that having a US office will be less of a requirement post-COVID. \u201cPeople are now comfortable with taking remote video meetings and making buying decisions without face to face contact. This will give EU companies a chance to win some early market share before committing to full-blown US investment.\u201d<\/p>\n

This lowers the barriers to expansion for EU start-ups. Previously, the size of the opportunity for European ad tech companies was seen as more constrained, due to the smaller size of the European market.<\/p>\n

The pandemic has also made a lot of capital available for start-ups and early stage companies.<\/p>\n

In response to the pandemic, governments across Europe have released a number of grants to help fuel business. \u201cCompanies can extend their runway significantly through COVID related debt programmes with very attractive terms, as well as national and European-wide R&D grants,\u201d said FirstPartyCapital\u2019s Ashton. \u201cOne of our portfolio expects to receive a $300k loan from the Danish government as well as $500k-$1M in research grants over the next few years.\u201d<\/p>\n

And those VideoWeek spoke with said that investors attitudes towards European ad tech companies are shifting, making fundraising easier.<\/p>\n

Michael Schultheiss said that European businesses are increasingly likely to look to work specifically with European tech outfits, rather than their larger US counterparts. \u201cPotential clients are tired of being dependent on someone from the US,\u201d he said. \u201cEven if they have European support, US companies usually concentrate development in the US.\u201d<\/p>\n

FirstPartyCapital\u2019s Ashton said that European businesses are also establishing a reputation for more realistic valuations.<\/p>\n

\u201cWe are seeing some crazy multiples at the moment in venture deals, M&A and the public markets, but this doesn\u2019t necessarily help founders at the earlier stage,\u201d said Ashton. \u201cIt is tempting to try and raise at the highest valuation possible but this can put you under an enormous amount of pressure to hit targets, and ultimately might make an exit difficult to achieve if you are priced too high. Most companies exit via trade sales that are sub $100M.\u201d<\/p>\n

And Franchi added that the success we\u2019ve seen from European\u2019s identity specialists has something of a halo effect.<\/p>\n

\u201cIt\u2019s a flywheel,\u201d he said. \u201cMore successful fundings begets more companies, because founders see their peers getting funded. So we\u2019ll see more successful exits, which again begets more funding because investors are that much more confident. In 2020, we saw that flywheel really get going.\u201d<\/p>\n

US expansion continues to be challenging<\/strong><\/p>\n

All of these factors, combined with the global trends moving in ad tech\u2019s favour, such as cheap loans and more room for innovation thanks to disruption from regulation and cookie changes, are helping to drive Europe\u2019s ad tech boom.<\/p>\n

But that\u2019s not to say there aren\u2019t still hurdles for European ad tech to overcome.<\/p>\n

While confidence in ad tech is on the up, there\u2019s still a lot of scepticism and uncertainty. \u201cIt\u2019s usually hard to find lead investors willing to take over a major chunk in a target company in Europe, especially at an early stage,\u201d said Michael Schultheiss. \u201cThe investor climate is not really open for risks.\u201d<\/p>\n

FirstPartyCapital\u2019s Rich Ashton agrees. \u201cDespite the general abundance of capital, ad tech is still ignored by most investors.\u201d he said. \u201cQuite a few people in the venture industry had serious doubts when we said we were launching a fund focussed primarily on ad tech.\u201d<\/p>\n

Ashton says that prior to his own fund, Europe lacked investment funds specialising in ad tech. For non-specialist investors, it can be a confusing and opaque industry, deterring investment.\u201d<\/p>\n

And while expanding may be easier post pandemic, it\u2019s still not completely straightforward. \u201cExpanding from Europe to the US will always be the North Star goal for founders who are looking to serve the biggest customers and achieve outsized investment returns,\u201d said PowerLink\u2019s Kevin Flood. \u201cUS expansion will always be challenging. It\u2019s a highly competitive market, often with well capitalized US players vying for customers and employees.\u201d<\/p>\n

\u201cEU companies can \u201cpop\u201d their valuation by entering the US successfully,\u201d Flood added. \u201cThat said, it\u2019s a strategic move which shouldn\u2019t be underestimated. Doing a half baked entry without the right network can be expensive and detrimental.\u201d<\/p>\n

Rich Ashton added that it\u2019s likely still a requirement for a founder to move to America when entering the market, which again might deter expansion. \u201cIt would be a red flag to a lot of investors if one of the founders was not willing to relocate,\u201d he said. \u201cCulture is important to the success of a company and it makes a big difference having founders on the ground.\u201d<\/p>\n

And for European ad tech companies, exit potential might still be somewhat limited by the fact that US companies have a harder time acquiring EU businesses than they do with other American companies.<\/p>\n

\u201cPotential US buyer companies need to go through a due diligence of a company in a legal system they do not know,\u201d said Michael Schultheiss. \u201cAnd US companies are the ones which tend to pay higher prices.\u201d<\/p>\n","protected":false},"excerpt":{"rendered":"

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