E513 | Rich Ashton, FirstPartyCapital: Backing AdTech’s Trillion Dollar Niche

0:00What if the biggest investment opportunity in tech is hiding in plain sight? Global ad spend has now surpassed a trillion dollars, and ad tech is really the software that underpins a lot of that. Despite that, there's only five specialist firms globally that are really focused on this. While hundreds of funds chase fintech, most investors have bought into a dangerous myth. I think there's also been a narrative, which we challenge, obviously, that Google and Facebook are one, and so what's the point? But what if that narrative is dead wrong? Certainly for us, it's not a bad thing that there's not much competition at the earliest date.

0:29Rich Ashton didn't just spot this trillion-dollar gap. He built an army to capture it. Fund One now has nearly 250 investors. We really talk about our network as being our superpower. And now a seismic shift could change everything. Any form of divestiture or opening up of the Google ecosystem, who knows? Tens of billions, if not hundreds of billions of dollars worth of additional value created for other tech companies in the kind of advertising and media space off the back of that breakup. Window is opening. The question is, will you be ready? Look, we're just launched Fund 2. We started to get some decent seven-figure commitments from strategic investors as well as angel investors.

1:05So, of course, we'd love to speak with your audience around first-party capital funds too. Discover why the smartest money is flowing into the space everyone else is ignoring on this episode of the EUVC podcast.

1:21Here's a few words from our beloved sponsor. Make an impact with a bank made for the innovation economy. We always take a relationship-first approach, bringing passion, dedication and unparalleled international connections to everything we do. Our specialised, flexible solutions for founders, firms and funds are built on deep expertise that are designed to facilitate growth and enhance your prospects for success. HSBC Innovation Banking. Connecting you with what's next.

1:54Tear down this wall. It's more than just an alliance. This is a union of values. Let's start acting. This show is not investment advice and the hosts of this episode may be invested in the funds and companies featured. Welcome back everyone to another episode of the UBC Podcast. Your trusted platform, hopefully by now, to champion European mantra and all the LPs that power it. Today, we continue our mission of mapping out Europe's top VC funds with a pitch episode from Rich Ashton of First Party Capital. That was a difficult sentence. Rich and First Party Capital are laser focused on leading early stage deals in ad tech and martech globally, which makes this an episode I obviously love because we have a bunch of sponsors here on EUVC.

2:44So we're thinking a bit about how that market moves. And also, I think all of us are partly in love, partly hating advertising. So for that reason, let's go into a conversation that I hope everyone will enjoy. Rich, you're saying it's a trillion dollar niche. Tell me about that. Yeah, that's right. Thanks a lot for the intro. Great to be on the show, Andreas. Good to catch up. Yeah, so First Party Capital exists to support early stage founders in the ad tech and martech space globally. Personally, I've been financing companies in this space for 10 years. I've worked with about 60 startups and scale ups now across a range of debt and equity financing products.

3:21But yes, the last four years at first party, early stage equity investing and really helping companies scale in this exciting but overlooked sector. Rich, you have a cool story. We know each other okay well, you and I and David, because we have both been leading syndicates for a while. Talk a bit about the community around the fund. Yeah, that's a great question. So we initially went to market in 2021 with an angel syndicate approach. myself and my two co-founders have good strong networks and so we took deal flow to well-known angel investors in our space successful ad trick entrepreneurs and senior executives from big agencies and big media companies and got very good feedback on that deal flow and then launched fund one in august 2021 fund one now has nearly 250 investors which probably makes us one of the biggest lps kind of funds in the world obviously not aum wise but certainly by number of people we invested in the fund and that's super important to us.

4:19We really talk about our network as being our superpower and we do a lot to try and build that community. So, you know, we run our own events and podcasts. We co-founded a female networking investors event and group. And we do a lot to really kind of bring the community together as much as we can. This is true, I'm sure, of a lot of sectors, but media and ad tech in particular is incredibly relationship driven. And so it's very important for us to have this large group of people globally that can bring us deal flow, help us with due diligence, and really meaningfully help companies scale once we've invested.

