Navigating the Evolving Landscape of Digital Advertising

Despite challenges presented by the pandemic, shifting media models, and impending iOS privacy updates, the digital advertising and marketing sectors continue to attract investment. Recent conversations with leading venture capitalists confirm ongoing opportunities within these dynamic fields.

Our previous survey of adtech and martech VCs centered on the effects of COVID-19. This follow-up inquiry focused on the recovery of deal activity – with Eric Franchi of MathCapital reporting exceptionally active recent quarters – and explored potential regulatory changes alongside emerging technologies.

Venture capitalists universally acknowledged that regulation introduces both challenges and possibilities. Christine Tsai from 500 Startups highlighted that increased restrictions for advertisers will likely drive demand for compliance software solutions.

Expert Perspectives

We also investigated the specific criteria VCs are employing when evaluating potential investments. Detailed responses from each participant are available below.

The following individuals contributed their insights:

• Eric Franchi, Partner, MathCapital
• Scott Friend, Partner, Bain Capital Ventures
• Christine Tsai, CEO and Founding Partner, 500 Startups

The rebound in digital advertising expenditure is demonstrably underway following the initial contraction experienced during the pandemic. Is a comparable trend evident in the volume of transactions within the adtech and martech sectors?

Eric Franchi: Indeed, that observation aligns with our experience. The third and fourth quarters of 2020 represented periods of heightened activity, marking some of the busiest we’ve encountered in the past three years regarding both initial investments and subsequent funding rounds.

This activity level appears to correlate directly with the commercial performance reported by numerous companies within our investment portfolio during 2020.

Scott Friend: Significant engagement is currently being observed in both adtech and martech, especially within the commerce landscape. Specifically, solutions designed to facilitate revenue generation for smaller retailers are attracting considerable interest.

Attentive, a company in which we have invested, continues to demonstrate exceptional growth. Furthermore, a renewed interest in digital Out-of-Home (OOH) advertising is becoming apparent – perhaps this is finally its moment to shine?

Key Observations on Market Trends

• Increased investment activity in Q3 and Q4 of 2020.
• Strong correlation between adtech/martech deal flow and portfolio company performance.
• Growth in commerce-focused tools for small merchants.
• Resurgence of interest in digital OOH advertising.

The overall outlook suggests a positive trajectory for the adtech and martech industries, mirroring the recovery seen in broader digital advertising spend.

Current Focus: Adtech and Martech Startups

Eric Franchi: As a fund, our investment strategy is specifically geared towards advertising and marketing technology. Consequently, over 90% of our investment efforts are directed towards companies within these industries. Currently, we maintain an equal focus on both adtech and martech.

Expanding Beyond Core Sectors

Scott Friend: Our attention has been increasingly drawn to the wider commerce landscape. This includes enterprise-level solutions, such as Flow.io, which specializes in cross-border transactions, and Mirakl, a provider of marketplace infrastructure.

The Shopify Ecosystem

We are also observing significant activity within the Shopify ecosystem. A multitude of innovative companies are emerging and experiencing rapid growth.

Supporting Small Sellers

These new businesses are dedicated to fulfilling the diverse requirements of the hundreds of thousands of small sellers utilizing the Shopify platform. This support extends to marketing and other essential functions.

Investment Distribution

Our investment approach reflects this broader focus, with a substantial portion allocated to companies supporting the commerce ecosystem alongside our core adtech and martech investments.

Investment Priorities in Emerging Sectors

Eric Franchi: The individuals leading a company and the overall team composition are given the most significant consideration in our investment decisions. Currently, we are strongly focused on ventures that deliver “outcome-based solutions.”

We anticipate that future enterprise clients will adopt a more refined strategy compared to those of the past. This translates to a preference for startups developing customized algorithms and comprehensive omnichannel measurement and attribution capabilities.

Scott Friend: Our investment criteria remain consistent: a forward-thinking team, the capacity to establish a durable business, and demonstrable initial traction or positive customer feedback are paramount.

