Perspectives: Opinions from our network of advisors, investors, operators and analysts on the risks and opportunities they see.

When Sizmek filed Chapter 11 in late March, concerns expressed privately for years by many investors in the ad tech space broke into the open: Sizmek was a Frankenstein’s monster, a dead man walking.

Sizmek’s stroll through the graveyard ended on March 29 when its primary lender, Vector Capital, and the group that owns Vector’s debts, Cerberus Capital, balked at further support and seized control of the company’s bank accounts. The case is pending in the U.S. Bankruptcy Court for the Southern District of New York.

Attention has now turned to how Vector, a VC firm with a long history of productive startups, could have made such a mess of it. What could Vector have been thinking when it paid $122 million for an already struggling Sizmek in 2016, then literally added Rocket Fuel to the pyre?

Rocket Fuel, an advertising firm that IPO-ed in 2013, was in the midst of a seemingly inexorable slide in share price when Vector ponied up $125.5 million, took it private again and added it to the Sizmek stack in 2017.

Frank Barbieri, a veteran investor and executive in the ad tech space, founded and led the ad tech pioneer firm Transpera to a successful exit, and later helped take public another one, YuMe. Now an angel investor and startup advisor, Barbieri says the sad tale of Sizmek’s demise contains lessons for tech investors. “When hedge fund managers who do not have domain expertise weigh into an industry, it’s fraught with peril.” Barbieri spoke to Karma Contributing Editor Michael Moran.

Michael Moran: Everyone’s got 20/20 vision in the rear view mirror, and there’s suddenly a lot of public criticism of both Vector and Sizmek’s management in the wake of its bankruptcy filing. Was this failure really so obvious?

Frank Barbieri: In a word, yeah. When they [Vector] bought Rocket Fuel everybody in the industry was scratching their heads. Rocket Fuel was a “catch a falling knife strategy.” The company was in disarray, It had become known for its questionable traffic and it was going to be a very, very hard turnaround. So we were all scratching our heads and everyone in the industry thought. ‘Well, they must know something we don’t know.’ It turns out they didn’t. So Rocket Fuel acted like a sea anchor – a complete drag on Sizmek. It was just mystifying and I think this just goes to show that when hedge fund managers who do not have domain expertise weigh into an industry, it’s fraught with peril. I think they could have had independent third-party operational experts in the ad industry really guide them on what the value was of Rocket Fuel, which was essentially zero. But if you look at the financials only you might see a strong balance sheet, an ability to generate reasonable cash flow by cost cutting and a chance to turn it into a positive contribution that you could then package up and sell. What looks good on paper can be exceptionally hard in execution. That’s where knowing the space better would have paid off.

Michael Moran: Let’s talk about ad tech generally now. What is the feasibility of small independent players surviving in this space given the DoubleClick lock on the top of the market and that increasing the big players, Google and Facebook, are Hoovering up all the ad inventory? Is there a way forward for that kind of independent smaller innovative firms?

Barbieri: There is and I think the key is that you’ve got to be independent and innovative. I think Sizmek probably checked off a few of those boxes and Rocket Fuel simply did not. You know the ad buyers in general are dying to buy something other than Google and Facebook. They don’t want to be shackled to the duopoly of players, who have a lot of leverage over pricing and distribution. So there is a lot of opportunity with ad buyers because they want to hear compelling stories, they want to try different platforms, they want to bring uniqueness differentiation to their customers and clients and you see that with successful ad tech and martech companies. If you look at what PebblePost [full disclosure: Barbieri recently left his job as chief development officer at PebblePost], that is a different take on how to efficiently and effectively acquire customers. If you look at what some of the DSPs, like The Trade Desk, are interesting. If you look at other firms — Tapad did it fairly effectively. So there are pockets of competition that the buyers are very willing to join. But if you’re building a direct analog to what Google and Facebook can offer, which RocketFuel was trying to do, you’re really stacking the deck against yourself.

