I had an enjoyable panel discussion with several highly accomplished industry operators and investors at last month’s Ramp2017 event. One discussion topic was of particular interest to me: the adversity in the AdTech industry from an investment perspective. While I recognize the challenges, I personally remain deeply interested in this area.

While MarTech has become the more popular nomenclature, in reality, most companies in both AdTech and MarTech are addressing similar problems. As Shakespeare once said, “a rose by any other name would smell just as sweet.” So what I’m discussing encompasses both AdTech and MarTech.

Let’s start with the main challenges. Lots of investors have lost money in private and public markets. On the public market side, in particular, investors have been disappointed with RUBI, TRMR, YUME, FUEL, MXPT, companies who have a combined enterprise value of under $500M. There’s tremendous fragmentation in both AdTech and MarTech, creating competition and confusion. And Facebook and Google account for between 75% and 85% of all digital advertising growth.

Yet I believe the declarations that AdTech is dead are greatly exaggerated. First, the industry is still large and growing. According to the IAB, U.S. digital advertising revenue in the third quarter of 2016 was the biggest ever at $17.6 billion, up 20% from the same period in 2015. And there is a continued massive shift in how consumers consume media, so I believe this trend will continue.

So what separates the beleaguered companies from the thriving ones? I believe it’s important to realize the following challenges:

• Avoid reselling media: it is relatively easy to generate revenue by reselling media bought through exchanges or direct relationships. But as we’ve seen with every ad network, DSPs and SSPs, this is not a sustainable path to a great business.
• Low gross margins: closely related to reselling media is the gross margin issue. Between paying out to your media partners, and covering actual costs of running your business, the low gross margins will make long-term profitability unlikely.
• Lack of predictability: public market investors want to see predictable revenue growth. Yet for businesses based on selling advertising campaigns, there is a lot of variability from quarter to quarter, insertion orders get canceled all the time, and even programmatic campaigns fluctuate greatly.
• Limited market size: we’ve seen many profitable niches in online advertising. But some of these niches are temporal, like social advertising; others are too small, like vertical ad networks. Eventually, the profit opportunities in these niches dry up, forcing these companies to expand into markets where they don’t have a competitive advantage. As a result, their growth falters.
• Wrath of the gorillas: in the ever-changing technology landscape, it’s hard to pin down when and how to play by “the rules” dictated by industry gorillas. Right now, Facebook and Google are the gorillas in advertising, and companies caught in their crosshairs have often failed to survive. The reality today for adtech companies: figure out how to play nicely with Facebook and Google by complementing their services, being critically important to them, or staying out of their way.
• Lack of differentiation: almost every adtech company has the same messaging. “We connect marketers to customers!” “We offer a platform for real-time marketing and bidding!” “We provide behavioral targeting, contextual targeting, and retargeting!” It all sounds the same. Like in any market, adtech companies must clearly define and communicate a unique value proposition that resonates with investors and customers.

On the other hand, there are still ample opportunities for MarTech/AdTech companies. To pursue them, remember the following:

• IPO alternatives to success: startup culture is often fixated on the IPO as the only or best path to success. But plenty of acquisitions have dwarfed lackluster IPO exits. Adtech/Martech companies Applovin, Krux, LiveRamp, and Vidible, for example, found a niche, built sustainable businesses, grew rapidly, and were eventually acquired for large sums. A key factor to the success of these companies: not raising too much capital, resulting in great return for both founders and investors.
• Unassailable technology: adtech is hugely complex. The technology is very difficult to build, given the massive scale required by today’s infrastructure. But difficult is not the same thing as impossible, as we’ve seen from companies who have accomplished this feat. And to build unassailable technology, startups must hire remarkable engineers.
• Adjacent markets: there are plenty of opportunities for adtech companies beyond pure-play advertising. Adjacent markets such as martech and salestech represent opportunities for adtech solutions to provide additional functionality in marketing and sales organizations. Krux, one of my portfolio companies which was recently acquired by Salesforce.com, evolved from a DMP solution for advertisers to additionally bring value to data-driven marketers.
• Unsolved industry problems: every founder knows that a startup is only as valuable as the solution it provides. And currently, there are plenty of problems in advertising that need solutions. Attribution in general, the TV and digital attribution divide, black boxes, ad blockers, proprietary data sets are just a few obvious issues that have yet to be solved.

So for me, AdTech and MarTech are far from dead. I welcome the consolidation, the cleanup, and the decrease in funding. The industry has experienced a market correction in which lesser-viable businesses have been meted out. AdTech companies that have met their demise share commonalities that serve as lessons for existing players and new entrants. To survive and succeed, AdTech companies must avoid the missteps of these beleaguered businesses and focus on the big opportunities that remain.