The marketing automation market has been garnering a lot of attention recently. Some new entrants have made big announcements of venture funding, while others have decided to take a more organic approach by bootstrapping from the beginning. I’m no expert at Silicon Valley investment strategies, so I decided to take a closer look.
Since 1998, VCs have poured $396 MM into marketing automation vendors.
Why are VCs investing?
The enterprise software market is mature, with several global brands dominating most of the business. Any interested parties face a high go-to-market cost structure, as well as the numerous policies that existing vendors have in place to block new entrants. As a result, venture capitalists have turned away from traditional enterprise software and focused their attention on software-as-a-service (SaaS) companies.
The web-based architecture and low-cost tools have broken down the barrier to entry for new vendors. New entrants are coming in and are aggressively seeking VC funding. Marketing automation is a SaaS market, with nearly every vendor offering a web-based solution.
VC interest was present in the early 2000s, but it wasn’t until recent years that VC investing has really spiked. Why? There are the obvious economic influences. However, marketing automation systems are becoming more robust, offering as many – if not more – features than their on-premise counterparts. Traditionally targeted at the SMB segment, these SaaS companies are beginning to focus on the enterprise, making them a more lucrative investment for VCs.
Where is the money going?
We selected the biggest recipients of venture funding and looked at their funding in relation to their revenue and number of customers. We tried to analyze how effective each vendor has been at turning their funding into valuable returns.
Keep in mind that these numbers are not enough to do a complete evaluation, and some of them have been hypothesized. However, I think we are in the ballpark with our estimates, and we have enough info to do a basic analysis.
Aprimo and Unica led the pack with funding of $76 million and $66 million, respectively. Both presented respectable numbers in terms of customers and revenue. Additionally, these two vendors recently had exit events of approximately $500 million. I wouldn’t necessarily call that hitting it out of the ballpark, but the buyouts were definitely enough to keep VCs happy. I would say their strategy worked out well.
Moving on to Eloqua and Marketo, the recognized leaders in enterprise marketing automation, we see two companies that have raised decent capital and enjoyed pretty solid momentum. I could see them rising in the ranks of Aprimo and Unica fairly quickly. There has been much speculation about one or both of these companies making a similar exit to that of their predecessors. However, based on comments from the executives, the companies seem to be shooting for at least a $1 billion IPO that would allow them to become independent entities.
Silverpop and Genius have gained some significant capital but have been unable to perform as well as Marketo and Eloqua.
IPO role models
A billion-dollar IPO is a pretty grand ambition. So what makes Marketo and Eloqua think they can pull it off? It is likely that their CEOs are looking to model themselves after publicly traded cloud companies that have done it already. Specifically, Salesforce.com, SuccessFactors and NetSuite. We pulled some financials for these three cloud successes to get an idea of what Marketo and Eloqua will have to do to reach the same level.
Each of the vendors has built up impressive revenue through consistent growth. However, the profit margin is the most interesting number. Other than Salesforce, none of these companies is realizing profit. And Salesforce is sitting at a modest six percent.
It’s clear that Wall Street supports the cloud. They have assigned premium valuations to these barely profitable companies. This sends the message that if you want to own cloud computing, don’t worry about your profits. Just invest heavily in marketing and R&D and you will be set. If you look at the numbers, that’s exactly what they’re doing.
Go big or go home. If marketing automation vendors want to own their market and get an impressive valuation, they have to take on capital. They have seen it done before with other cloud vendors, proving that if you raise a lot of money, you can do well.
That being said, there are plenty of success stories of vendors that have gone it alone, such as Pardot and Net-Results. However, when it comes to owning the market, can the bootstrappers compete? What are your thoughts?
Lauren Carlson is a CRM Market Analyst at Software Advice. She writes about various topics related to CRM software, with particular interest in sales force automation, marketing automation, and customer service. She is a graduate of the University of Texas with a bachelor’s degree in journalism.