Marketing Technology World

Martech companies are dropping venture capitalists – here’s why


By Samuel Scott | The Promotion Fix columnist

September 17, 2018 | 15 min read

San Francisco was a city that we built on rock 'n' roll, but venture capital funds eventually took over. That may soon change due to growing economic and social trends in the martech and investment worlds.


Social media sharing platform Buffer recently spent $3.3m to buy out the company’s venture capitalists. Video software company Wistia turned down an offer to sell and instead took on $17.3m in debt to buy out investors. Audience intelligence platform SparkToro raised $1.3m from 35 individuals rather than going down the traditional VC route.

While it is impossible to know the exact percentage of martech and other companies that have eschewed VC funds, many are now using alternative funding methods, according to industry observers, activists and company executives.

"My impression from data people have shown me over the years is that probably around half of the companies on my martech landscape haven't received funding from institutional investors. Instead, they're funded by the founders, angels, or customers,” marketing technologist Scott Brinker said. (His Martech Landscape currently lists more than 6,000 vendors.)

There are also recent examples from consumer brands. Watch brand MVMT was bought by Movado last month for $200m. The founders and employees owned all of the company’s shares at the time. Deodorant brand Native was acquired by Procter & Gamble in 2017 for $100m. The chief executive had owned 90% of the company by not going the VC route.

Mattress brand Tuft & Needle was funded with only $6,000 from the founder and a $500,000 loan and is reportedly in acquisition talks with Serta Simmons in a deal that may be worth $400m to $500m.

How VC funding really works

To understand the big picture, it is first important to know the realities of the VC world.

Take people with money such as corporate pension fund managers, wealthy families, and university endowment administrators. They could simply do nothing and invest in a low-fee index fund that tracks the US S&P 500 or UK FTSE 100 and grow their savings at a long-term market average of 10% to 12% per year.

But like everyone else, these limited partners – as they are known – want to make more. So they hear sales pitches for anything from corporate bonds to real estate to VC funds. Venture capitalists who receive funding from the limited partners must then decide on which high-tech companies to place their bets.

A typical VC fund lasts for seven to 10 years, meaning that it must at least triple in value within a decade to beat the annual market average. If a VC fund receives $100m from the limited partners, it needs to invest in enough successful startups to grow to at least $300m before time runs out.

“The goal is to improve upon the rate of return that would have been achieved through putting the money into public stocks, bonds or other investment vehicles. The target is 12% annual growth,” Rand Fishkin, the co-founder and former chief executive of Moz who founded SparkToro, wrote in a memoir after leaving the SEO software platform. “Beating the market is hard. Like, really, really hard. Only about 5% of venture investment firms actually succeed at it.”

PitchBook, which researches private and VC markets, shared a new report with me comparing VC returns to the S&P 500 through 2015.

PMEs by vintage

(The company’s numbers above compare the compounded annual S&P 500 growth rate to the "vintage" year when a VC fund held its final close or began making investments. The S&P 500 numbers are not those of the index’s individual annual returns.)

VC funds beat the S&P 500 in nine of the 15 years above. However, most of the VC industry’s gains came from a small number of funds.

“The S&P 500 has posted gains each year since 2009, including three years with returns more than 20%, which has made it difficult for private equity and VC funds to keep pace,” PitchBook senior strategist James Gelfer said in reference to the index’s individual annual returns. “VC fund performance data shows only top VC funds tend to outperform [the market].”

Gil Ben-Artzy, a partner at the Silicon Valley VC firm UpWest Labs, gave a presentation at Google’s Tel Aviv office in 2016 noting that 2% of VC funds are responsible for 95% of the industry’s returns and only 5% triple their value and beat the market.

Do VCs meet investor expectations?

In an interview, Ben-Artzy dismissed the idea that the low performance level means that venture capitalists in general are overrated.

“Succeeding in venture capital is hard,” he said. “Given that VCs invest in startups that the vast majority of which will fail, it's not easy identifying the ones that will become marquee companies. Though not many VCs succeed, the risk-reward equation and the fact that only a few will succeed is understood by institutional investors, most of which include venture capital only as a small percent in their portfolios.”

