Research has found that out of 55 Social Business Startups that a majority (69%) have received early and late stage funding, averaging $14m in total funding. A significant 31% have not taken investor funding, which we’ve listed 6 reasons ranging low costs of operations, self-funding, VC avoidance, and market saturation of startups. 18% of startups had achieved a material event (acquired or IPO) and of them, 40% we’re not funded. Expect three macro trends in 2013 including: 1) Startups focus on business value to battle software giants, 2) Investors hot on SMMS market, but wary of vendors who lack differentiation, and 3) As Social Business Software market matures, expect growth in late stage investments
I’m continuing industry analysis of Social Business Software funding and will do a series of data cuts from my sample of 55 software vendors to tease apart trends, insights, and built a forecast for what is to come. First, read part one on The State of Social Business Software (including methodology of this study), which dissects into funding amounts, averages, and frequency of funding rounds. I interact with VCs, startup entrepreneurs, software giants, brand buyers, press and media to obtain multiple points of view.
Above: Figure indicates that while two-thirds were funded, a large set of social business software vendors were not funded, a rate greater than I expected to see.
Above: Of the two-thirds who were funded, a majority of them raised a small amount of money, most commonly under $10m, a paltry amount compared to funding rounds in other tech categories in prior decades.
Above: The industry ratio of 18% of startups achieve a material event, still holds as an industry benchmark. I found that consumer based startups may have a lower rate of material event, but with larger returns. Interestingly, 40% of those who achieved a material had no public records of funding from angel, seed, or venture investors.
Key Data Points
After cutting/comparing/probing this data sample of Social Business Startups (not consumer startups like Facebook, Instagram, Twitter) the following data points were discovered:
- A total of 55 Social Business Software Vendors were selected for this sample set.
- 17 (31%) did not take funding per our searchers on public websites, press releases, S-1 filings and Crunchbase.
- 38 (or 69%) were funded in public records listed as Angel, Seed, or various Venture Rounds
- Of the 55 startups, 17 we’re not funded, and the majority who we’re funded (16) received less than $10m in total funding
- 7 startups were acquired by larger corporations (Buddy Media/Radian6 to Salesforce, Context Optional to Adobe, Viture/Involver to Oracle, etc)
- 3 startups achieved IPO (Liveworld, Bazaarvoice, Jive)
- A total of 10/55 (18%) of startups have achieved a material event.
- 6/10 (60%) of the startups who achieved a material event (IPO, Acquired) were funded.
- Of the 6 startups who achieved a material event, they averaged total funding amount of $26.3 million.
- Of the 6 startups who achieved a material event, the largest round raised was Buddy Media’s D-Round at $54 million.
Material Events, defined, debated.
For the purposes of this report I’m defining a material event such as an acquisition by another company or IPO for publicly traded shares. There have been many arguments made that successful companies do not need a material events, if they can yield consistent dividends to investors. The challenge is that the venture model requires multiples returned per fund to LPs in order to raise monies for future funds. VCs tell me “You’re only as good as your last fund” and with fund management being 5-10 years, there’s a time clock on returns, causing pressure on executive teams to achieve a material event. It’s also worth noting that in some cases, an acqusition occurs because a company is distressed and is auctioned as a fire sale.
Nearly One-Third of Startups Avoided Funding
Six Reasons why Startups Don’t Obtain Investor Funding
While over 2/3rds of startups took funding, a surprising 17 (31%) did not take funding in the form of seed, angel, or venture funding (A, B, C, D, rounds). This number is shockingly high, as in previous decades tech startups were dependent on Sand Hill investors to anoint companies to market. Today’s market has changed and startups are not dependent on VCs. Even of those who achieved a material event, 4/10 (40%) did not have funding. There are six primary drivers why entrepreneurs have confided in my why they don’t take funding
In near future, I’ll post why 60% of startups prefer funding, surprisingly, it’s not just about the money.
||What Entrepreneurs Don’t Tell Anyone
|1) Self Funded
||In most cases where I see self-funded startups, often the executive team are self-funding from prior wins as a serial entrepreneur.
||This means more money for them, control. In some cases, the serial entrepreneurs I’ve met are doing this company both for personal accomplishment, fun, and are no longer driven by monetary gain alone.
|2) Company Too Early Stage
||A large portion of startups in our sample set were early stage, (many in SMMS market) who do not yet need expansion and growth funds.
||In some of these crowded markets, they’re struggling to get favorable terms as first time entrepreneurs, slow growth, or in a crowded market.
|3) Low Costs to Start Company
||Today’s startup needs a few 10’s of thousands of dollars to get going, with recurring SaaS licence revenues, they can sustain after one year of landing a few key brands.
||Cloud technologies, open source, virtual workforces, and overseas developers make today’s startup a low cost.