4:52Beautiful, Rich. Not an easy feat. Shall we pull up the deck and run through it? Yeah, let's move over to the deck here for first-party capital fund two. Fund one was recently closed, about$16 million AUM, and as I say, nearly 250 investors, 17 portfolio companies. So fund two is very much a continuation of what we've been doing over the last three or four years and we really will be that lead investor, you know, pre-seed and seed stage rounds, opportunistically doing series A, but mainly focused on pre-seed and seed. And we talk about this trillion dollar niche. So yeah, global ad spend has now surpassed a trillion dollars and ad tech is really the software that underpins a lot of that.

5:35Despite that, there's only about five investors or five specialist firms globally that are really focused on this. So we think it's a massive market. We know it's going through a lot of disruption and change, but it's very overlooked. Other investors don't like it. And that's, you know, for us, mainly an opportunity. Obviously, it comes with some challenges regarding co-investment and follow-on investment. But, you know, our second fund is a 50 million pounds target size, which will be four times bigger than fund one, mainly so that we can carry on following on much more meaningfully and, you know, leading series A rounds into companies that we've already invested in.

6:09Can you unpack this dynamic a little bit? Because if you look at the numbers, it can make you think, what the hell? One trillion global ad spend, only five specialist funds, 300 billion in fintech as an example, and we have hundreds of fintech funds. So what underpins this dynamic? not to call out just fintech here but clearly it's a very popular uh vc category and you've seen you know hundreds and hundreds i think of specialist funds or fintech focused funds so we think it's odd that there's a roughly a market that's roughly a third of the size but hundreds more you know funds going after it i think there's a few issues regarding the generalist investor perception of ad tech which leads to them either not being that interested or kind of, you know, not focusing on it.

6:56I think the original wave of kind of ad tech 1.0, which probably started in about 2010, was exciting, but quite a few generalists got burned. And some got, you know, made a lot of money as well on big outliers like the Trade Desk and App Lovin'. But there were also a few companies, to be honest, that kind of crashed and burned quite spectacularly. Maybe understanding some of those, you know, firms or partners, you know, decided that they didn't want to do ad tech again. I think there's also been a narrative, which we challenge, obviously, that Google and Facebook have won. And so what's the point?

7:25There's not going to be another ad tech unicorn or whatever. But of that trillion dollars, yeah, the big five platforms are probably 50, 60%. But there's still hundreds and hundreds of billions of dollars a year of ads, but that is going to independent ad tech companies. And so we think that if you know where to look and you know that the right opportunities, then it makes a lot of sense. So we're always trying to bring more co-investors and follow-on investors in and kind of raise the awareness of the sector. But certainly for us, it's not a bad thing that there's not much competition at the early stage.

7:59What do your VC colleagues say when you're talking to those that are journalists or those that may frown when you say you're an ad tech focused investor? What is the typical pushback you get? Is that this Facebook, Google behemoth have taken? That's part of it. I think they also recognize that it's a very complex and quite nuanced space that can look quite saturated from the outside. I think you do really need to be a specialist to understand, to be in the weeds and understand of the 50 companies that might look quite similar, which is really the one to back and why. There's quite a lot of deep technology involved, but as I say, it's still very relationship driven.

8:38You have to have the right network and be able to collaborate with the ecosystem. I think it's quite different to other categories where you can build or more easily can build a standalone software company. In the digital media ecosystem, by the nature of its very complex supply chain between the advertiser and the ultimate media company, there can be dozens, if not hundreds of intermediaries and data companies. So you really need to be able to plug into this ecosystem. So I think for generalist investors, it can seem a bit kind of complex and messy. And it is. But again, for specialists, that's, again, kind of the opportunity.

9:14Can you give some examples of, so maybe first and foremost, if you have this, that's how much of the$1 trillion ad spend is captured by Facebook and Google? Yeah, it's probably about 50%. And then Amazon, TikTok, and a few other big platforms probably capture another 10, 20%. But yeah, we still think that there's hundreds of billions a year that's going to effectively the open web, which means not the big social media platforms and not Google. Can you give some examples of companies that have been accepted either in Europe or other places that have ended up being good VC returning models? Yeah, there's lots.