The reality for employees and marketing campaigns

While venture capital firms have surprisingly low rates of return, more martech and other companies are also choosing not to work with VCs at all.

“Buying out our main Series A investors puts Buffer truly on a path of sustainable, long-term growth,” Buffer co-founder and chief executive Joel Gascoigne said. “The main benefit is being able to take Buffer in the direction we wish and to be creative as a company. Without VC investors with specific timeframes for a return, we can be on less of a singular and binary path.”

“Often times, the VC path means a lot of sacrifices for several years. Founders might push their teams and hope it’ll work out, but it’s not guaranteed. Now, we can focus on work being truly fulfilling along the journey. We can do profit sharing with the team so that people can benefit our success without it being tied to a liquidity event.”

The benefits extend further down the organisational chart. In typical VC-funded companies, the investors receive most of the money from any exit rather than the founders and workers who, well, do the work. (For the details on how venture capital affects employees, I will refer you to this prior column.)

Further, VCs know finance, and many startup founders are software engineers – and both typically understand and value only immediate metrics. They need to show fast results. Concepts such as brand building are foreign to them.

The VC model condenses a company’s entire life cycle into an artificial 10-year lifespan with the goal of a quick exit. In marketing terms, this means being low-rent media companies that distribute cheap “content” to generate clicks to a website, tracking and targeting people with direct response, and maximizing lead conversions through bait-and-switch tactics.

For VC-funded startups, it is sacrilegious to think about sacrificing one sale today for five sales tomorrow by allocating 60% of resources to brand building and 40% to activation for the greatest long-term success. When this mentality travels down the food chain from the VCs to the founders and to the staff, marketers focus only on immediate conversion rates even though digital metrics have significant faults.

Overall, VCs prefer to invest in digital B2B companies, which is why the digital and B2B marketing worlds focus on short-term tactics. But is that truly effective?

Andrew Chen, a general partner at the VC firm Andreessen Horowitz, recently wrote that the “growth hacker is the new VP marketing”. But the biggest VC-funded companies that focus on “growth” at the expense of real marketing lose tens of millions of dollars every year.

“I believe we’re at a point in time where a lot is being questioned,” Gascoigne said. “The concept of ‘growth at all costs’ is being questioned in a fundamental way, and I believe the purely growth-driven approach is becoming less effective over time. In its wake are these non-traditional paths that involve doing right by your team, paying people well, and doing good in the world.”

When VCs claim to be experts and dictate long-term strategy, marketers should ask for their funds’ average annual returns. If they do not beat 12%, we can ignore their thoughts. And that is 95% of them. I will wager that few VCs have any traditional marketing training or education.

“I have to explain all the time to tech founders and players in the startup ecosystem that marketing is not an add-on at a later date. Marketing is something you design into the product from the ground up,” advertising legend Cindy Gallop, now the founder and chief executive of the sex-positive startup Make Love Not Porn, said. (The company received $2m in funding from an anonymous investor.)

“That's why every tech startup needs marketing insight and thinking on the founding team, and every VC fund needs marketing insight and thinking within its own walls.”

Unicorns, donkeys, and zebras

Today, relations between men and women and pushes for increased diversity are receiving much attention in the public and private sectors. Those issues may change the financial world as well.

In the tech world, a “unicorn” is a private company that has a minimum valuation of $1bn. Larry Kim, the founder of the online advertising software platform WordStream, frequently writes about “unicorn marketing” and warns against being a “donkey”.

But Mara Zepeda, the founder and chief executive of community building and engagement platform Switchboard, would prefer that companies be “zebras” instead.

“‘Zebra’ is shorthand for a forward-thinking, long-game economy that promotes distributive business models that balance profit and purpose, champion democracy, and put a premium on sharing power and resources,” she said. “Companies that create a more just and responsible society will hear, help, and heal the customers and communities they serve.”

Zepeda is the cofounder of Zebras Unite, a partnership with the California not-for-profit think tank Institute for the Future that works with investors, policymakers, and entrepreneurs to encourage the creation of “zebra” companies that integrate profitability and what they describe as “socio-economic equity”.

martech VCs

“Many founders, especially women and people of colour, aren't interested in building companies that exit and make a few shareholders wealthy,” she added, citing the Alternative Capital Summit in Denver later this month. “They are looking to entrepreneurship for freedom, flexibility, to build generational wealth, and improve their communities. These motivations and desired outcomes are fundamentally at odds with VC mandates and culture.”

