Terence Kawaja from LUMA Partners, an investment bank, has some very insightful comments around current ad tech valuations. It wasn’t too long ago that everyone was claiming that the ad tech party was over, citing poor IPO’s by Millennial Media, Tremor Video, and YuMe. But fast forward to today, and you can point to successful IPO’s by Rocket Fuel and Criteo along with some high profile acquisitions (Adap.TV by AOL, and MoPub by Twitter), and say that the party is back on.
LUMA Partners’s analysis shows that forward revenue growth and forward revenue multiples are highly correlated, which demonstrates investors premium on growth. However, it’s the “valuation vectors” that put additional context around different valuations, depending on the business models. For example, “Network 1.0” companies such as Tremor Video (campaign-based models serving as middlemen between advertisers and publishers, and earn profits from the spread between media bought versus sold) trade on a lower valuation vector, 2x-4x forward revenue, than “SaaS” companies such as Marketo (contractually recurring monthly software fees with no regard to media, which is the most predictable), that trade 8x-15x forward revenue, with the slopes reflecting scale and operating leverage.
From a deal perspective, this analysis is interesting and and suggests that companies can use M&A to improve their position, pointing to ValueClick’s acquisition of Dotomi at ~5x forward revenue (a comparable of Criteo) as improving its positioning, and Millennial Media’s recent acquisition of JumpTap (~4x forward revenue) also helping its valuation.
The post from Re/code by LUMA Partners can be found here with the complete SlideShare below