Getting Real On Valuations; Netflix Wants To Build Ad Tech; And DSP Sale Update

Valuations Need To Be Grounded In Reality

The bank run on SVB caused quite a stir in the startup world over the past two weeks.  

The saga marks the end of the “easy money” era that has lasted the better part of decade.  Low interest rates encouraged a “risk-on” approach to investing, fuelling the insane valuations that a lot of startups are struggling to live with.

This has resulted in a collective haircut for many late stage companies.  Stripe is a good example of this market shift, having recently cut its internal price by 40%.

FPC has always taken a fairly conservative approach since we launched.  We have spent a lot of time working on revenue multiples and models that are benchmarked to reality and not faux Silicon Valley hype.  

This will ultimately give our portfolio companies a better chance to justify their price, helping with the follow-on funding process.   

You only have to have a few conversations around the bars of Farringdon to get a sense of  the trouble some late-stage ad tech companies are in right now.

If you are an investor thinking about an investment in the space, it’s best to understand a few of the following points when faced with a frothy startup number:

• Ad tech is not curing cancer or building fusion reactors.  The multiples therefore need to reflect that.  At best companies in our sector are looking at 5-10x on recurring revenue and a fair lower multiple on occurring media revenue.  A hybrid model needs to be applied if startups are in the "occurring” and ‘recurring” buckets.

• Anyone telling you higher multiples are justified because they are going to change the industry is a) not from the industry, b) going to burn through piles of your money, c)  never going to scale and d) likely insane.

• MadTech unicorns are a myth.  Do not chase memes and themes.  A 20x multiple is a sure fire way to lose money in the long term - despite the enticing SEIS/EIS tax relief in the short term.

• Don’t believe the hype.  Seek out people who understand the space and get some advice.

Or alternatively, just invest in the FirstPartyCapital fund. Either way, be careful out there.

Netflix Looking To Go It Alone

FPC and portfolio company, LightBoxTV, were in the news this week.  Our good friend, Ronan Shields, penned an interesting piece about the evolving ad tech strategy at Netflix - specifically around whether the company should build, borrow or buy.

The streaming giant seems to be leaning towards a “build” strategy.  Netflix wants to build a stack that fits its view of TV advertising.  

One of the areas it wants to incorporate in this bespoke approach is traditional TV measurement, as pointed out by LightBoxTV CEO, Mark Giblin:

“Mark Giblin, CEO of CTV campaign management platform LightBox, told Digiday the Netflix team demonstrated positive signs, such as a willingness to sign up to BARB, a panel-based measurement system used by TV buyers in the U.K. 

“BARB measures overnight ratings, and when you think how you watch on-demand viewing in a different way, it can look as if shows are not as big as they really are,” he explained. “So, they took that risk on, as that’s the [TV] currency [in the U.K.].” 

Sources told Digiday that in the early phases of ads running on Netflix, campaign delivery was comparatively manual and third-party measurement wasn’t available.

But should they build it all given there are options on the market?  Ad tech is notoriously difficult to develop and maintain.  Few media companies have managed to do it - and if they have, it is hard to think of any that continues to innovate in ad tech.  FPC gave its take on the “buy” option:

Several sources told Digiday that part of Netflix’s agenda has been to examine the prospect of potentially buying-in ad tech with some advising them to look on the public markets for potential acquisition targets. 

Ciarán O’Kane, CEO of First Party Capital, told Digiday that Netflix’s advisers will likely be on the lookout for an ad server and supply-side platform and that an M&A route may be a sensible route to take. 

“Building ad tech is really hard, you need to have the right DNA to know what’s going on,” he added, “If you were to look at companies then you could look at Roku, which has scale with its consumer product [and ad tech], or you could look at pure-play ad tech companies such as Magnite as it has an ad server and SSP.”

Whatever happens, Netflix is going to be an interesting player in ad tech.  If it does build, it will need to buy some technology to help accelerate the process. 

And, ultimately, it will also have to work with third party ad tech in terms of measurement and brand safety. Fun times ahead.

DSP For Sale - Moving To The Next Stage

As you know, we are currently helping one of our portfolio companies sell its enterprise DSP - as it is surplus to requirements. 

We have had a lot of interest in acquiring the asset, and are now moving parties to the next stage.

Here is a top line of what’s on offer:

• Enterprise DSP

• SPO capabilities core to the product

• Profitable business

• Strong client base

You have one last chance to get into the process.  If you want more details, email us on contact@firstpartycapital.com.

Have a great weekend. readers.