Challenges of investing in marketing technology companies

Martech startups make up a fair chunk of the dealflow at Innovation Nest. Out of the 15 investments we have made so far, 4 have been into marketing technology companies. It is likely that this ratio will increase in 2015. Our focus on B2B SaaS limits the number of deals we look at, giving martech startups a significant advantage.

Nowadays all marketing technology companies are cloud based and ofcourse business facing. This makes it very easy to benchmark them against each other. They focus on the same key metrics like MRR, CAC, LTV, CHURN and follow a very similar path to growth.

I had an opportunity to look at a fair number of these companies and a chance to work closely with some of them. This experience led me to pose these questions:

1. these companies often start as a single functionality app — how do you assess the potential to grow into a large business?
2. there is a defensibility problem — the tech behind the app can be easily copied. How do you fight competition?
3. each category is full of similar products. There is often a notion to copy the core functionality and offer it for a fraction of the cost. How can these products differentiate?
4. the more innovative the product the harder it scales. Marketers who are the main users of these marketing apps, need a lot of time to train, familiarize and adapt. How do you cross the chasm?

The Marketing Technology Landscape, carefully crafted by Scott Brinker shows how complex this ecosystem really is. There are almost 1 000 different products that a marketer can use to form a marketing stack.

The same complexity is experienced by early stage VCs who are trying to invest in the best martech startups. We are all hoping to get into the next Hubspot or Zendesk or Criteo for a European success story. Although martech is one of the hottest themes for VCs, the “unicorns” are very rare. Many of these startups get acquired very early before they can reach any meaningful scale. There is a legion of big publicly traded companies who are buying these martech companies to fill gaps in their marketing clouds.

I few days ago I asked this question on Quora:

What are the leading marketing technology companies out of Poland?

I wanted to find out if there was enough dencity of martech startups/companies. As it turns out Polish entrepreneurs are pretty active in this segment. You can find interesting Polish products in most of the leading categories of martech. One of the products worth mentioning is SalesManago. It is a marketing automation suite, which is growing very fast in number of served companies and revenue. Eventhough SalesManago is a late starter in a very established category it has managed to stake a claim in marketing automation land. Mostly due to the fact that it focuses on ecommerce rather than B2B as most companies like Marketo or Hubspot.

You can probably find many companies similar to SalesManago across Europe. This makes the whole martech market even more interesting from a VC perspective.

Coming back to the challenges. I think that martech is different from most investment themes. Trying to build my own “playbook” I came up with these points:

1. it is not a winner takes all market. There might be many winners in a category because every marketer is different. Each organisation is unique. This allows for an array of custom marketing stacks, where the marketer will choose software to fit his individual needs.
2. marketing processes are not universal. It is not like messaging or marketplaces were small and large organisations can coexist. In marketing a small ecommerce site will have very different needs than a large brand serving millions of customers. These leads to many cracks to fill.
3. instead of chasing “unicorns” it might be wiser to focus on supporting businesses “small” but clear value proposition.
4. there might be many martech startups which exit in the $50M–$100M range. The business model behind these companies is very predictable and can be easilly projected/benchmarked.
5. martech is not a Silicon Valley domain. Marketing technology is more democritized in terms of geography. Even in the US alone, leading martech companies are scattered. This might be a huge opportunity for startups from many different hubs around the world.
6. the market is big enough to take in multiple leading products in one category. There are more than 200M businesses around the world, and all of them will rely on some sort of marketing technology in the future. This trend will be strengthen by growing ecommerce, lead generation, and digital goods/services.