Key Areas of Interest

Christine Tsai: We are actively seeking opportunities in several key areas.

Privacy and Compliance

We are particularly interested in companies developing solutions that address consumer privacy and ensure regulatory compliance, seamlessly integrated within existing digital marketing workflows.

Marketing Automation

Software designed to assist businesses in the creation, optimization, and execution of marketing campaigns in an automated and data-driven manner is also a priority.

E-commerce Personalization

Furthermore, we are exploring software solutions that enable businesses to deliver personalized experiences within the e-commerce landscape.

Specific Investment Focus

• Companies offering solutions for consumer privacy and compliance within digital marketing are highly sought after.
• Software facilitating automated and data-driven marketing processes is of significant interest.
• Solutions focused on personalizing e-commerce experiences are also a key area of focus.

The Evolving Landscape of User Data Regulation and its Impact on Startups

The expectation of heightened regulation concerning user data and privacy is not merely a possibility, but a current reality. Existing frameworks like the GDPR and CCPA, coupled with forthcoming modifications from browser and operating system developers, demonstrate this trend.

Significant opportunities are emerging for startups focused on developing privacy-centric and consent-based identity solutions. Furthermore, a supporting infrastructure centered around data management is becoming increasingly vital.

Opportunities in a Privacy-Focused World

A key area for innovation lies in enhancing transparency and ensuring compliance regarding data utilized for marketing initiatives. This represents a substantial market need.

Scott Friend emphasizes that startups lacking a thorough understanding of current data privacy regulations, both domestically and in Europe, will face considerable challenges.

Successful companies are proactively addressing data privacy compliance and actively collaborating with regulatory bodies to maintain adherence to evolving standards.

Adapting to Shifting Industry Norms

Christine Tsai points to changes initiated by companies like Apple, such as alterations to the IDFA functionality, as further evidence of this shift.

These changes present a valuable opportunity for startups, as robust record-keeping and compliance will become essential for all marketing endeavors. Software solutions are poised to become the primary means of achieving compliance.

Navigating the Risks

However, increased regulation also introduces inherent risks. Data security will be paramount for any organization processing user information.

Potential consequences of security breaches range from reputational damage to legal action, financial penalties, and a complete erosion of customer trust.

Key Takeaways for Startups

• Prioritize Compliance: A deep understanding of GDPR, CCPA, and emerging regulations is crucial.
• Embrace Transparency: Focus on building solutions that offer users clear visibility into data usage.
• Invest in Security: Robust security measures are non-negotiable to protect user data and maintain trust.
• Seek Collaboration: Engaging with regulators can help ensure proactive compliance.

Ultimately, startups that prioritize user privacy and data security will be best positioned to thrive in this evolving regulatory environment.

The Role of Startups in Adopting New Adtech and Martech Solutions

Startups frequently lead the way in embracing new advertising and marketing technologies. What innovative tools and strategies are currently gaining traction among portfolio companies and the broader market, and are poised for wider adoption?

Insights from Eric Franchi

Eric Franchi notes the emergence of numerous compelling new tools and platforms, leading to several investments. These include CRMs specifically designed for future needs, software designed to transform CRM data into actionable insights, and platforms focused on pinpointing enterprise-level clients exhibiting clear buying signals.

Scott Friend on the Power of Automation

Scott Friend emphasizes the increasing importance of automation. He highlights the value of straightforward tools that streamline and automate routine processes. Alloy serves as a prime illustration of this trend.

Christine Tsai’s Perspective on Visualization and Low-Code Solutions

Christine Tsai observes a continuing demand for tools that facilitate the visualization and effective response to data gathered from various marketing channels. Furthermore, there's growing interest in low/no-code solutions that enable rapid testing and deployment of customized marketing campaigns and automated sequences.

Investments have been made in companies actively developing solutions within these key areas.