When the news broke early this year that Twitter had, for the first time, turned a profit, many outside certain industry bubbles thought it staggering that such a huge and ubiquitous organisation hadn’t been covering its costs for years.
Of course, its valuation was built on potential, and that potential was grounded in data. Like the majority of social media platforms, advertising is the core revenue generator, and more importantly how personal data gathered on these platforms allows advertisers to target key audiences on a much more granular level than traditional demographics.
What’s more, this is the model of many digital tech companies, and the management of, and application of personal data has been a booming business for years, as investors recognise the value in leveraging people’s behaviours and attitudes, even if it’s not driving a profit just yet.
However, this drive for consumer data and the investment in digital tech and social media platforms has had a knock-on effect on other industries, not least the market research and data analytics industry. Market research has an almost symbiotic relationship with the tech industry. On one side research is a tech driven industry, often using leading edge technology such as AI, automation, and voice technology to drive innovations in data collection and analysis.
At the same time, market research has provided decades of analytic expertise in turning that raw data into something useful. Consumer data isn’t collected ready for use. It arrives in a torrent, an unstructured digital wave, high enough to drown any statistician. If data is the new oil, then market research and data analytics are the fractional distillation that makes that crude oil useful.
So, it’s no surprise that investment is flowing into the data and insight industry. What might be surprising is that, according to Cambiar Consulting’s Capital Funding Index in 2018, $2.891 billion was invested in the data and insights industry, either through venture capital or private equity. This was an increase of 27% compared to the previous year, and has been growing by at least 20% year on year since. And of the 173 investors in research and insights in 2018, over 90 of them are completely new to the sector. Market research is now receiving funding comparable to sectors such as Energy and IT Hardware, with recorded investment of $1.75 billion and $2.28 billion respectively according to PitchBook data.
Where’s the money going?
It’s worth noting that the significant increase in funding certainly isn’t because VCs are snapping up research companies left, right and centre in a web bubble 2.0 style. Cambiar tracked 67 discreet investment transactions in 2018, down from last year’s 86 transactions. But those 67 investments resulted in 27% more investment in real terms. Simon Chadwick, managing partner at Cambiar, said “Given that we believe we only see about 80% of the transactions that actually take place (many are unannounced or do not reveal the amount invested), this would suggest the total inward flow to have been $3.6 billion in 2018 – the second best result we have seen in the eight years the index has been in existence.”
As is the pattern in a maturing market, just seven of these transactions accounted for two-thirds of the money invested. In fact, one company, Sensetime, a Hong Kong based ‘unicorn’ received two investments of $600+ million each from Alibaba and others. Additionally there was more series C phase investment (investors pumping money into a company showing real signs of sustainable success) than at any time in the last five years.
At the same time we also saw more series A and B funds being invested than at any time since 2014. “What this suggests is a resurgence of interest in our sector in terms of funding initial start-ups and early stage companies. It can be read as a sign of confidence in the sector among the investment community based on previous results,” says Chadwick.
One of the most interesting – and provocative acquisitions in recent times was SAP’s purchase of Qualtrics. $8Bn was spent on a company which only generates USD$360M of turnover and does not have a consistent profit track record. This has on the one hand, supercharged both valuations of, and expectations in, the tech sector, while also sounding a warning note to other investors about anticipated returns. Although, it’s worth noting that the Qualtrics acquisition was not included in the Cambiar Index since it was an outright acquisition and not an injection of new funding,
The relative interactions of the tech, data and market research industries can be seen as a Venn diagram. The tech industry on one side, and the market research data and insight industry on the other. In the middle is the convergence; tech companies built on a consumer data model, and research companies that are collecting and analysing consumer data through innovative technological solutions. It’s at this convergence that the sweet spot lies for investors.
Impact of data regulations
Data and insight shows all the hallmarks of a maturing market, one that continues to show great potential as the tech and research overlap gets bigger. However, those that have tracked the growing challenges and legislations around data regulations might view the area with a little uncertainty. With GDPR being introduced in the EU last year, and it’s use as a template for other data regulation in markets such as Japan, South Korea and now California, what might be in store in the future?
Interestingly in the area of data regulation there are less similarities than you might expect. The data and research industry has been collecting and storing consumer data for decades, and although the sector is technically self-regulated, a series of checks and balances have grown up through the heritage and history of market research. Industry associations, nationally and globally, often ensure that their members are signed up to a strict set of codes and guidelines that ensure that consumer data is treated with transparency, consent and respect. What’s more, these same associations are often in close contact with legislators to safeguard the ability to collect consumer data whenever new regulations are being drawn up.
Unfortunately the tech industry, and also broader business, do not have the experience in the treatment and storage of consumer data, and as such are still struggling to create a similar set of checks and balances in the face of growing pressure from governments to treat personal data with more respect.
This could mean that investing into the market research industry, a sector that is driven by technology and provides the expertise to not only keep data safe but make use of it, could potentially be a safer bet than a data driven tech company. Data and insights provides the best of both worlds with an added safety net. The sector is certainly maturing, but it still has a lot of potential left.