|4) Seek Lifestyle Company
||Often a controversial discussion in tech circles, many entrepreneurs want to avoid pressures of a material event put on them by investors
||Being an entrepreneur is tough work, when your company does well, the board may want the founder out, requiring them to go to beach get board, and get itch to restart. An addictive, never ending cycle.
|5) VC Avoidance
||Unfavorable terms, pushy board members, or lack of value-add cause entrepreneurs to shudder. Additionally, the time required to pitch, negotiate, expose secret plans, and deal with new influencers on board a risk if they don’t see eye-to-eye.
||Many serial entrepreneurs confide that they’ve been burned by VCs in the past, and as a result seek to avoid them as long as possible.
|6) The Startup is a Bust
||Some startups are clones, unoriginal, and will not succeed and VCs simply know a failure when they see it. In fact, we track 28 SMMS vendors in the active market.
||Entrepreneurs are prone to bluntly admitting this. Instead, expect euphemisms such as “strategic roadmap pivot to respond to changing market conditions”. ahem.
Market Trends: 2013 Social Business Software and Funding
Expect three macro trends in 2013 when it comes to social business software, their buyers, investors and last year’s activity, they include:
- Startups focus on business value to battle software giants. Have At the high level, social business startups must focus on value creation and market domination as after the rash of M&A in 2012 (Adobe, Oracle, Salesforce, Google), this has left an opening for independents to build value while blue chip software companies re-tool and figure out their suite strategy up until the second half of 2013. With the IPO exit taking a major beating from Facebook, Groupon, Zynga, and questionable results from Bazaarvoice, social business startups must focus on recurring revenues through business value to clients.
- Investors hot on SMMS market, but wary of vendors who lack differentiation. While the brand monitoring, community platform, ratings and reviews space has already consolidated, VCs look at SMMS market, despite a handful of acquisitions. My time on Sand Hill road has yielded excitement and hesitation from VCs examining the fast growing –yet crowded– social media management systems space. Expect SMMS vendors who can achieve market differentiation and integration with larger blue chip software players to be ideal for investor funding –our findings indicate the market is not strong at differentiation.
- As Social Business Software market matures, expect growth in late stage investments. There’s room for independent players who’ve not yet been acquired to land and expand their enterprise clients, some claiming 400 year over year growth in revenue run rates as social licenses are spread enterprise-wide. As these companies seek funding to grow in international markets, hire seasoned enterprise sales and account teams and acquire smaller competitors, they’ll need late stage investing over $10m, which bolsters overall valuation before a material event.
Future reports to come: We’ll explore status of top funded investments, which VCs are most active in funding Social Business Software, and other data cuts.
Social Business Software vendors (Startups that offer social technology software and solutions for corporations to use to interact with employees, customers, and partners) have raised on average $14m with the most common round being an A-Round at $5.2m. A few vendors have received large D-Rounds, however most are receiving $5-10m rounds from a series of investors. Brands must ask vendors at least 5 questions on who and how this money is and will be used, to understand the strategy before buying.
[Funding in social business software is an indicator of a Vendor’s potential to quickly accelerate to meet the needs of corporate customers]
Why this Research:
As an Industry Analyst, I look at The Three Spheres of Web Strategy of the market to understand it: 1) Consumer behavior (who brands want to reach 2) Brand appetite (customers of software vendors) 3) Technology providers (those who aid brands, like these players). On a weekly basis I interact with Brands, Media, Software Vendors, and Media to exchange information. I wanted to bring some hard data to the conversation on the funding aspect which fits in the technology sphere.
[Investor relationships with software vendor shape the direction by providing guidance, network access, and may guide a ‘material event’]
Above: Figure 1 indicates that across these 55 startups, the total funding amount was $765. Please read method and scope below to understand this is not the full space.
Above: Figure 2 indicates that on average, Social Business Software vendors have raised $14m in funding.
Above: Figure 3 indicates that on average, the average funded round is the A-Round.
After probing the data for hours, I found some interesting trends in the market worth notating.
- Total Funding across these 55 active vendors is $765m. with most funding occurring in last few years however some vendors like Lithium have been present for over a decade. This is a relatively small amount of funding in the VC space, as some giants like Andreessen Horowitz are managing over $1b for a fund, and my finger to the air estimate is that many a Sand Hill VC average around $400m per fund in my space.
- Funding is significantly smaller compared to consumer cousins. For comparison, Facebook received a total of $2.2b of funding, and Groupon with $1.14b and Zynga with $860m. I’d argue that the returns on B2B players revenue (on a percentage basis) may be higher. While bluechipper Facebook is on track for a potential $4b runrate, but Zynga and Groupon have questionable destinies. Furthermore, the startup costs for Social Business Software vendors is low with open software, cloud infrastructure, and sometimes virtual workforces.
