Wednesday, November 16, 2011

Marketo Raises Another $50 Million: Where Does the Money Go?

Marketo this morning announced a new $50 million funding round, almost exactly one year to the day after raising $25 million in November 2010.  In accompanying commentary, the company also revealed its 2010 revenue was $14 million, that it expects 140% revenue growth in 2011 (meaning about $34 million), and that it has about $70 million remaining of its total $107 million raised to date.

All this new information begs for an update of the analysis of Marketo’s finances that I prepared last year. I won’t go into the same details, but the key figures for 2010 and 2011 are:

This is good news, in that Marketo has managed to increase the all-important Revenue per Client figure by 20%, from $24,900 to $30,900. As I wrote last year, this is a critical problem for the company. (By comparison, arch-rival Eloqua will earn about $70 million this year on 1,000 clients, or $70,000 per client.)

Ah, but there’s a fly in that honey. Remember that Marketo said it has $70 million cash on hand? (Actually, it said “in excess of $70 million” but we’ll assume the excess isn’t large.) Well, last year at this time it had raised $57 million and spent $20 million, so it had about $37 million. That means the company burned about $17 million in the past year. ($37 million + $50 million = $87 million; if $70 million remains then $17 million was spent.)

That $17 million cash loss in 2011 compares with $7 million I estimated that Marketo lost in 2010. (Marketo has never confirmed this figure, although they’ve never offered an alternative, either.) If total costs equal the reported revenues plus cash loss, the company’s costs actually grew even faster than its client count, and, thus, both cost per client and loss per client increased substantially:

Now, Marketo would surely point out that much of the added expense related to sales and marketing costs to acquire new clients (and, thus, future revenues), so “loss per client” isn’t an important measure. There’s some truth to that.  But Marketo has said that it earns back the acquisition cost in less than one year. So that loss per client seems awfully large even allowing for future revenues and timing differences.

Something doesn't add up here.  Marketo began the year with 140 employees and ended with 240, for an average of 190.  Using my rule-of-thumb $200,000 per employee, this gives $38 million in expected costs.  That would put them close to break-even (a good thing), but it raises the question of why actual costs were $51 million.  In particular, was the $13 million difference spent on recurring operational costs (suggesting continued margin problems, at least until growth slows), or a one-time outlay like payments to early investors or staff.

I have no way to know, and Marketo isn't talking, other than to point out that people with access to the answers chose to invest $50 million.  The rest of us will learn more when Marketo files for its initial public offering, which they said could happen in 2012. I’m looking forward to it.


Anonymous said...

Funding rounds can be deceptive. There could be some recapitalization in there -- I.e., new investors buying out old investors such that all $50m isn't going to the balance sheet. Then again ... Maybe not...

smersy said...

David - nice analysis. I have huge concerns about the viability of the (b2b) marketing automation market as a standalone entity. $100m IPO for Eloqua. Marketo sits at about $100m in funding and profitability is at least a year - possibly more - away. There are at least 5 viable competitors. $30k per customer in revenue is peanuts unless they can scale. There aren't clear differentiations that make that scaling a foregone conclusion. Based on your analysis, what would it take for Marketo to get to $100mm in revenue and profitability?

David Raab said...

Hi Scott. I think Marketo can get to $100 million revenue, probably in about two years if they keep doubling. Profitability is another matter -- really depends on their ability to get prices to a profitable level vs. costs, as well as how much they're spending on acquisition, and ultimately on retention rates too. I have no real visibility into those items but they are definitely a concern.

boblondon said...

IMHO, The very high cost is indicative of a promotional arms race among a disproportionately high number of competitors in a space that is still emerging. The vendors themselves are creating so much noise that it raises the expense bar for those to try to break through.

Factor in the middling average revenue per sale and you have a recipe for continued losses.