Consolidation Watch — Where to Look for Deals in Local Tech

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pacman1The first half of 2013 saw total investment activity, which includes both M&A and private financing, grow from a year earlier, as the number of deals stayed flat but total reported deal value jumped from $5.2 billion to $7.2 billion over the same period, according to BIA/Kelsey’s Local Media Investment Watch.  Expect to see more deals — both large and small — in the local space as big firms search for a foothold in the industry and host of maturing startups look for the exit.

Here’s a look at two areas where we think deals may be made.

Local marketplaces, and the Uber derivatives
Uber’s success hasn’t gone unnoticed. Over the past 24 months, a number of companies have popped up to automate the way local services, and certain goods, are bought and sold. There’s Thumbtack, Housecall, and ClubLocal for home services; HomeJoy for cleaning your apartment; MyTime for haircuts and other fixed rate services; and a number of more mature food delivery startups that continue to grow across the world.

But consolidation might be around the corner. Last spring, Grubhub and Seamless, the two largest food delivery companies in the U.S. merged en route to a potential IPO. Fast-forward to January, and Handybook, a home services provider, bought cleaning service Exec, just days after Prim, an on-demand laundry startup, folded. Meanwhile, the leadership at Uber — often, held as the standard bearer for the emerging sector — repeatedly hinted that the company planned to move beyond the personal transportation industry into other logistics-driven businesses.

Three key factors are driving the consolidation. As a general rule, marketplaces feed on scale. Buyers look for sellers, and sellers look for buyers, so growth in one segment drives the other. Subsequently, a business building a marketplace needs to two develop and promote two products simultaneously — one for merchants and the other for consumers — making it a capital-intensive process. Finally, the majority of these startups valued their business on umbrella markets like local services or retail, which means that many of these businesses will like move into adjacent services in order to grow their valuation.

Location adtech, and the data play
As brands fold mobile into core budgets, marketers will push the industry to streamline the media buying process, reducing some of the complexity and redundancy that’s developed in the mobile ad tech industry. For the subset of mobile ad tech companies that have focused exclusively on location, this means they either need to sell out or rethink their business for a post-mobile world.

Today, there’s both growth and redundancy in the sector. One startup, xAd, reported last week that it more than doubled revenue in 2013, ending the year at a $65 million run-rate. But, new features like attribution spread quickly throughout the competitive set, and bigger mobile advertising firms have quickly replicated some of their core features.

In many ways, the sector is coming to a crossroads. For those looking for an exit, a handful of newly IPO’d mobile advertising firms will likely become active acquirers, snapping up a location specialists in order to fold their technology and publishing relationships in order to expand their addressable market.

But there’s also a potentially lucrative opportunity for a firm to transition from a media buying service to a data management platform. As I’ve written about before, we will likely see an explosion in the amount of local information that is generated over the next few years, with a plethora of new connected devices measuring consumer activity in the real-world. It’s a competitive and difficult market, but one that will grow steadily over the next decade.

Steven Jacobs is Street Fight’s deputy editor.