Ad tech company Rocket Fuel sold for a fraction of its peak $2 billion valuation, and it marks the end of an era

When a company that pulled in over $US450 million in revenue in 2016 and over $US95 million during the first quarter of this year suddenly sells for just $US125.5 million, it raises eyebrows.

That’s what happened on Tuesday when the ad tech company Rocket Fuel was acquired by rival Sizmek. The deal appears to mark the end of an era for the ad tech industry, which has been characterised by a massive flood of funding, a proliferation of startups, several rocky IPOs, along with lots of layoffs, pivots and consolidations over the past half dozen years or so.

Here are five reasons why Rocket Fuel (once valued at close to $US2 billion, according to The Wall Street Journal) and companies of its ilk are crashing down to earth.

1) There wasn’t that much tech to begin with

This is an often heard complaint when it comes to firms like Rocket Fuel: that their technology required a lot of people to help marketers use it. And at the end of the day, they just sold ads on other people’s websites.

“They were an ad network,” said David Yovanno, CEO at performance marketing technology firm Impact Radius. “The whole concept of service and tech bundled together is now obsolete. That business model is gone.”

Even as Rocket Fuel made investments in better tech, “they would not not let go of the legacy model,” Yovanno added,

2) The ad business is moving to mobile, where cookies and retargeting just don’t work as well.

“Apps are dying, desktops are dying, and the mobile web is winning,” said Ryan Urban, CEO of the marketing technology firm Bounce Exchange. “That’s a big dent in the business. [Companies like Rocket Fuel] are focused on old ad sizes from the 1990s, those standard banner ads. Those formats don’t work for advertisers and they haven’t adapted at all.”

3) Marketers are screaming for more digital ad transparency

“Rocket Fuel certainly has had a tough go of it in the post ‘black-box’ world,” said Mac Delaney, head of programmatic at the ad agency Merkle. Indeed, over the last year, major marketers have been placing far more scrutiny on where their ads are running (following a flurry of ads spotted in bad places on YouTube) and how they are being billed. “For some time on the buy side [Rocket Fuel was] synonymous with what was lacking in the automated ad buying space,”Delaney said. “[Namely] transparency into tactics and margins.”

“The squeeze on transparency now makes these companies untenable” added Marco Bertozzi, vice president Europe, head of sales at Spotify and a longtime programmatic ad buyer.

4) Giants like Apple, Google and others are pushing for better ads.
As both companies plan to roll out web browsers that block certain types of ads and making it easier to block cookies, that makes life a lot tougher for the Rocket Fuels of the world, say industry executives.

5) There’s a lot less tolerance for high margin businesses in this industry

Ad tech companies are known for passing on very high margins to advertisers, in the realm of 40% or more. That’s no longer tolerable.

“It’s the end of the businesses that got rich through a massive arbitrage and making clients think tech was behind results when really it was just throwing billions of cheap impressions at every problem,” said Bertozzi.

Added BounceX’s Urban: “In ad tech, unless your product is extremely differentiated, you are just middlemen offering middleware with fees, fees, fees. You have no reason to exist.” Especially when marketers can run ads on Google and Facebook without such markups, he said.

Yet there is hope.

Several industry experts say that Rocket Fuel does boast of some solid technology and advanced analytics tools. Merkle’s Delaney noted that the company had made smart investments in machine learning. That coupled with Sizmek’s business could yield some value, especially given the price paid. The industry surely wants alternatives.

“Sizmek purchasing Rocket Fuel is helping to complete a strategic picture of working to become a more meaningful competitor to companies like Google,” said Jessica Peltz-Zatulove, partner at MDC Ventures. “Considering the sale price was almost a 90% discount from Rocketfuel’s 2013 IPO, scooping them up is a smart, efficient move to enhance their data and tech offering.”

NOW WATCH: Briefing videos

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.