Institute for the Future executive director Marina Gorbis echoed similar thoughts.

"There are many people with great ideas who don’t fit traditional venture profiles and who do not get access to capital to start and grow their ventures,” she said. ”We are losing out on tremendous growth opportunities by not leveling the field for these people. We need to find ways to give them access to capital. We need more ‘zebras’ and fewer ‘unicorns.’"

VCs and analysts respond

However, the trend is not so simple. Specifically within the marketing technology world, one prominent analyst thinks that martech companies are not avoiding VC firms. Rather, he said, it is the other way around.

“I'm not sure it's martech companies avoiding traditional venture capital so much as it is venture capitalists avoiding martech,” Forrester Research vice-president of emerging technology research Carlton Doty said. “I predict that VC and private equity investments in martech and adtech will essentially dry up in 2019. Funding across these categories peaked two to three years ago and has been in decline since then.

“Of all the technology categories I track, martech has shown the slowest overall growth since 2012 at a compound annual growth rate of just 19%. This is in stark contrast to CAGRs of 100% or more in markets like transportation tech, augmented and virtual reality, and AI. As big brands like P&G redirect their ad spend [and] advertising practices in general adapt to GDPR, the irrational exuberance we've seen in martech and adtech in years past will soon flatline. VC firms will redirect their attention to more favorable tech markets.”

GDPR, I predict, will indeed wreak havoc on the martech and adtech worlds. After all, we have not yet seen EU enforcement. The privacy-focused web browser Brave filed GDPR-based complaints to regulators in Britain and Ireland last week, and others will surely submit more complaints in the future.

“GDPR will do three things,” Johnny Ryan, the chief policy and industry relations officer at Brave, said. “First, it will put a premium on clean, ethical adtech. Second, non-personal data will become the adtech norm. Third, it will expose adtech, and those who use its services, to enormous legal risk.”

Regardless of the future relations between martech companies and the VC world, Ben-Artzy pointed out that venture capital firms provide sudden inflows of millions of dollars that allow businesses in any industry to move quickly.

“Those founders that do raise funding from VCs are potentially able to get to product-market fit faster due to the ability to spend on faster iterations,” he said. “They are able to pursue deep tech ventures that take longer to materialize, invest in faster growth, and potentially outrun the competition. However, this often comes with the expectation of continued growth ‘at all costs,’ and, at some point, founders do not have full control of their startup strategic decisions.”

(For this column, National Venture Capital Association spokesperson Devin Miller did not respond to requests for comment.)

“Though entrepreneurs deserve all the plaudits, the VC community fueled some of the most meaningful companies in the world today, including Google, Apple, Facebook, Amazon, and many others,” Ben-Artzy added. “VCs serve an important role in driving innovation, with the understanding that only a small percentage of the funds will succeed in the long term.”

They're rebuilding this city

Regardless of the future relationships between martech companies and venture capitalists, the additional social undertones of the burgeoning anti-VC movement cannot be ignored.

“White, male VCs don't want to fund anyone other than white men,” Gallop said. “White men get hired, promoted, and funded on potential. White women get hired, promoted, and funded on proof, and not even then. Black women don't get funded.”

San Francisco may never be built on rock ‘n’ roll again. But if activists such as Gallop and Zepeda have their way, the city’s financial giants and the martech companies they fund will be rebuilt with equality and diversity.

“We need to build our own financial ecosystem because the white male one isn't working for us,” Gallop added. “So, we're going to invent and fund our own hi-tech startups, fundraising processes, and VC funds to overtake and explode the closed loop of white guys talking to white guys about other white guys.”

The Promotion Fix is an exclusive biweekly column for The Drum contributed by global marketing keynote speaker and workshop facilitator Samuel Scott, a former journalist, consultant and director of marketing in the high-tech industry. Follow him on Twitter. Scott is based out of Tel Aviv, Israel.

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