Martech vendor investment forecast: Sunny with just a few ‘clouds’

A powerhouse panel of marketing technology investors came together at the 2017 San Francisco MarTech Conference to discuss and debate the future of the marketing tech investment landscape. Moderated by Scott Brinker, the panel continues to be bullish on the future of martech.

Why? A few reasons:

1. Marketing is becoming an agile discipline, and companies are investing in tech to keep pace with changing customer habits.
2. It’s marketing’s turn: the marketing organization is the last business function to be automated.

For background, the panelists were seasoned martech and technology VCs who have invested in a broad spectrum of tech companies. The panel was comprised of Ashu Garg, general partner at Foundation Capital; Doug Pepper, managing director at Shasta Ventures; and Roger Lee, general partner at Battery Ventures.

Here are the highlights and takeaways from my front-row seat:

• While every market worth investing in has a “supergraphic,” the changing nature of marketing — driven by consumers and the resulting digital transformation of business — is quickening the pace of marketing technology adoption.
• The marketing technology investment environment shows no signs or symptoms of an investment bubble. Growth and innovation are prevalent across martech categories (even email).
• Of the nearly 5,400 martech providers, about 1 percent are (or have the potential to be) standalone enterprise cloud “platform” players ($1 billion more in revenue). The other 99 percent will revolve around these enterprise platform players, consolidate or die.
• What makes martech unique is marketers themselves. Marketers, the primary buyers of martech, are natural “experimenters.” They regularly test new software, so they’re more likely to buy more tools, more often.

Marketing is on the front line of businesses’ digital transformation

No role in corporate America has changed as much as marketing over the last 10 years. Marketing professionals and departments are leading the digital transformation of business. This has investors leaning into the need for new technology to advance marketing’s contribution to this transformation.

According to Ashu Garg, roughly $100 billion has been spent on martech over the last decade, with more growth projected as marketing budgets continue to shift from offline to online spend.

Much of this change is driven by a reaction to their customers’ desire to engage and interact digitally with their brands and company. Garg shared, “Marketers aren’t waiting for their IT departments to swoop in and save the day. They’re diving in to figure it out.”

This was highlighted as a significant reason why every marketer must embrace technology or “get out of the way,” as Pepper put it.

Martech isn’t in a bubble, but marketers may be living in one

This begged the question: “The explosion of new marketing technology… this feels like a bubble, correct?” asked Brinker with a grin.

The panel, however, agreed there isn’t a bubble. “A bubble is speculative funding, big risk-taking and little to no growth or profits,” said Pepper. “Funding is holding steady between $500 million and $1 billion over roughly the last 10 years. And there is solid growth and innovation happening widely in martech.”

With all the noise created by both new and existing tech vendors moving into the a white-hot martech space, marketers are quickly becoming overwhelmed by so many options. Lee quipped, “With so many new options to understand and evaluate, it might be easier for marketers to go hide in a bubble.”

It was agreed that martech is still in its early years of formation. “This isn’t a mature market,” shared Pepper. “It feels like every 10 years or so there’s a new cycle of software that comes out. Legacy software gets disrupted because the new software becomes easier to use. This creates a new group of companies and technologies.”

Martech ‘cloud’ platforms form, driving consolidation

This prompted the discussion of what happens to a large group of martech companies that aren’t a major platform or stall out at lower revenue run rates.

The consensus was anticipation of a significant period of consolidation — or, as Lee called it, “A cleansing period for martech vendors.”

Garg added more detail from his view:

“These sub-$10 million ARR [annual recurring revenue] companies will be absorbed by the big players. We’ll see eight to 12 major platforms with $1 billion in marketing tech revenue. And then 100 or so companies at $100 million-plus in revenue that reside in these mega-platforms’ ecosystems to round out marketers’ solutions.”

Pepper weighed in:

“There will be no uberplatform that does everything. Rather, a few core platforms that take on more and more responsibility over time. Everybody else will consolidate or die.”

Martech is different from other tech sectors for investors

The panel laid out a sharp observation: “Martech is different than other tech sectors such as security, human resources or manufacturing software,” stated Pepper. Why? Martech can directly be linked to revenue and business and customer value. And martech can become a competitive advantage based on the way it’s deployed, how a company uses its holistic martech stack and how intelligently the resulting data is put to work.

The panel discussed another unique attribute of the martech space. Marketing is in non-stop experiment mode, always testing new things to keep pace with their customers. This creates the need for continual trialing of new software-driven approaches and the adoption of new tools.

Garg shared another view about marketing’s mindset when purchasing martech: “Marketing is used to testing as a regular practice. The technology is often lighter and more agile so, they do not view tech as a long-term investment. They expect it to be obsolete sooner, and they know they must be ready to try the next thing.”

Cautious optimism pervades martech

The panel was bullish on the prospect for martech investment, both for investors and brands themselves. The cautionary advice was to invest wisely, do your homework, and don’t buy into the hype. This seemed to match the mood of both the attendees and sponsors of this year’s MarTech Conference, produced by Third Door Media and chaired by Scott Brinker. Forecast = sunny with a few “clouds.”