Advertising technology SMEs: What are the options for funding?

This article was first published on Real Business and the original article can be found online here.

Recent reports have identified a decline in investment in advertising technology companies over the last two years.

Investment in advertising technology companies is tougher to attract than in previous years.

Broadly speaking, advertising technology companies enable automated digital advertising by developing algorithms to link consumers to advertisements that are relevant to them. The technology and markets continue to evolve but venture capital is reportedly shifting focus away from pure advertising technology.

The declining market can be attributed to the dominance of the online advertising market by Google and Facebook, which last year attracted 75 per cent of new online advertising revenue according to the Internet Trends report.

So are advertising technology SMEs done for or is there still a way to attract investment? Whilst there is a decline, the market is by no means dead. Billions of pounds continue to be invested worldwide, with companies such as AppNexus and Adbrain attracting recent investment. US businesses like Snapchat will be aiming to increase market share and there is also increased activity in China, with the likes of Baidu and Tencent aiming to disrupt the market. Such disruption should ensure that a market remains for startups and SMEs developing new advertising technologies.

In the meantime, venture capital funds operating in this space are increasing focus on software-as-a-service marketing technology, with its more stable and attractive recurring revenue model. So what is seen as a decline in investment may also be a refocus on business model.

As for sources of funding, early-stage companies will continue to compete with other technology fields.

Investment by individuals – often via angel networks – is common at the seed stage, especially if the company needs to develop its technology and prove its business model. In the UK, tax reliefs are available to individuals making equity investments: the Seed Enterprise Investment Scheme and Enterprise Investment Scheme remain very attractive. Crowdfunding may also be an option, primarily to those with a more consumer-facing business.

To secure venture capital, the company will need to show potential for rapid growth and high returns. Venture capital investors will usually have a role in the company’s governance and should be expected to contribute expertise and know-how alongside the funding.

As an alternative to traditional venture capital funds, multinational technology corporates such as Google, Salesforce and Cisco continue to develop venture platforms to invest in new technologies, including those complementary to their own business. And grants or loans may be secured from the public sector, in particular the British Business Bank, which specialises in providing loans to start-ups. Tax credits for research and development also provide critical funding to technology companies.

Investment in advertising technology companies is tougher to attract than in previous years, but digital advertising will be subject to rapid change as technology develops and consumer preferences evolve. Despite the current market dominance by Google and Facebook, new entrants will help disrupt the market and digital entrepreneurs will still be able to secure funding if they can demonstrate innovative technology with, critically, strong commercial potential.