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I read with interest today Hubspot’s coverage of their new monster VC round.  They’ve raised a $32M Series D monster round from Sequoia, Google, and Salesforce–certainly an all-start cast.

There’s a lot of interesting data in these announcements, such as Hubspot’s view of what market shares look like for the Marketing Automation category:

If true, and we should wait to hear what the other vendors have to say before concluding it is, it suggests Hubspot is blowing away their competition at Eloqua and Marketo, and not by just a little.  That’s pretty big news too.

But there was one part of these announcements that really caught my eye.  Brian Halligan says:

Dharmesh Shah follows with:

For the following leading companies, see if you can name the #2 player and #3 in their category.  You have 30 seconds, I’ll wait:

• Amazon
• NetFlix
• VMWare
• eBay

Difficult, isn’t it?  Chances are you struggled a bit with coming up with the #2 and failed completely to come up with #3.  The point here is, as these tech categories evolved, the #1 player became so dominant that we often don’t even know who #2 and #3 are.

I don’t know about you, but I’m skeptical about this new “rule”.  There’ve been so many “rules” that the Internet has supposedly changed in some form or fashion.  I think it’s worht delving into this one.  First, is it really true that there can be only “one”, or is there something about this list or this environment that makes it a temporary abberation?

First, we could as well have asked whether there can be “only one” SaaS company in each category.  Certainly that market is closer to what HubSpot is than these companies they’re holding up as examples.

While there are not tons of companies, there is often more than one public SaaS company in a category.  I’m going to call that a strike against the “only one” hypothesis.  But, I will point out, that it is very difficult to fund a new SaaS company today and they take a lot of capital.  It may very well be that a factor at work here that has nothing to do with the Internet is the funding environment.  VC’s today are focused on companies that can be bootstrapped before they bring their millions to bear.  HubSpot got their first capital before we had fully entered that era.  It would be hard to found a company today on a slide show and team, which is where most of the SaaS world started.  So that’s a factor that has changed, but that could change back.  Personally, I think that when VC’s get tired of funding 12 different add-ons to each popular service, each with no perceivable barrier to entry, and each at the mercy of services like Twitter, they may start to look for opportunities with more substance than the usual Consumer Internet Plays that need no marketing.  From that perspective, the more firms like HubSpot that succeed, the better.  But, for the time being, we’re immersed in Dot Com Bubble 2.0 as huge valuations roil around us in markets where “there can only be one.”

Second, some of these companies mentioned have profound network effects.  That’s an ideal reason for there only to be one.  eBay is the best example.  I did an auction e-commerce business called PriceRadar that was aimed at delivering some cool optimal merchandising and selling tools for online auctions.  When we started there were circa 8 auction houses and more being announced all the time.  There were going to be not only huge horizontal auctions like eBay, but every major Internet service would have one (like Yahoo!), and there would be vertical auctions for industry (DoveBid).  Within 2 years very little was left except for eBay.  That’s how strong the network effects are for that business.  Netflix has network effects.  How many subscriptions to movies will a household tolerate?  Amazon may have network effects.  They are the online superstore merchandise-wise, they control some key franchises like books, they sell readers that read their books and create further network lock-in, and Clouds may have network effects due to latency.

The upshot of network effects is that there is a very short window for competitors to respond.  If they don’t, the compound interest associated with the network effect and the lock in makes it impossible to catch up.  That should be a sobering thought if you’re competing in a market with network effects, but it isn’t clear to me that Hubspot is.  Do companies plug and unplug their marketing automation software?  To some extent they do.  I was given that perspective by no less an authority than a key executive at one of the three Marketing Automation companies I’ve mentioned so far in this post.  Color me skeptical about network effects for these guys.

What else leads to just one?

Platforms, which are related to network effects.  Sometimes they become so pervasive you must deal with them.  Google owns search.  Facebook is another.  The network effects aren’t as striking as eBay’s when you deal with a platform, but it is a function of needing to be compatible with the status quo and it being too hard to reinvent all the wheels you get with the platform.  Oracle and SAP have platforms in this sense.

What about VMWare?

That one is pretty easy–there are VM managers that are just as popular as VMWare, but they’re Open Source.  You could argue MySQL was just as popular as the big DB vendors, but never hit their revenues because they were Open Source.  This is a scary thing about building a business around Open Source–you may succeed without getting much for it.  It’s very tricky to find exactly the right balance that ignites passion while delivering profits.

How about properties like Groupon?

Man, hard to believe they won’t see a #2 and #3 that make good money.  Living Social is already on that road.  Moreover, there’s been a spate of articles lately that are finally recognizing that coupons aren’t really even all that unique and they may not be the best thing for you and your customers in terms of fostering a long-term relationship.  It’s like the world started switching from newspapers to online media and forgot to bring their coupons along.  So, wow, Groupon is great, I have coupons again!  And then pretty soon we’ve got coupons coming from 18 different mailing lists, we’ve got flash shopping sites, we’ve got small businesses getting hit with tons of visitors who buy below cost and then never come back, and we realize we weren’t missing all that much.

I’m not buying “there can only be one”.  There may only be one if the others don’t get moving soon enough, and the Internet may shorten that window, but that’s all it does.

What do you think?

Related Articles

David Raab, longtime marketing automation expert, raises a little heck with the idea that the game is over, there can be only one, and it is Hubspot.  He also pointed to the little inconsistency in Hubspots graph of lead sources which shows email and not inbound to be the lion’s share.  That caught my eye too.  Read David’s article to see what Dharmesh had to say on that one (good explanation).