In the wake of Google’s acquisition of Launchpad Toys and YouTube’s recent (and probably related) announcement of their kids product, the ‘kidtech’ space is clearly heating up.

And think about it: Europe has been responsible for a disproportionately large number of kids startups in the past (Rovio, Outfit7, Zepto Labs, Mind Candy and so on) – almost all of which were content-based.

And yet, despite the kids audience driving some of the largest entertainment revenue on the planet (e.g. Frozen), the digital kids space is surprisingly under-developed. Although there’s been quite a bit of VC investment into kids content (Mind Candy, Stardoll), there has been significantly less in platform and tools companies.

Partially, this has been due to quirks of VC behaviour: many professional investors are reluctant to inject capital into sectors where there hasn’t been a history of exits. The lack of direct experience with these apps and services – most VCs are not children – has also been a factor in evaluating opportunities.

This is about to change. There is a new generation of kids startups focused on platform, tools and adtech fuelled by a broader structural shift in the sector. Occasionally referred to as ‘kidtech’, they are tackling opportunities in the kids market that are worth billions of dollars in the adult sector.

An unusual disruptor: government legislation

Over the last 2-3 years, the entire digital kids market has been reshaped by kids data privacy legislation led by the US (but being rapidly followed by the EU). The latest version of the Children’s Online Privacy and Protection Act (COPPA) prohibits behavioural online advertising – the proverbial backbone of the mainstream online ad market – almost entirely.

This isn’t mere posturing; in the US, the FTC have handed out millions of dollars in COPPA fines to companies such as Yelp and Path, while others like Marvel, Topps etc. have been singled out for investigation by lobby groups. To wit, the EU is likely to follow the COPPA standard fast with an equivalent due in 2016 as part of the Data Protection Directive.

Going one step further, the EU plans to fine companies up to 5% of revenue for infractions. The writing is clearly on the wall. Companies like LEGO, Mars and others have already adopted COPPA as a global standard with many more contemplating similar strategies.

This doesn’t just impact adtech; there are restrictions on user registration, CRM and major challenges for user experience. In effect, an entirely new layer of kid-compliant technology is now required. This new set of standards is enormously disruptive for existing companies and is one of those rare windows which presents a huge advantage to new entrants.

There is a wall of money waiting for the companies that get this right.

At the same time, Internet giants are finally waking up to kids

An on/off topic in boardrooms for the last couple of years, it’s becoming clear that the major Internet companies are by now taking the kids market seriously. Google appears to be furthest ahead of the pack with their strategy that includes YouTube Kids (which was announced at Kidscreen Summit this week) and a more general kids offering the company spoke publicly about late last year. They also just acquired Launchpad Toys, which sparked a lot of speculation.

But Google is not alone: Amazon have been extremely active in commissioning kids content for their Prime service and Twitter launched Vine for Kids earlier this year, for example. And of course, it’s impossible to ignore Apple, whose creation of the Kids Category has been a critical validation.

There are two broad agendas at play here. Firstly, these companies are desperate to ensure that their consumer-facing products remain relevant for the next generation of Internet consumers. Facebook’s gigantic WhatsApp acquisition is the perfect illustration of this.

Secondly, they are all eyeing up the enormous kids ads market, which has been largely held captive by the TV companies. It’s worth diving into that a little deeper.

The big prize? Advertising

Despite declining TV views – to illustrate: viewing figures for Nickelodeon are down 20% year-on-year – and massively increasing digital growth, the proportion of ad spend across digital platforms in the kids space remains bizarrely small (approximately $700 million in the US and UK).

The chart below highlights the imbalance compared with every other audience vertical:

kidtech 17 bn gap

Because of the lack of VC-funded companies in the sector (especially adtech), there has been a limited pull-factor at work for those digital budgets. Although TV remains a powerful factor in the kids market, clearly this imbalance is going to change fast.

Already kids brands are doubling and tripling their digital ad spend for 2015 and it seems highly likely that kids digital ad market will be a $2 billion space inside two years driven by the availability of kid-safe platforms from a new generation of startups as well as the increasing activity led by Silicon Valley.

But the importance of this is beyond the ad companies. A buoyant ad market in any sector is a huge catalyst for the emergence of new companies and unlocking the digital kids ad market will fuel the general ecosystem in this space.

Who are the kidtech startups to watch in Europe?

The lack of historic investment make the interesting startups in this sector relatively easy to spot.

Unsurprisingly, many have grown by tapping into the burgeoning angel sector across Europe. Don’t be surprised if several of these raise large venture rounds or get acquired in the near future.

Osper: A kid-focused payment platform founded by Alick Varma (ex Spotify). Backed by Index Ventures.

Hopster: Founded by an ex-Viacom exec, Hopster is a Netflix-like service for kids which is growing rapidly in the UK. Backed by Sandbox and several high profile angel investors.

Kano: Backed by Index Ventures, Kano is a hardware computer kit for kids founded by Alex Klein.

SuperAwesome: An ad platform built for the kids market. Becoming the standard kid-safe adtech of choice for both advertisers and developers. Backed by angels, Inspire Ventures and Hoxton Ventures.

(Disclaimer: the author of this guest post is CEO of SuperAwesome)

MakieLab: 3D printing platform which created the Makies 3D dolls brand – now working on follow-up brand. Backed by Sunstone and Lifeline Ventures.

Teddy the Guardian: Croatia-based medtech-for-kids startup which uses a teddy bear to detect a child’s health. Backed by UK angel investors.

Crisp: Not a startup but worth mentioning. The leading community moderation software used by most major kids virtual worlds.

Maily: Created by an ex-MIT student, this is a fresh email platform designed for kids.

(Disclosure: Tech.eu co-founder Robin Wauters is an advisor to and tiny shareholder of Maily)

Storytoys: Growing digital book publisher targeting children of all ages

My educated guess is we’ll see a lot more of these as the kidtech space continues to heat up.

Featured image credit: Matthew Cole / Shutterstock