Our proximity to Email Service Providers and Marketing Automation companies allows us to sometimes take a macroeconomic viewpoint and share findings of the rapid changes taking place within the “white hot” digital messaging industry.
Here’s a quick review
Last week Marketo had a very successful IPO. Shares jumped almost 50% on the first day of trading. Friday. The week prior, Movable Ink received $11M in Series B funding. After Eloqua went public, it wasn’t long until Oracle found its digital partner, buying Eloqua for almost $900M. This came on the heels of the $95M buyout of Pardot by ExactTarget. Shortly after the recently announced Marketo it’s IPO of 75M and its potential suitor, SalesForce, news broke that SilverPop raised an additional $25M to help reach out to new customers and build better automation tools to generate revenue and improve ROI. So, what happens next?
As Bill Nussey CEO of SilverPop remarks, marketers and customers are more discerning than ever, more educated about the bevy of platforms and add-on services available in the space, thus are rapidly becoming more selective. Marketers are no longer willing to be part of an audience that is locked into a single channel. Because of this change, the ESP space continues to evolve and entering into partnerships with a variety of other industries. Many of these partnerships display enormous potential, making this an exciting time to be an ESP. One such industry is healthcare.
Healthcare to Use SMTP Backbone
Forrester’s interactive marketing forecast says that investments in Email Marketing will grow to 2.468B by the year 2014. Assuming that number is correct, this bodes well for the ESP and Marketing Automation space. While there are roughly 400 different ESPs/Automation companies currently, we see this number doubling to well over 1000 different ESPs by the year 2016 or earlier. Additionally, what will continue to propel the SMTP space for many years to come is The Direct Project. The Direct Project is a protocol that will enable direct messaging using the SMTP backbone for all healthcare related messaging. I will have a separate blog post on this in the future. This segment alone will open up an immense new industry for the ESPs to target, which should complement the current growth trajectory of our industry.
Venture Capital and ESP Volume
Unless a company is poised for growth, a VC will not invest. Maturing ESPs with monthly volume of 300-500 million emails are entertaining investment capital from venture capitalists (VCs) in exchange for a chunk of ownership. With the right leadership group, that number is less. It’s important to point out that each relationship with a VC is different, so what appeals to one start-up ESP might be less attractive to another. Venture Capitalists want to create value. The industry drives U.S. job creation and economic growth by helping entrepreneurs turn innovative technology into products and services that change the way we live and work. That said, taking an ESP from $5M to $30M in revenues differs from taking a company from $5M to $100M. Each stage gets more challenging and VCs have the best intentions to provide incremental value. VCs help to find ways to professionalize and monitor the company. They find and put different types of processes, systems and controls in place in order to discern optimal value and potential.
Every ESP ownership group has a different vision and different values for their company. Some stakeholders prefer to stay private as long as possible, while others have the mindset to strike while the market is hot. The decision to bootstrap, raise VC funding, get acquired or go public, is based on a certain set of standards, ethics, and morals that is different for every ESP ownership group. In the end, it’s a matter of the right relationship with your board and employees. In many respects, employees become the decision makers in an ESP’s decision to raise capital.
So, Where Are We Headed?
From our perspective, it seems as though a new ESP is born every day. There were only about 200 legitimate ESPs in 2011; today, that number has doubled. This growth is largely due to low barriers to entry; as previously stated, it is entirely possible to start a powerful ESP/automation company for a relatively small investment.
In light of this low barrier, the industry will continue to morph and if Forrester is correct in a 2.4B valuation, we’ll witness well over 1000 ESPs by 2016. However, the current ratio, in which 80% of all the email sent is conducted by 20% of the ESPs, will likely remain. Perhaps. Even with the right partnerships, platforms, technology and professional sales and marketing prowess, along with lead generation strategies, growing to 500 million emails per month in volume in relative short order is still a challenge for startups. If you need a blueprint on how to do just that, just ask MessageBus. A VC backed company which recently snagged $11M in series B funding.
So, this might open the door to a new, fledgling industry in our space: ESP Consulting. Companies that understand and recognize and consult marketers on the different tools, features, and platforms from the ESPs, such as ClickMail, will thrive. Marketers will need direction to properly navigate the growing ESP landscape and ultimately choose a provider best suited for their needs not to mention budget.
In terms of sheer ESP volume of email, we surveyed 75 ESPs, most of which in the Port25 ecosystem. Here is how things are shaping up across the ESP space as of May 2013. Of the survey participants, 13% of all ESPs that send 0-500M emails a month are public and another 13% are VC funded. Of the ESPs that send between 501M-1B emails per month, 67% are private. And for those that send 1.1B to 5B per month,64% are either public or VC funded. In general terms, 40% of ESPs are public or funded by venture capitalists, while 60% remain private.
The above chart shows the percentage of total ESPs that fall into the specific Volume bin and Funding mode. 36% of ESPs have a Volume 1.1B-5B and are privately funded. Likewise, 13% of ESPs have a volume less than or equal to 500M and are Public.
The charts above drill down a bit deeper. They show the percentage of Public, VC Funded and Private ESPs for each Volume bin. For example, of the ESPs with a monthly volume of 500M or less, 73% of ESPs are private. Likewise with ESPs of monthly volume between 1.1B-5B emails per month, 27% of those are VC Funded. Likewise, of ESPs have a volume less than or equal to 500M, 14% of those are Publicaly funded.
Further, the charts above show the percentage of each Volume bin for each funding source. Of the Publicly funded ESPs, 54% of those have a volume in the 1.1B-5B range. Likewise, of the VC funded ESPs, 31% of those have a volume less than or equal to 500M.
It is important to remember that closed-door deals are frequent in this industry, so this composition could change at any time as the space continues to evolve. We support and monitorthe ESP space closely. So, be sure to watch this space for further analysis as the industry continues to evolve. I’ll drill down further on each particular heading in the future of this blog post, such as healthcare, but wanted to give you an overview of how we see things shaping up.
The numbers reflected here are in aggregate of ESPs using both SAAS and appliance models.