- On average, vendors raised $14m across all rounds. On average, these startups took a relatively modest amount of revenue over the lifetime of their companies. While the scope of startups includes both established and early stage, $14m is a relatively modest amount when software salaries, the high rent in coastal cities, and compared to consumer startup giant funding, is relatively small. Many vendors boast annual revenue streams of about $5m-$10m of SaaS best repeatable revenues in my interactions over past 5 years, with exceptions on both ends.
- The A-Round is most commonly funded round. The A-Round investments lead the back, 8 of the total 88 investment events (33%) were at the A-Round at $5.2m. This crucial round demonstrates to the investors that they’ve received corporate traction in an addressable market, and are ready for faster growth to keep up. For further momentum, the most common round was a B-Round which comprises of 22 of 88 events, (25%). Although there are fewer D rounds, the average value exceeded $42m, a goliath size readying the company for a material event.
- D-Rounds lead the largest portion of overall funding dollars. This later stage fund is often ‘double down’ money by VCs who look for companies that have proven their mettle and are ready for expansion at a rapid pace. (product, sales, territory, aboard offices and M&A), or are preparing for sale to third parties (Salesforce, Oracle, IBM, Adobe have rapidly entered this space). In some cases, late stage dollars increase overall value of software firm to raise valuation amounts before a material event.
- Confusion over terminology of funds makes tabulating not clear. The amorphous term “Venture Round” spanned funding that was pre-A and even post-C (like Gigya). In some cases, some vendors received only 1 round of funding and titled it Venture Round, which could be assumed as A. In some cases Venture Round was an extension of a A-C round (Gigya’s latest large round was listed as a venture round, post-C), and while that data is likely listed in the S-1, I chose not to dive into it to dissect for purposes of this industry level data.
- Only 18% of Startups had a Material Event (M&A, IPO). For some startups the mecca is a reaching a material event, which would involve M&A or IPO. While it may seem like there’s been a rash of M&A activity, in this particular data set, only 7 of the 55 vendors (12%) have been acquired and a notable IPO of Bazaarvoice with the media questioning the performance of stock, also LiveWorld went IPO nearly a decade ago. So that’s 10 materials events out of 55 companies, a 18% rate. Granted, a few vendors that were acquired did not make this list, but overall, there’s been few material events. (edits made to this section, see footnotes)
Five Questions Brands Must Ask Software Vendors
Brands are making million dollar commitments to these software vendors, and often their careers, and quality of worklife will pin on choosing the right vendors. Beyond features and functions, buyers must pay attention to the root of funding as it shows financial stability, ability to grow, and credibility from third party investors who also believe in the company. As vendors pitch brands their software and services, it’s important to carefully pay attention to the slide on funding, as it helps to give an anchor point on where the firm has come from, and how fast they may grow in the future.
- How much have you raised and from whom? What other software companies are in the VCs portfolio are related? Find out who has invested and look at their websites for a track record of successful investing in enterprise software. They’re often key advisors, or make connections for the startup, you’ll want to know every angle.
- What is that money going to be used for? How have you used it in the past? How will this help customers? As you look under the hood, find out how they’ve used investor dollars in the past, and look for key acceleration points, if you don’t see this, raise a red flag. For recent funding, ask how they’ll strategically use this.
- Do these investors advise your company on a frequent basis? Are they on the board? Ask specifically what each round was used for, and what were the business impacts. As firms raise new money, have a frank discussion on how they’ll use it going forward.
- So you raised a big ton of money, are you going to sell the company? If a vendor has raised significant money as a later stage, have a frank discussion on their exit, while IPO is no longer attractive in today’s market conditions, we’ve seen a number of acquisitions occur which will impact customers.
- You haven’t raised much at all, why? If a company has not raised much funding, find out why and how. Question if they’re going to match growth rates with competitors who have cash on hand to do expansions and potentially purchases of competitors. In some cases, vendors have inability to raise much money, due to VCs passing up on the deal, due to issues, it’s key you track this.
Methodology and Scope
First, we developed a data set of vendors based on feedback from my initial vendor set who we hear about from clients, press, and VCs, as well as took in input from Altimeter’s research team. Then, I commissioned a researcher to conduct public research to collect all this data with sources and I vetted data content.
This research was conducted across 55 social vendors spanning 6 sub-categories including: Social Media Management Systems (like Sprinklr, Hootsuite, Buddy Media), Social Commerce (Bazaarvoice), Social Integration (Gigya, Janrain, Echo), 2 Gamfication (Badgeville, Bunchball), Community Platforms (Lithium), Listening (Radian6, Social Bakers). A majority of the sample set are SMMS vendors who are the most active funded at this time. The time tables on these funding notes typically span 1-5 years, but there are records of some longer term vendors that were included that have been funded over 10 years ago.