9:58Since 2021 alone, we've been tracking liquidity events in Europe and there's been$11 billion worth of exit events. And obviously, the last few years haven't necessarily been great, but that's just in Europe alone in the last four years. But some of the biggest standout success stories have been some of the biggest VC returns ever. There's a company called The Trade Desk, which IPO'd in 2016. Earlier this year, the market cap was$60 billion. A lot of generalist VCs have never heard of it. Applovin recently surpassed$100 billion valuation. That's an ad tech business monetizing mobile apps and mobile games.

10:33and you know there's a bunch of companies that went public in 2021 PE is really moving into the space you're seeing a lot of nine figure you know PE deals so yeah there's a lot of activity I would also I do understand that it might be a slightly different flavor of VC and a slightly different sport to the typical Silicon Valley kind of unicorn hunting approach you know we certainly yeah so we there's so much consolidation in the space there's a huge amount of M &A activity. And that generally happens at a price tag of between$50 million and$250 million. And so if you're a large fund and you really are looking for unicorns or decacorns, then it might not be the best category for you.

11:13And we're honest with our LPs about that. However, for us, relatively small fund sizes and backing capital efficient companies that shouldn't need to raise series BCV to try an IPO for a billion dollars should be able to get to profitability at series A. So then we should still be the lead investor, not be diluted, not be at the bottom of a horrible press stack. So if our company has an M &A outcome in the 50 to 250 million range and we invested at a valuation of 2, 3, 4, 5 million, we should be doing really well. But it wouldn't necessarily move the needle for a 500 million or a billion dollar fund.

11:49which makes sense in terms of then explaining why isn't really on the average person's map or just being something being discussed about in the VC circles because typically the conversations publicly are being driven by the major successes and the major funds and the major talking heads. And those are typically from firms that need those platform businesses, those trillion or billion dollar outcomes. which then explains why it's not really surface level conversations that are happening about ad tech. And similarly, given that many LPs don't spend tons of time thinking about venture capital, it also means that it doesn't surface to them oftentimes.

12:36So I imagine that for you, it's oftentimes you really need to break through with this, the whole point that ad tech is actually very investable. And I can definitely see your arguments here. I'd love to ask you, because one thing is, now we spoke about Google and Facebook and so on, there's at least two very big things happening in ad tech, I imagine. One is the potential Google breakup. Let's see what happens there. Could be interesting to hear your thoughts on that. And the other is, of course, AI. Yeah, absolutely. So we've got a slide here, which talks to two of those points and a few others as well that we think are key.

13:12But yes, it was really interesting to see that the Department of Justice has ruled for the second time that Google has been running a monopoly in digital ads. We'll see what the exact remedies are. There's obviously a lot of speculation, but yeah, ultimately, look, any form of divestiture or opening up of the Google ecosystem, which could be selling off key parts of the stack, or it could be allowing third-party ad tech to access YouTube inventory. There's a bunch of different things that could happen, but whichever way you cut it, at some point there is going to be a lot of additional opportunity for non-Google ad tech here.

13:44And that is something that even the more generalist VC or investor community is obviously very aware of. Everyone's heard of Google and knows how big of an advertising platform it is. So yeah, we think that there could be, who knows, tens of billions, if not hundreds of billions of dollars worth of additional value created for other tech companies in the kind of advertising in media space off the back of that break. And how about AI? Everyone is thinking, like we're now thinking, if I'm not doing SEO anymore, am I doing AI engine optimization? Is that what I need to be focusing on? I think we can all see how our behavior on the internet is changing given AI and a completely new search experience.

14:28How are you thinking about that? What are you seeing happening to the market? Does it disrupt this whole thinking around 50 % of the market being captured by very few incumbents? And of course, also what new models arise? But let's start on what happens to the incumbents part. Yeah, it's a good question. And it is definitely moving very fast. We are starting to see more and more companies coming through with those kind of AI native businesses. I'd say a slight word of caution, though. We're always a little skeptical of jumping on the latest bandwagon and buzzwords. You know, we kind of passed on a lot of Web3 opportunities and metaverse ads opportunities a few years ago.

15:04Are you happy about that? Yes, so far, so good on that front. But look, AI clearly is going to be transformative for all industries. I feel like ad tech is already quite advanced in terms of its machine learning capabilities. Obviously, trillions and trillions of ad requests going out all the time and being optimized and then decisioned in real time. So I think, you know, versus maybe other less advanced industries, more traditional industries, there won't be such a night and day shift. But obviously, you know, I think for agencies, that's where the biggest challenge is. For ad tech companies, I think it's generally a kind of net benefit.