Michael Moran: Another firm that had some success early on was the French ad tech Criteo. They IPO-ed way back in 2013, and it was one of those offerings – maybe a rare one – that seemed to go well when others sank like a stone. Now we’ve recently seen Criteo’s stock price take a dive. What’s behind all this?

Barbieri: Criteo’s struggles are partially attributable to Apple’s policies on Safari browser and there’s more of that coming. [In 2017, Criteo’s retargeting model took a hit when Apple’s Safari browser introduced a Intelligent Tracking Prevention feature to limit such activity. Google’s recent announcement that it is considering similar privacy changes for Chrome cookies sent Criteo shares tumbling]. But the interesting thing is that some of these third-party platforms, like Criteo, like PebblePost, that are willing to operate as marketing technology tools for brands vs. first party sellers of audiences for brands may actually have a leg up and I’ll explain why. Let’s take Facebook versus a Trade Desk, which is a buy-side marketing technology tool. Facebook is selling audiences that they own. But Facebook is going to start to face steep challenges with the growing regulatory environment around personal privacy. They will have to start getting consent from their users for the ability to use data and target advertising. That consent for a platform like Facebook will have to be very clearly stated, it has to be understood by the user and is going to be hard for them to collect the amount of data that they’ve historically been able to collect. That’s going to diminish their opportunities to service brands. Take Procter & Gamble for instance.

A marketing technology platform like The Trade Desk will use data direct from the brands themselves. And I think there’s a much higher likelihood that users will consent to a brand that they trust using their personal data rather than a third party like Facebook. Brands for instance could offer promotions, club memberships, or simply say that you get a 10% discount on your next purchase for giving data consent. If you are sitting there and you get a pop up on your screen that says, “Facebook would like to share your data with advertisers. Please click below to consent” What would you do? You would automatically click No. But if you’re on the Tide site from Proctor and Gamble and the pop up comes up and says “10% off your next purchase if we can send you emails and coupons,” A higher percentage of consumers would. They will click thinking: “I am in! I like this brand, I don’t mind sharing my data with them if I’m getting something in return. I trust them.” I think you’re going to start to see a huge shift in the data footprint from third-party platforms that aggregate audiences like Facebook to brands and independent technology providers of the world. I think that’s a big opportunity.

Michael Moran: Will that continue to create an environment of care and feeding for the smaller players that are mobile and are nimble enough?

Barbieri: I think so. Players that draft behind brands and present a toolset for brands will benefit. The coming data and regulatory wave is going to play in martech platforms’ favor and it’s going to create opportunity. The one who will suffer is likely Facebook. Think if you’re an executive sitting at P&G, thinking, “Do I let Facebook manage my customers’ data or do I want to manage all my customers data myself?” The decision is a no-brainer. You want direct-to-consumer relationships, you want to be able to manage and use the data yourself, you want consumer content and trust. You want a consent management platform that you own and operate. Then when you advertise you want to bring that data to inventory pools with strict and rigid use guidelines that do not share that data with third parties. That’s the goal for the brands. It’s a huge question mark whether they can be successful. A lot of them have failed in the past trying to do big technological implementations. There’s a reason why Facebook is so successful. But the incentives are such and the regulations are such that I think there will be expanding opportunity for brands and for marketing platforms that service brands.

Michael Moran: A lot of people are talking today about regulatory risk with regard to data and personal privacy. But talk is cheap. Do you think we’ll see something like GDPR in the US anytime soon?

Barbieri: Absolutely. I mean we’ve already seen GDPR obviously but the CCPA[California Consumer Privacy Act] is coming in 2020. That is going to be the next big shift for the ad industry in North America. But having privacy legislation come from the states – there are 50 of them remember – is a problem. We’re going to see a crazy quiltwork of data privacy regulation and I don’t think that the Trump administration has the wherewithal to try to either prevent it through the courts or coordinate it through Congress and the Commerce Department. I think it’s very complex for the next wave of advertising and marketing technology companies to manage what will be this quiltwork of privacy regulations. It’s really begging for a federal solution. But the chance of the house and the senate agreeing on a bill that the president would sign in the next 18 months is practically zero.