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AdTech

Why We’re Excited About Ad Tech

Jim Ferry
The Historical Hatred of Adtech Amongst Investors

Digital advertisers have been on a test-and-learn odyssey the past few years as they’ve adapted to emergent technology, shifts in consumer behavior, and impending changes to third-party data tracking. Despite these challenges, the ad tech market is booming – overall deal volume went up 82% from 2020-2021, and digital advertisers are projected to spend $240 billion this year alone.

So, what is fueling this optimism? We’ve been studying and following the ad tech industry closely for years. Even back in 2015 when investors were shying away from ad tech companies, Volition Capital was looking for deals and ended up investing in Connatix in 2017. Since then, we successfully exited that company along with another early innovator in the space (Visual IQ). 

While there has been lots of money flowing into the vertical the past couple of years, we have always held the contrarian view based on a commitment to understand the complexities and history of the sector.

The prevailing notion today is that Google, Facebook, and Amazon will dominate the ad tech future, but there is still a large spend outside these channels, and we’re interested in digging deeper to unlock opportunities others might be overlooking.

Ad Tech Resurgence

It’s a familiar story – technology improves and options increase, behavior shifts and competition rises, subscriptions plateau and offerings evolve. From the early days of banner ads to native advertising on sites like BuzzFeed, digital advertising has been a saga of fits and starts, struggling to build trust with consumers, battling slow tech and blockers, and experimenting with nascent pricing models.

By 2015, ad tech companies were a bugaboo to venture capitalists who had become convinced the industry was overcrowded, overinflated, and full of “low-margin managed services businesses.”

At the time, their concerns seemed valid – there were several prominent IPOs that flopped, big companies like Google, Facebook, and Twitter controlled their data in end-to-end platforms, and the sector was moving towards more restrictive privacy-focused targeting.

But over the next few years, a few things happened – the tech got better, speeds improved, streaming, gaming and e-commerce flourished, and an influx of available capital propped up deal activity and successful public offerings.

Now, thanks to “a rise in digital ad spending and cheap borrowing”, everyone wants a piece of the ad tech industry – media companies, retailers, and especially investors drawn to automation and big valuations.

At Volition, we identify problems and look for solutions in the market. We have a multi-pronged viewpoint on the ad tech sector, but we’re most excited about how video and changing consumer behavior is shaping the future of digital marketing.

The Proliferation of Video

For digital marketers, the strategy has always been to find creative new ways to reach people where they are consuming content. And right now, people are consuming video – lots of video. By 2023, nearly 3.5 billion users will watch streaming or downloaded video at least once per month on any device. 

Video is versatile, effective, and offers digital marketers a dynamic, less intrusive method of communicating with their audiences, with higher engagement rates. In the ad tech sector, we see video creating opportunities in three distinct areas: (1) CTV advertising, (2) digital online, and (3) social media.

1. CTV Advertising  

The ad tech industry (like all industries) has been irrevocably shaped by the pandemic – notably, by the frequency with which Americans continued to cut the cord and adopt over-the-top (OTT) streaming content. Already more than 80% of US households own a minimum of one connected TV (CTV), and a recent Roku/Harris Poll study showed that TV streaming has now surpassed linear TV in view time. 

The average American home pays for nearly 9 streaming services, dominated by those like Netflix and Disney+ that charge pricier ad-free packages. Those costs can add up for the average family nowadays, and there is a growing network of platforms offering free or lower-priced entry points with limited ads.

Hulu was an early champion of this model, and Peacock, Paramount+ and others have since created their own limited ad offerings, all hoping to steal some market share among cost-conscious cord-cutters.

And the ad tech industry is leaning in – by the end of 2021, CTV ad spending increased by almost 60% to $14.44 billion, and total OTT ad spending reached $1.3 billion.

2. Digital Online Video

In the past, publishers that wanted to monetize through video content and syndication had to embark on a process that involved multiple point solutions and managers. And early ad tech companies only built products for desktops unable to adapt to native mobile, leading to a janky, slow-loading mess. But things have changed.

Now, thanks to companies like Connatix, there are all-in-one solution for all publishers, regardless of size, amount of video content produced, or initial advertiser demand.

Video players will provide pre-roll ads out of the box, allow the publisher to connect to their own direct sale campaigns, and give them the option to syndicate their content to third-party websites to further monetize their video assets. 

With plug-and-play solutions that reduce the normal costs associated with video content creation, syndication and monetization, video has become a crucial way of increasing SEO, keeping customers engaged, and connecting with younger audiences.

3. Social Media Video

A recent study conducted by the Consumer Technology Association, found that US consumers now spend almost as much time streaming videos on social platforms as they do watching traditional TV.

Native social publishers are capitalizing on this behavioral shift through content that can be viewed passively on social feeds, an evolution from native web publishers that utilize social channels or paid ads to drive traffic to their websites for longer-form content. The passive social video views are monetizable through branded content, programmatic ads, and e-commerce revenue that is amplified by social virality with high-engagement metrics.

The benefits to social video are many, most obvious is that the cost of production is far lower and requires significantly less headcount than other digital media assets.

The ease of producing memes and posts, utilizing user-generated content (UGC), and creating raw video content results in attractive cost structures for a very scalable business. The proof is in the metrics, with spending on social due to overtake search for the first time in 2022, according to eMarketer.

The scale and growth of social platforms led our team down the path to find a company that also realized this unprecedented opportunity, resulting in our recent investment in Doing Things Media (DTM), a native social publisher that owns and operates more than 25 brands across social platforms. Read more about that exciting announcement here.

Buffering Ahead

Despite the tremendous positivity surrounding the ad tech sector, we’re closely following how regulatory and privacy updates are impacting the ability to track customer data and target appropriately. As these changes continue to roll out, stay tuned to the Volition blog or sign-up to our newsletter for ongoing insights.

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