For every marketing tech firm consolidated, 1.5 are born

Trading Places: Scott Brinker and Terry Kawaja

My doppelgänger (or am I his?) agrees: marketing technology isn’t consolidating yet.

Digiday recently published a terrific podcast interview with Terry Kawaja, the CEO of LUMA Partners — an investment bank that specializes in adtech and martech companies. Of course, Terry and LUMA are probably most famously known for their amazing LUMAscapes that map out companies in marketing-related sectors such as display advertising, search, video, social, gaming, commerce, content, etc.

Terry’s original display advertising LUMAscape was the inspiration for my own marketing technology landscape. And if you stitched all of the LUMAscapes together, they’d show over 2,500 different companies in the marketing ecosystem, way more than my one slide of a paltry 1,876.

While Terry and I both share a passion for marketing tech companies — and also obsessively arranging little logos — we do bring somewhat different perspectives. LUMA is in the business of understanding these sectors for their M&A dynamics. I’m more interested in how marketers manage these technologies and put them into practice. There’s overlap, of course. But I find Terry’s market view to be a great complement — and sanity check — for the patterns I observe in the marketing technologist community.

Which is why I take great satisfaction when we both independently reach the same conclusion — especially a conclusion that most pundits argue to the contrary: the marketing technology landscape isn’t consolidating.

At least not yet.

As the Digiday article notes, in the 6 years that LUMA has been creating landscapes, they’ve seen a remarkably consistent pattern: while companies get bought, more get created. “For every one company that is consolidated, another 1.5 are spawned.”

If you examine many of the big marketing technology acquisitions over the past several years, you can see this pattern for yourself. Here’s just one example — in a nod to the burgeoning marketing tech ecosystem that is AtlantaDavid Cummings sells Pardot to ExactTarget (later acquired by Salesforce). David then goes on to launch Kevy, a fantastic marketing middleware company, Rigor, and SalesLoft. He also invests in a series of new start-ups related to marketing and sales technology, including Dragon Army, Rivalry, Terminus, and Voxa.

Did Salesforce’s multi-billion dollar acquisition consolidate the industry or diversify it?

If you’re just counting the number of companies out there, the math is simple: the marketing tech landscape grew, it didn’t shrink. Of course, there are many factors behind that expansion — I tried to capture as many of them as I could in my post on the system dynamics of 2,000+ marketing technology companies.

Channeling My Inner John Nash for Marketing Technology Dynamics

However, some found that a bit overcomplicated. One person on Twitter remarked that I was channeling my inner John Nash — picturing that scene from A Beautiful Mind where he’s wildly connecting all the imagined secret connections of Soviet spies. I later remarked that the TL;DR version was: Asymptotically, every company will be a software company, to some degree.

Terry explained it much more eloquently in his interview with Digiday. It’s the combination of two growth forces:

  1. The clamor for more innovation in the market.
  2. The ease of company formation.

“We’re always going to see new companies,” he said. “It never does consolidate.”

Of course, a large number of companies doesn’t mean a large number of big companies. As related to Digiday, LUMA identified only 148 companies that they thought were likely to be bought for $75 million or more on their current set of LUMAscapes. That’s about 6% of the field. Those are the companies, of course, that LUMA is interested in for their M&A business. And, naturally, they’re the set that most VCs would want to back.

But still, there are a lot of other companies out there. And while LUMA and the VC community might not be very interested in a $10 million, $20 million, or $50 million business, a number of entrepreneurs and individual investors might feel differently. And as I noted in my TL;DR remark, a whole bunch of other firms who aren’t “pure” software companies are likely to develop a presence in the marketing technology space moving forward.

Again, this doesn’t mean that for particular product categories that consolidation — happy acquisitions or more ignoble bankruptcies — won’t happen. Terry expects we will see quite a bit of that in adtech over the next 12-18 months.

But in that same time frame, how many new ventures will be launched?

The 1.5 growth multiplier won’t last forever — geometric growth hits a ceiling eventually, and probably sooner than later. But it hasn’t petered out yet.

Want to hear more from LUMA and the top marketing tech minds in the VC community on this subject? Come join us for MarTech later this month in San Francisco. Terry is on the advisory board for MarTech, and his partner Brian Andersen will be joined by general partners from Battery Ventures, Bain Capital, and Foundation Capital for a candid fireside chat: Follow the Martech Money. There will also be 25 other amazing speakers, 62 innovative marketing technology companies in a bustling exhibit area, and over 600 attendees pioneering the intersection of marketing and technology. Hope to see you there!

Comments

  1. My prediction is that there will be some fantastic middleware developed that will really help to tie all of these technologies together and transfer data between them. There are currently some, but I think they’ve only really scratched the surface of what is possible.

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