The last decade has been transformational for the global marketing industry, with a new wave of dynamic digital-first martech agencies stealing the spotlight from established behemoths.

Ten years ago, digital’s share of media consumption was just 10%, but as consumers’ screen time has soared, that has grown to more than 60% today. Added to this trend, digital marketing campaigns are typically less expensive for brands to implement than those designed for traditional media channels.

Combined, the shift is driving an uptick in investment activity, with holding companies – known as holdcos - looking to snap up SMEs that focus on monetising data and insights. A prime example was the recent acquisition of Goat, one of the world’s leading influencer marketing agencies, by multinational communications holdco WPP earlier this year.

Goat attracted WPP’s attention because of its impressive growth, driven by huge demand for its specialist data-driven influencer marketing services and supported by our FRP Corporate Finance team, which advised the business on its growth capital investment by Inflexion two years earlier.

Online audiences

The rapid shift towards digital marketing has driven a growing awareness of the importance of attracting an online audience in achieving growth. As a result, M&A activity in the martech sector remains strong.

In 2022, transaction volumes bounced back to pre-pandemic levels, though the mix of transactions has changed somewhat as investors set their sights on more digital and social assets. At the same time, established digital-first agencies are focusing on monetising marketing data and insight.

So, we can confidently imagine that, in the next two years, demand for strategic acquisitions will remain high, from both holdcos and private equity-backed, new-era agencies.

For traditional marketeers who are working to maintain their place in the industry, this means they must either look to acquire complementary offerings, or invest in building their own in-house offer from scratch.

But this takes time, as well as significant investment, and the outcome is never certain, so many will opt to invest in established expertise. Others will see an opportunity for arbitrage with a relatively short payback period.

For private equity investors, there’s an additional upside in that backing a martech agency gives its other portfolio companies access to that skill set too. 

Data drives decisions

There’s a big question mark over how this increased interest in martech firms will impact valuations. While the right assets will continue to attract a decent price, data will be key.

As a result, scrutiny of potential acquisition targets will be far more detailed and diligent, especially when considering conversion metrics. Anyone considering an exit must ensure they have this kind of detailed performance data to hand, or risk being overlooked.

In fact, if I only had one message for agencies seeking investment, it’s to start putting data at the heart of their decision making. After all, brands’ marketing strategies have two main aims; maximise sales and increase brand awareness or reputation.

Regarding sales, the most important KPI for buyers - whether strategic or private equity - will be the cost of customer acquisition, so anyone looking for an exit must be able to show that they can add customers at a lower cost than their competitors.

And for awareness, the key metrics will be those measuring marketing activity reach. In both cases, agencies must put data at the heart of their decision making.

Growing numbers of brands are also seeking to work with marketeers with direct relationships with consumers, which enable marketeers to personalise their activity, rather than delivering a one-size-fits-all campaign, boosting conversion metrics.

Against this backdrop, the next 18 months will be critical for the industry, with three main outcomes.

First, social will make up an even bigger share of overall marketing spend, with in-app purchases becoming more popular as consumers overcome anxieties around both security and service quality, including retailers’ returns policies. Marketeers’ use of AI will also play into this trend.

Second, micro influencers with 10,000 to 100,000 followers will become increasingly important, as they enable brands to target niche audiences more effectively than macro influencers and celebrities, delivering a better return on investment.

Lastly, we can expect to see a significant uplift in online experiential marketing spend by brands, including e-sports and gaming campaigns, reflecting upcoming events including the Olympics in Paris 2024, the Men’s FIFA World Cup in the US, Mexico and Canada in 2026 and the burgeoning profile of women’s sport.

These trends will deliver a surge in investor demand for martech businesses that can prove their expertise in these areas and back it up with hard data.

Those companies that can deliver measurable, cost-effective marketing solutions will likely see an influx of interest from investors, which will help drive up valuations too.