From @Chiefmartec: Is winter coming for martech? Or just for martech VCs?

For the past seven years that I’ve been tracking the growth of the marketing technology landscape, I’ve been hearing prophecies of its consolidation.

I’ve been quick to acknowledge that’s a possibility, probably an inevitable one. In fact, if you look at the distribution of revenue across martech companies today, you can argue it’s already happened. But I’ve found it ironically amusing that, at least in the short term, the more predictions of consolidation there have been, the larger the landscape has grown.

My meta-level takeaway: predicting the future in a complex environment is hard. That’s why I feel much safer playing the role of the empiricist — describing what’s actually happening today — than the prophet claiming to know what will happen tomorrow. And it’s why I encourage marketers to think in terms of optionality for their own marketing stacks.

But there is a case for a coming “martech apocalypse” that I’ve heard from multiple sources — primarily people in corporate development who look at the martech landscape as a kind of M&A buffet — that I think could dramatically change the dynamics in this space.

But not necessarily in the way they think it will.

The Devil Went Down to Georgia Tech

The premise is this: There are a significant number of martech companies that have taken large amounts of VC funding, their burn rate is much greater than their revenue, and the exponential growth curve that their VCs expected of them is flattening out.

It’s important to note — and we’ll come back to this — that many of them are great companies, with amazing products and happy customers, continuing to grow. But not at the pace that supports the VC math of a 10x return.

Therefore, they’re not going to be able to raise their next round of funding, and since they’re not self-sustaining with their cash flow, they’ll either be forced to sell to the hungry corp dev wolves or simply go out of business.

Not only will that consolidate the landscape through mass attrition, the large number of VC write-offs that will occur will make the space radioactive to investors, so far fewer martech start-ups will be able to to raise VC funding in the future. The engine of growth for the landscape will grind to a screeching halt.

Goodnight and good luck.

Martech VCs != Martech Vendors != Martech Customers

As with so many other predictions in this space, its most glaring flaw is that it’s a gross oversimplification. Its next-most-glaring flaw is that it conflates the needs of large martech VCs with those of martech vendors and martech customers.

Now, as an empiricist, I agree that there are many funded martech companies that are not profitable today and are going to have a hard time raising large follow-on VC rounds because they can’t justify how they’ll deliver 10x returns at that scale on the timetable that institutional VCs have come to expect.

That said, I’m skeptical of pretty much every other assumption and inference around that martech apocalypse scenario.

The mother of all assumptions here is that you need large VC investment to grow a successful software company. Talk about an epic false dichotomy: either you can raise tens of millions (or hundreds of millions) and IPO to a billion dollar valuation, or you might as well not bother getting out of bed.

Those are the only companies that matter to large VCs with gargantuan funds that have to deploy at least $20 million or more in a portfolio company to make their economics work.

There will be some martech companies that fit that model. But doing the math on the total market, it’s obvious that there can’t be thousands of them.

But thinking that those are the only kind of software companies that matter to everyone else in the world — the only kind of software companies that can be successful and provide real value to their customers — is a Sand Hill Road fantasy from one or two decades ago.

It runs contrary to every other trend happening in software.

[Read the full article, which originally appeared at Chiefmartec.]

Some opinions expressed in this article may be those of a guest author and not necessarily MarTech Today. Staff authors are listed here.

About The Author

Scott Brinker

Scott Brinker is the president and CTO of ion interactive, a leading provider of landing page management and conversion optimization software. Scott is the conference chair of the MarTech® Conference, a vendor agnostic marketing technology conference and trade show series produced by Martech Today's parent company, Third Door Media. He also writes a blog on marketing technology, Chief Marketing Technologist. Follow him on twitter via @chiefmartec.