by Thomas Zadvydas, with analytics by Lana Vilner
Digital marketing for small shops like local bakeries, grocers and regional accountants is growing into big business.
Those small-and-medium-sized businesses (SMB) are increasingly turning to growing outside firms to handle their digital outreach, according to industry sources. Among their goals is to become more social media-savvy: for instance, drawing a Facebook user on their phone clicking on a business page into a local shop.
Several digital marketing startups focused on smaller companies are looking to capitalize on the opportunity, and they are hungry for venture capital to fund their efforts.
They also could see interest from larger marketing technology players eyeing the SMB space. Big companies such as Salesforce are developing marketing solutions tailor-made for the small business community and should be interested in these types of targets to add capabilities, said Seth Rosenfield at middle market investment bank Petsky Prunier.
The startup opportunity
The reason smaller businesses turn to startups for their marketing needs comes down to money. They “don’t have big ad budgets to buy a retainer contract from a digital agency that might cost them $7,000 a month,” said Chris Herbert, spokesperson for Smart 1 Marketing.
Smart 1, based in Blacklick, Ohio, helps small and medium-sized businesses with website design and online marketing campaigns. It has about 32 employees with revenue exceeding $5 million and is trying to at least double in revenue by year-end, according to CEO Todd Swickard.
Vendasta Technologies, which provides marketing services for small businesses, is targeting organic expansion abroad and additional product development, CEO Brendan King said. The Saskatoon, Saskatchewan-based company has about $8.25 million in funding to date with backing from Vanedge Capital and Business Development Bank of Canada.
Other businesses provide large media companies with intelligence to precisely target advertising services to SMB clients.
One such operation is San Francisco-based Buzzboard. It makes a data platform to show media companies like publishers and broadcasters the demographic and industry metrics on 20 million SMBs throughout the US. Buzzboard’s artificial intelligence and data mining algorithms look online for this information. It is then used by marketing and advertising sellers of media companies, such as Hearst Corp., Tribune Co. and Sinclair Broadcast Group. The company is aiming to expand its service into the telecom and insurance spaces, said Buzzboard CEO Umesh Tibrewal.
Companies like Buzzboard, Smart 1 and Vendasta should see healthy growth over the next few years through the expanding digital presence of SMBs, said marketing technology banker John Matthews of investment bank Oaklins DeSilva+Phillips.
“As the world becomes more digital, SMBs have to adapt and in a lot of cases, they have been a bit slow to do this,” he noted.
All these startups should attract private equity groups and strategic investors – particularly in the CRM, publishing, tech service and telecom spaces
Marketing software companies like Salesforce, Oracle, HubSpot or Dun & Bradstreet could feature among the buyers, Matthews said. Salesforce released a small business version of its core marketing tech suite on 13 March, he noted.
Website or online marketing solution providers focused on SMBs with an international presence – such as Wix or Web.com Group – could also feature among the buyers, according to Matthews.
A third type of buyer for these marketing startups includes payments technologies companies such as Deluxe or Harland Clarke, which could benefit from having online marketing service offerings for SMBs to offset declines in personal check processing, according to Matthews. Deluxe, for example, announced a $200 million purchase of New York data-driven marketing firm First Manhattan Consulting Group in January 2017.
A fourth group features telecom firms both in the US and Europe, said Matthews. Players like Verizon Communications, Swisscom, BT Group and Deutsche Telekom could use an acquisition to sell an online marketing package along with telecom service.
An emerging group of buyers are private equity firms. A middle market private equity shop interested in SaaS marketing solutions for the SMB space, such as ESW Capital, could be buyers, Matthews said. Buyout shops are typically looking to see a minimum of $10 million in annual recurring revenue when evaluating these SMB marketing tech service companies, added Rosenfield.
“Expect more [private equity firms] coming into this marketplace,” Matthews said.
Mergermarket data shows private equity interest in the advertising and marketing tech service space is indeed on the rise.
In 2017, Mergermarket recorded eight private equity deals in adtech and martech worth $189 million, compared with seven deals worth $50 million in 2016. Private equity accounted for 17.4% of the number of deals in 2017, up from 14% in 2016.
Nonetheless, strategics dominated deals in the advertising and marketing services space in 2016 and 2017, Mergermarket data shows. In 2017, there were 46 strategic deals worth $699 million, compared with 50 deals worth $2.6 billion in 2016, which included Dentsu Aegis Network’s acquisition of a 68.3% stake in CRM tech, digital, and search agency Merkle for $979 million.
Targets in SMB marketing tech typically trade at revenue multiples of between 3x and 8x, with 4x to 5x being a sweet spot and valuations depend on how high the subscriber retention rates are, said Rosenfield.
“It’s an interesting space that has a lot of potential,” Matthews said.
Zadvydas is a reporter with Mergermarket and Dealreporter covering the telecom, media & telecommunications sector. Zadvydas can be reached at Thomas.email@example.com.
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