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How Marketo Built A Billion Dollar SaaS Company

Posted on Wednesday, Oct 8th 2014

We’ve looked at a number of Unicorn companies so far: Tableau, FireEye, RightNow, Palo Alto Networks,Kayak, and SuccessFactors. Today, we look at Marketo.

Marketo was founded in 2006 with the stated objective of building a high-velocity SaaS company focused on a critical (and then somewhat new) business process called lead nurturing.

In a 2011 interview, CEO Phil Fernandez explained the value proposition as follows:

The value proposition is that we help our customers find more prospective buyers, we help to deliver more ready to buy leads to the sales teams, and we help your sales teams be five times more effective thus driving 40% top-line revenue. We are all about the end-to-end revenue operations in companies. We have increased the revenue of our customers by 40% of their first two years of Marketo use.

We do it by looking at the end to end process where the buyer is in control. We typically sit behind online advertising such as Google AdWords as well as their traditional media. Google AdWords represents 5% of the average marketing spend in the B2B space. Events and trade shows represent 26% of that spend. We are a multi-channel company.

We start right at the place where our customers meet their prospective buyers. We help their marketing team open up the front end of their funnel. We give them many more names by using the best of the Web, the best of social [media and Internet], and the best of traditional events to capture their leads into a critical new business process called lead nurturing.

Lead nurturing is about how to manage a lead from the date you meet them until the date they are truly ready to buy, and how to do that at scale.

Marketo obviously identified a gap in the sales and marketing workflow. The team came from the world of sales and marketing automation, and had significant domain knowledge.

Phil was well connected in the venture capital world, and raised $3 million on a business plan at the end of 2006. It took until the end of 2007 to develop the first beta product, and they sold their first deal in March 2008. Phil remembers how:

My co-founder, Jon Miller, likes to say that he started search optimization before we had a product. He did a remarkable job of finding customers and educating them so that they would be ready for our product when it launched. We sold to 15 customers the month we launched our beta.

Search engine optimization is really content marketing. He started a blog talking about macro trends in the market. He talked about how Google was changing the job of a salesperson and how to conduct new sales techniques. He built a phenomenal blog with classical search optimization techniques to get us found. We had a great website with whitepapers and resources.

We did not have anything to sell, but we had resources for people to register and give us their contact information. As the product got closer, we started doing our own webinars and gave people some sneak previews of what was coming. We became our own beta user. We adopted content drive and social driven marketing strategies, and we did for ourselves what we do for our customers now. The day our product was ready for launch he was able to give our sales people 50 names of potential buyers.

Marketo’s target market are companies that spend a million dollars or more a year on sales and marketing. The lowest end customers pay $1,000 a month. The largest spend 100 times that a month.

By the end of 2008, their first year of selling, Marketo had 80 customers following the exact strategy Phil describes: eating their own dog food!

In 2009, they acquired 150 customers, and did $4 million of recurring revenue, mostly focused on the small and mid-sized customers.

In 2010, Marketo started selling to enterprise customers.

And in March 2011, they reached the 1000th customer milestone, and did $30 million in revenue that year.

Phil gave Marc Benioff the credit for developing the market:

We will achieve the same fourth-year revenue that Salesforce.com achieved in their fourth year. The difference is that they spent $250 million to build that market, and I have spent $17 million. It is radically more efficient to build a SaaS company today.

This statement highlights the advantage of not being first to market in a sector that is just getting established. Salesforce.com had to overcome a lot of objections about hosted software when they started in 1999. But in 2006, those objections were no longer relevant. So the velocity of Marketo’s growth, and its capital requirements were dramatically more attractive.

In fact, there are a number of SaaS companies that are still private, but growing very well, who share this general characteristic. You can read my interviews with some of these baby unicorns: Xactly, Egnyte, Apptio, Adaptive Insights, etc.

Marketo went public in May 2013. Marketo’s 2014 revenue forecast is about $140 million, and its current market cap is over a billion.

To get there, they raised close to $100 million in funding from InterWest Partners, Storm Ventures, Mayfield Fund, Institutional Venture Partners, and Battery Ventures.

It is not difficult to raise large sums of money if a venture demonstrates that it can acquire customers efficiently and deliver high velocity growth, both of which Marketo did very early on.

If there is one lesson to learn from Unicorn companies like Marketo, RightNow, and Tableau, it is this: figuring out how to acquire paying customers economically early on, and then being able to create a repeatable sales and marketing process that scales, makes all the difference. Every single SaaS company that has been unusually successful follows this simple, basic tenet.

They do not get enamored with giving away lots of value for free.

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