US or bust: Why London’s adtech start-ups want to scale in America

According to adtech experts, the biggest opportunities for scaling UK digital businesses lie in the US. Here's why.

Despite most industries facing the brunt of Brexit uncertainty, the world of advertising seems unfazed. According to recent figures from Advertising Association and Warc, UK ad spend grew to £21.4 billion in 2016, up 3.7 per cent from 2015. This marks the seventh consecutive year of market growth, fuelled particularly by digital advertising and a new tranche of adtech start-ups sprouting wings and taking flight.

Internet ad spend is up 13.4 per cent to £10.3 billion, and 99 per cent of this growth came from mobile advertising, with ad spend for mobile platforms up 45.4 per cent to £3.9 billion.

While mobile ad spend was a growth catalyst for the sector, the Advertising Association and Warc Expenditure Report predicts that this type of growth will slow over the coming years, to 30.4 per cent this year, and 20.8  per cent in 2018, as the mobile boom peters out.

But according to adtech experts, the UK is only a tiny fraction of the global market, and anyone who’s anyone is heading westward to New York, the adtech capital of the world.

“If you’re thinking about a European expansion, forget about it. It’s a sh*t-show,” says Ciaran O’Kane, CEO and founder of ExchangeWire, speaking at a panel hosted by FastPay on scaling digital businesses. “Get to New York. The budgets are insane. You can go to Miami or Chicago and the budgets are as big as most of Western Europe. Any adtech business that’s growing needs to get to the US.”

The lure of big budgets

New York’s historical Madison Avenue has spawned some of the world’s most memorable campaigns. From supporting the war effort through posters to blimp advertising, New York’s admen have pushed for the early stirrings of marketing innovation for decades. Now adtech hubs around the world include London, Berlin, Singapore and beyond.

Still, New York remains a hinterland for adtech entrepreneurs, says Tim Finn, CEO and co-founder of growing adtech company, Statiq.  “I lived and worked in New York for six and a half years building an adtech company. I’ve seen it first hand and completely agree that the US is where the big budgets are,” he says. “When we started Statiq, we had an idea of what to do and where we’d like to go. But the US wasn’t part of it then. Our strategy was that we’d be bought up by a large firm.”

Have VCs lost faith in adtech?

Digital businesses in the adtech space are notorious for high volume mergers and acquisitions, but fundraising has also been integral to getting businesses to the stage where they’re ready to be acquired. Yet in recent years, the majority of funding rounds backed by VCs have almost stayed stunted at the seed stage.

According to Thomas Olszewski, associate at Frontline Ventures, it’s not so much that VCs have lost faith in adtech, but that adtech entrepreneurs tend to sell before they can grow the business to a level where it would need to raise a series A or series B round.

“The good news is that adtech has the most exits in the sector. But a lot of the activity is in the $25 million to $75 million range, and (adtech entrepreneurs) can get that without venture capital,” he explains.

“We’re generally targeting exists of $500 million. A lot of the time, we like the founders, we like the business, but we know they’ll probably be acquired by the likes of WPP for $50 million, so why bother?”

A funding gap

For Statiq’s Finn, this is the reason why the adtech sector has a funding gap issue. “When we started, we did the road tour of all the VCs, and it’s true. There’s a funding gap, and it is created a large part by the funding methodology of venture capital. A lot of VCs would rather put a larger investment at a later stage. But adtech start-ups need funding to grow to that size.”

According to Matt Byrne, UK director at digital media lender, FastPay, this is where alternative financiers can swoop in.

“We (can) plug that gap between seed and series A to use as growth capital,” Byrne explains. “It’s traditionally difficult to finance businesses that can’t show recurring revenue. It’s very hard to scale that. We try to change the conversation. Equity isn’t always the answer. It’s about looking at what’s owed to you in the balance sheet. Why raise £5 million when can just pull the £3 million sitting in your balance sheet? We advise clients to mix equity with debt.”

Frontline Ventures’ Olszewski agrees. “When we invest in companies, we want that capital used to grow the business, not to plug a 30-day hole for Facebook. I see FastPay as ‘debt relief’ in that sense.”

Angel investors and building a virtuous circle of finance

Tim Faircliff, founding partner of Volando, and ex-chair of the AOP believes that the UK’s adtech space needs more of a push to reach the maturity of other markets. “Through SEIS and EIS, it’s relatively easier to get £1 million to £1.5 million from angels. Then you can grow to show recurring revenues, regular clients and the high valuations that VCs want,” he says.

“However, in the UK, there haven’t been that many ‘wins’ so we don’t see that capital cycled back into the sector. We see that in France, but not so much here. We’re the middlemen between these businesses and VCs, and it’s obvious that the UK isn’t like the US. We’re not all about successes and gains. Here there isn’t enough recurring revenue. There needs to be a decoding as to why advertising sector’s model is the way it is.”

The US: a mature market

For Amy Williams, founding Good-Loop was about taking the trend of micro-donation into adtech. The basic premise of Good-Loop is to end what she calls ‘badvertising’. Views can watch at least 15 seconds of opt-in video advertising, then donate 50 per cent of the profit to their chosen charitable cause. The remaining 40 per cent goes to the publisher and 10 per cent goes to Good-Loop. The London-based start-up recently graduated from the Collider programme with seed funding.

“The US feels like the natural place to go next. We buy cheap banner space and convert it to premium video through the opt-in model. It’s really important for us to expand in places where philanthropy is strong,” she says. “We have two areas of focus. One is for SMEs and the other is programmatic for large publishers. For us, it’s that second seed round that’ll help us develop our technology.”

As a VC, Olszewski sees the merit in moving across the Atlantic. “Opportunities for funding are a lot larger, and vast majority of acquisitions happen in the US,” he adds. “But VCs need to see genuine commitment from (adtech start-ups).”

According to Olszewski, the first thing investors look for is a strong commitment to the market. “A lot of people move to US to get a lot more finding, but that won’t happen until the CEO moves to the US. You can’t just have a VP of sales holding down the fort. It’s telling of the founder if they want to stay in Europe or are thinking of actually investing in their business’s long-term standing in the US.”

Volando’s Faircliff stresses that a more measured wait-and-see approach would work best. “Prove the model in the UK and then take it transatlantic. It’s very expensive to enter the US market. Office space is expensive, sales people are expensive and like to be paid fortnightly, for some reason!”

Statiq’s Finn, having been there and done that, warns that it’s easy to forget the opportunity cost associated with going westward. “The idea is to take UK talent to the US. You don’t want to alienate your home market,” he says. “You have to also work out the cost to set up, and to have enough runway to build a successful business. The great thing about London is everyone you want to talk to is just a mile away. In the US, you have so many different regions. Before you know it, you have 15 sales people and they are expensive. I think to do it, you have to have a lot of free cash flow or VC funding, at least around $4 million.”

For Exchange Wire’s O’Kane, it’s US or bust. “The Europeans are like street fighters. We have to go toe to toe, bare-knuckle fighting to get budgets. Then we go to the US and it’s a piece of p*ss,” he says. “No offence, but Americans are lazy. But we’re lean, mean, fighting machines.”

Praseeda Nair

Praseeda Nair

Praseeda was Editor for GrowthBusiness.co.uk from 2016 to 2018.

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