15:37I think the media agencies and creative agencies, that's where the real challenge is because they have huge, huge teams, tens, if not hundreds of thousands of people that they're generally higher out to clients on a kind of cost plus basis as headcount, but they're going to, come under increasing pressure to massively reduce those teams, be a lot more efficient. But then they need to think about a whole new revenue model, which leads towards more outcomes and rev share, profit share with their clients probably, and or more of a consultative kind of business model. But I think, yeah, for a lot of the ad tech companies, they're going to be able to adopt it.

16:09And whether that's obviously on kind of creative or media buying, media planning, and new types of measurement, we are seeing a lot of interesting companies coming through. We have a lot of companies that are really data businesses in our portfolio and will be in the Fund2 portfolio where they have proprietary data. And we think that those proprietary data vendors are going to be very valuable to the larger LLMs and bigger kind of ad tech acquirers because ultimately the success of their own algorithms and AI capability is only going to be as good as the data that's fed into it. So, yeah, we're investing in quite a few what we call procreatory signal vendors who have some sort of unique capability to differentiate the LLMs that otherwise might all start to look quite commoditized.

16:56Final point maybe to say on AI is just around that search traffic referral piece, and that's going to be super interesting. I'm sure you're the same, but I'm already using ChatGPT for most of my kind of search queries rather than Google. And I think, yeah, ultimately, you know, we will see a slow decline of display advertising across kind of the broader publisher base because people will just get a lot of the information. So, yes, we are also seeing new companies coming through that are looking to monetize those search results within chat GPT, perplexity, et cetera. So we'll definitely be keeping an eye on that trend.

17:30AI is changing everything. It's so interesting. Everything that has to do with how do you capture people's attention. I can tell you from our side, it's nerve-wracking to be someone publishing newsletters. Because all of a sudden I have superhuman, right? And all of a sudden, all newsletters that I have automatically go into a folder that I only look at if I think about it. You know, I did have a news piece before, or a news folder before, but it was only the ones that I had actually put in there. Now AI just takes everything that looks like news and puts it in there. So it really is. And I'm sure there's going to be a layer on top of it that also says, yeah, you put it in this folder, but this one you open every single time or this one you rarely open.

18:11So I'll just put it in spam for you. So there's a lot of stuff happening there that's very anxiety creating for someone like us. And I'm sure that anyone thinking about ads, because it's in the end about capturing people's attention, are thinking through similar things. What are you most excited about? And I ask you this and I'm always, I don't ask generalists this question typically because analysts tend to be a bit more opportunistic, whereas when you're yourself from the ad business, you truly understand what's moving. And it's always exciting to hear you typically have pretty strong theses around, this is going to be exciting.

18:54And we're very much looking for a company that we think has the right founders to be building in this. Yeah. So there's a category emerging within ad tech that's referred to as commerce media or retail media. And it's the central pillar here, central column here on this slide. So the biggest example, most successful example already is Amazon, obviously massive retailer, lots of other businesses, but they've now got a 50 or$60 billion advertising business. Therefore, the likes of Walmart and Tesco's and Boots and Sainsbury's, other retailers are all realizing that they can make a lot of high margin revenue by placing ads within their e-commerce sites.

19:28But then you've really seen this interesting knock-on effects of Uber, Instacart, JP Morgan, PayPal, Marriott, United Airlines, a lot of these non-traditional media companies with large user bases, lots of rich first-party data are realizing that they can turn what is currently probably a very low-margin business into a very high-margin business by adding monetization of their audiences. Obviously, it has to be done in a respectful way. They don't want to end up with five crappy ads trying to monetize the hell out of every single engagement, but done right, it's going to be a huge driver of value for these companies.

20:03Instacart is a great example. When they went public a few years ago, I think about one third of their revenue was coming from advertising rather than actual food delivery, but pretty much all of the profit. And so that's another interesting trend where a lot of these companies that have raised hundreds of millions, if not billions of dollars to become the next scooter rental app or whatever, realizing that, oh, we need to make money somehow. And so our ads is going to be a huge part of that. So yeah, we're investing in quite a lot of the picks and shovels companies that are helping these retailers and marketplaces and non-traditional media businesses to roll out of that kind of ad-funded piece in the right way.