This study does not include funding from consumer startups Facebook, Twitter, Groupon, Zynga who all leave these other vendors dwarfed with total funds amassed. This is only a sample of 55 vendors out of 100s, the total sample size was intentionally limited vendors on my ‘coverage radar’.
I’d like to thank the following people for their assistance: Jennifer Jones for her guidance on the VC landscape, Nadim Hossain (seasoned Social Business Exec), Blake Bartlett (Battery Ventures), Andrew Jones (Altimeter Researcher), Christine Tran (Altimeter Researcher), Julie A for data research.
Social Business Software Vendors Evaluated (55):
- Argyle Social
- Awareness Networks
- Buddy Media
- Context Optional
- Curata HiveFire
- Dialog Solutions
- Echo (Aboutecho.com)
- Engage Sciences
- FALCON Social
- HearSay Social
- Mass Relevance
- Meltwater Buzz
- Nielsen Buzzmetrics
- Sociable Labs
- Social Bakers
- Targeted Group
Future Data Cuts I’ll explore:
Funding across category types, top VCs funding Social Business Space, profile of the top 5 Funded Social Business Software startups. Please check out my full body of research
to learn more about my coverage.
(Update: I discovered another material event after posting this, and have updated these numbers to correctly list 18% –prior was incorrectly listed at 16%, Jan 10, 2013)
VCs Seek Scalable Technologies
Lately, I’ve been spending time trading information with one of the most powerful groups in our industries: VCs. They spur innovation by injecting funding into startups, help fuel those that need an accelerated path, and work many deals in the background to connect their investments with the right folks.
[Although VCs seek investments that rapidly scale, startups must satisfy the needs of enterprise clients by offering a range of services]
Yet despite their power I’m often concerned about one of goals that VCs have of their investments is finding and investing in a company that will quickly scale an an exponential rate then exiting. Their vision is for technology to go from 1 person to 10 people to 100, 1000, 10k and so forth. Then the opportunities for monetization and exit strategies are more at hand.
Yet Enterprises Often Need Service Offerings
I understand why this model makes sense to VCs, but this is often the opposite model that enterprise class companies may need. Some analysts approach the same industry from a different perspective. I’m looking for companies that just won’t scale to reach millions of users, but companies that will help brands and users make a difference, yet often, this requires offering non-scalable offerings, like services.
The Conundrum of the Solution Startups
Take for example the community platform market, a space I’ve been covering for over a year and a half. These vendors sell to large enterprise companies, yet the business case is far different. To be successful in selling to the enterprise, vendors need to have a solution offering that includes services like: education, implementation, custom development, support, analytics services, and community management services. When you couple these services with a technology offering (called a ‘solution sell’), you’re now able to provide value to large brands.
What’s the challenge when vendors offer a solution to enterprises? Services don’t scale in terms of revenue, it’s only an incremental growth in the top line incomes (2-10X). As a result, some VCs may shy away from investments that are heavy services focus, and may instead encourage their portfolio companies to instead focus on scalable technologies.
[Often, social media implementation in the enterprise is 80% process and labor, and only 20% technology]
80/20 Rule of Services/Technology
In the end, you’re going to need both types of companies (scalable technology and solution partners) to help both businesses and users, in fact the most successful companies will often have both. I often encourage my clients (large brands) to look at vendors beyond technology, in fact, most enterprise deployments of social media are only 20% technology and 80% process and labor. So when you’re selecting a vendor, be sure to understand their roadmap, how their investors perceive the direction of the company, and take a long hard look at the services and support they can offer you.
Note: I’ve also heard that some VCs are scaling back their investments in startups, while you continue to hear of funding happening for vendors.
Speaking of community platform vendors, I’ve submitted the community platform wave report to editing, and am anticipating a publish date in early Jan.
I’m extremely busy these past few weeks, and you’ve noticed a slow down in my posting (have you met our other analysts?), so I’m going to do a series of short blog posts, unlike my longer meaty posts.
I met with Ali Partovi, CEO of iLike today, who told me about a recent trend of what I call “Transplant CEOs” that have addresses in Silicon Valley, are often here for meetings, but their company is located in other tech hubs like Seattle, Portland, Texas, Canada and beyond. Why this pseudo address? two reasons:
1) Running a company in silicon valley is expensive, talent tends to be flighty, and cost of living is high. In other cities, take Seattle for example there’s only a handful of web companies, keeping churn to a minimum.
2) Clients, investors, and prospects tend to want their leaders to be connected to silicon valley so having the CEO in the area makes sense, even if he or she just has a second house here.
It’s amazing that even in this day an age of the digital natives, that location still is important. Well for some this isn’t anything new, way back in 2006 (I know many of you weren’t even born then) the NYTimes had a article showing that most startups had to be 20 minutes driving distance from VCs.