The UK ad tech industry is a hot bed of innovative talent. So why is homegrown funding so hard to come by for its ad tech companies? ExchangeWire talks to Nick Moutter (pictured below), CEO and co-founder of Admedo about how the risk aversion of UK venture capitalists results in a lack of support for UK ad tech startups, versus their US counterparts.

Interest in the ad tech market is strong; AOL recently purchased mobile ad tech provider Millennial Media and US media giant, GroupM, acquired London-based programmatic company The Exchange Lab late last year. 

But activity in the US consistently outpaces the UK — even successful UK-founded companies such as OpenX are being forced to cross the pond to accelerate their funding, a tactic that is clearly working given their recent announcement of 40% growth year-on-year and the generation of £140m in net revenue in 2015. 

The position of UK ad tech companies is not helped by negative publicity, which has earned the industry a negative reputation. From the poor performance of companies such as Rocket Fuel, to the much talked-about and overhyped issue of ad blocking, as well as several failed IPOs, media coverage has focused heavily on the challenges of ad tech, which has consequently given local investors an aversion to the industry.

It is clear that UK businesses are undervalued and underfunded in comparison to their US counterparts. So what is at the root of this issue? 

When a budding young company starts to gain momentum, securing series A and B funding is the obvious next step. In the UK, the flow of such deals not only appears slow when set against US transactions, but the average deal rate is also smaller. In a recent interview, Leo Seigal, UK entrepreneur and founder of Prizeo, expressed his dismay at the UK VC scene: “It’s only now that I see how far behind the attitude to entrepreneurship is in the UK […] we raised USD$2.5m (£1.7m) at a USD$10m (£6.9m) valuation with Prizeo [in the US] when we’d barely done anything […] valuations in the UK are just tiny.”

For example, progressive ad tech provider Strikead had to travel across the Atlantic to make their name, establishing their core business in New York and eventually finding a buyer in US open ad management company Sizmek. But dynamic UK ad tech businesses do have the value and potential required to attract financial support, just not from our own VCs — funding from US investors for London tech firms hit a record high of more than USD$795m (£555m) in 2014.

Why then are VCs failing UK ad tech businesses? The explanation lies in the fact that UK venture capitalists do not live up to their name – they are more cautious than courageous, which means that up-and-coming ad tech start-ups do not receive the support they need to succeed. In contrast, investors in the US embrace the spirit of true financial venture — providing resources that drive the success of young companies and accepting that each deal comes with potential risks.

Much like our banking sector, UK VCs – as well as our government – are prone to risk aversion. Bound by restrictive red tape and government legislation, they pursue deals that offer a fast return and are therefore unlikely to provide funding for startups where early dividends are not guaranteed. From the vehicles through which VCs raise funds — Enterprise Investment Schemes (EIS) — to tax saving mechanisms — Venture Capital Trusts (VCTs) — every UK system comes with heavy regulations, due diligence, and a lot of paperwork. For many UK investors, this makes ad tech seem like a risk not worth taking, when in fact they are missing a lucrative opportunity.

The environment in the US is very different; financial systems are structured to support businesses – particularly start-ups – and fuel productivity that feeds back into the economy. The government facilitates growth by making larger funding amounts available in less time, as well as encouraging a vibrant IPO market that keeps supply and demand flowing for investors.   

As a result, US firms are at a distinct advantage — they can hire greater numbers of technical experts, which increases capacity, drives technological development, and ultimately ensures business growth. UK ad tech companies are unable to compete and many flock to the US in search of better opportunities; the British Consulate in Silicon Valley receives almost 300 requests to move each year.

But it takes more than just decamping to US soil to make it big in ad tech. The US can amplify the size of companies, but there are two crucial areas in which UK ad tech businesses lead the market — agility and tenacity. In a smaller marketplace, with fewer funds to go around, companies need both a great idea and the determination to keep pushing until it succeeds. They must also quickly embrace new technological developments — an ability the UK ad tech scene demonstrated with its ready adoption of programmatic and the successful switch from ad networks to automated trading.

UK publishers also led the way in the adoption of data management platforms (DMPs) to better segregate and realise the value of their audiences. UK-founded Skimlinks, for example, have become the frontrunner of digital content monetisation and attracted interest from a range of international backers, including Greycroft in the US.

Perceptions of investment are brighter in the US; with access to larger funds, VCs can afford to give young companies the resources needed to quickly demonstrate their value and provide tangible ROI. They can also corner other markets. US companies are an increasingly familiar presence in the UK ad tech scene and they are proving to be tough competition for homegrown businesses. With fewer resources to attract talent, negative press and a government that hinders investment, UK companies are stuck firmly behind US players that can outprice their recruitment efforts and provide superior functionality thanks to enhanced financial support.

So, while UK ad tech firms struggle to secure a deal, US businesses win sizeable investments and British companies are increasingly turning to the US in frustration. For the UK ad tech ecosystem to compete, VCs must re-examine the way they operate and learn from the US — adopting not only its methods but also its attitude.  

The UK ad tech scene is thriving and excellent investments are there for the picking. Contrary to VC and government perceptions, ad tech acquisitions tend to provide much higher multiples of revenue on valuation due to the value within the IP, making the industry an ideal investment. With fewer restrictions and a greater entrepreneurial spirit, UK VCs can help to close the divide, building a buoyant marketplace where homegrown talent can develop and lead the way in the global ad tech market.