20:37Anyone who loves ad tech should go and watch the first episode of the new season. I know what you're going to say. What's it called? Black Mirror? Yes. Horrible. To those that haven't watched it, there's a lady who ends up in hospital and then she needs a surgery done to save her brain and then she gets implemented something that ends up being able to turn on advertisements via her. Quite a disturbing thought. It's safe to say we're not looking to invest in anything like that. No, no. Well, you say so. Now, we've spoken a bunch about the market here, and I think it's interesting. I always love talking about it with, as I said, specialists, because this is in the end what you do.

21:32However, I think we should, of course, also talk a bit about the first party capital team. So tell us a bit about why you're the best place to capitalize on the opportunity. Yeah, sure thing. And so, you know, between myself and my co-founders, we've been in the space of 10 to 20 years, respectively. Kieron O 'Kane probably started the first ever ad tech blog and first ad tech events back in 2005. And he's really emerged as one of the main thought leaders, very strong following on LinkedIn and a lot of the events and the podcasts and newsletters that we do. I think it's very unlikely that anyone else would be able to kind of catch up in that regard, just the sheer amount of time and energy we put into it.

22:12Our other partner, Kevin, has successfully launched three ad tech businesses as a founder and now turning obviously to an investor. And he's also been rolling out our venture studio model as well. So, you know, we just sort of eat, sleep, drink ad tech and have done for a long time. So that domain expertise I think is kind of hard to match. And then, as I said earlier, the network we have is amazing really. We're really lucky to have that and we work hard to build that. It allows us to punch massively above our weight for a small team. We have 250 people that are all industry insiders out in market, bringing us deal flow able to help us on due diligence if we need it but then also you know opening doors and helping companies kind of scale as advisors and everything like that we're getting a lot of strategic LPs investing into funds too so quite a lot of ad tech companies media companies hopefully some retailers telcos advertisers and of course those strategic partnerships are going to be super valuable for our portfolio companies in terms of you know commercial growth and hopefully all the way through to acquisition.

23:13So yeah, I think it's quite a unique proposition based on the core team plus the network that we have. Yeah. Let's talk a bit about the network. You have a cool slide in as well. Let's take that as our point of departure. Yeah, exactly. So obviously we've got the core fund, first party capital, fund one, now funds two, which still operate an angel syndicate, allowing people to invest on a deal by deal basis. There's probably 500 people in that. And then, as you can see here, we launched an annual investment conference three years ago, and that's open to the whole industry or anybody, not just FPC investors.

23:47In November, we joined you guys as podcast hosts. So we do a weekly kind of roundup of the latest news, funding rounds and M &A activity. As I said, we launched a female investors networking. our investment associate Jack started an ad tech connect which is a kind of career guidance and mentoring a kind of networking thing for for younger people that are looking to meet and become the kind of leaders of the future and then there's two really interesting additions that I only mentioned briefly in the bottom left of this slide but you know we've just launched our venture studio model as well so previously obviously we've mainly invested in existing companies where founders have come to us with an idea and a product but we're now actually starting to do more venture building work as well.

24:27So we've got a venture studio that two senior kind of executives, industry experts have coming in to co-found and run alongside us, where they'll obviously give idea stage founders access to the right resources in terms of talent and tech and funding to help de-risk and accelerate those businesses. And then the third part of the sort of pillar, if you like, first-party capital, first-party studio. And then later this year, we'll be rolling out first-party finance, which will effectively be our lending business. So rolling out a range of non-dilutive funding options, mainly for our existing portfolio to start with, but then also it will become a wider offering.

25:04And we think that'll be really key so that we can provide that non-dilutive kind of alternative funding to our portfolio companies as they continue to scale. So yeah, really doing as much as we can to kind of provide all of the tools and resources and types of funding that these companies need to be successful. That is cool. I love all these community models. We could talk for ages on it, but let's not. Let's rather go one second just before we close here to a few of your portfolio companies. I always think it's exciting to see a bit what the companies you've invested in already are doing. Yeah, sure thing.