It’s been an exciting time for B2B technology companies, as more vendors and startups secure funding to expand and enhance their offerings.
According to Tracxn, a venture capital data firm, as published on livemint.com, “2018 saw investments of $3.09 billion in B2B startups across 415 rounds, 28% more than the $2.41 billion allocated in 2017 across 534 rounds.”
In the first half of 2019 alone, companies such as Influitive, Sendoso, LeanData, 6sense, Bizzabo, Alyce and FullStory, just to name a few, have raised millions of dollars to grow their businesses. (See sidebar)
According to Kelly Ford, Investment Partner at Edison Partners, a growth equity investment firm, the B2B tech space has been an active category in terms of funding for the last five years.
“For some time, most of the capital was going more into B2B2C or B2C-oriented marketing tech. And I'd say over the last five years or so, that started to really shift more toward B2B,” said Ford. “If there's a resurgence, it happened with a shift of probably more dollars going into B2B marketing tech, rather than B2C.”
So, what has driven investment firms to focus on B2B tech above B2C? According to Ford, B2B tech has evolved heavily since the emergence of marketing automation. B2B companies have learned from their B2C counterparts to innovate, scale and focus on the customer journey.
“B2B started to learn from B2C and the access to data insights has come such a long way,” said Ford. “For B2B tasks that were manual, it just felt heavier and slower. For so long, marketing automation existed, but was only really helping with some workflow and speeding up basic insights. It wasn’t doing much to truly have a handle on who your buyer is and what your customers are doing … and [it wasn’t] leveraging data and multiple channels to apply that to all of the key stages of that buyer and customer journey. It was just too hard. But for B2C brands, this has been table stakes for them for so long. And the tech just started getting better, allowing B2B solutions to apply a lot of the same principles, goals and outcomes.”
At the same time, marketing tech stacks have grown more complex, with innovative point solutions helping marketers fill in gaps that marketing automation and CRM systems can’t offer in detail. For Edison Partners, this means focusing their investments on solutions that are integrating with or doing something to enhance marketing automation. Ford noted that, from an investing perspective, there is more of an opportunity to consolidate the market.
“I'm now to a point where I'm a less interested in placing the early bets, like we did with companies like Terminus, PathFactory and Sigstr, and more interested in where the synergies are, and how some consolidation can start to take place in the space,” said Ford.
Data, Revenue Marketing Companies Catch Investor’s Eyes
According to Ford, companies that are heavily focused on all things revenue marketing — especially data and engagement — and can marry data with various engagement channels are getting much attention from investors. “That continues to be an area where there’s been innovation and exciting things going on,” she said. However, there are still too many silos, so she added that any solutions that help break down the silos within different channels of engagement are catching investor’s eyes as well.
“Content is part of engagement; the actual medium is part of engagement. But engagement is nothing without the right data to target and measure,” she continued. “And, again, this is something that B2C has always done really well. And I think B2B is now getting better at it. There's a lot of great companies that are growing and getting some scale that are solving for those problems like Terminus and Sigstr. They're playing in this space. Even PathFactory from a content, plus engagement, plus measurement perspective — they're all going about it slightly differently, but in very complimentary ways.”
At Edison Partners, Ford said there is a wide variety of criteria the investors follow when making a funding decision. The firm invests mostly in companies that offer enterprise software and have direct sales models.
“A lot of these tools are really kind of cutting their teeth and driving good adoption in the mid-market,” she said. “But for us, we want to see that the software is solving meaningful problems at the enterprise level. Part of the use of capital is to truly move up market and be something that's integrated and sticky and truly adding value in an enterprise marketing stack.”
It’s also not uncommon for the product to feel more mature than the company itself, according to Ford. “Maybe the leadership team needs to be rounded out or completed, but the product is already robust and is meeting customer needs — and they have that high customer retention.”
Other criteria Ford uses to identify tech companies to invest in include:
- Have proven product market fit;
- Have been reasonably capital efficient with $5 million to $25 million at the time of investment;
- Are growing at least 30%, although Ford said many are typically growing at 70% or 80% year-over-year;
- Have not raised much money prior to the investment going in; and
- Have been a mostly customer-funded product.
While the surge in tech funding has been active in 2019, investors have had their eye on B2B startups for quite some time. However, just because a company has raised significant capital, Ford noted that this does not guarantee future success.
“In the B2B marketing tech space, you need to build out your go-to-market engine, and your revenue marketing engine — you have to be ready for scalable growth,” Ford said. “So, I think there's an irresponsibility that sometimes comes into play in this market and in other markets, and there can be noise around that, where folks will try to spin it as a positive thing. OK, you were able to go and raise $35 million — congratulations. But are you really growing any faster than your competitor that's raised a fraction of that?”
“I do think it brings credibility, but when there is actual direct competition and tons of capital going into a category, you’ve got to look at it sideways a little bit. Don’t just praise the company for their ability to raise that much money, but ask ‘what have they actually done with it?’”