A little over a month ago VC firm Greylock Partners led a funding round raising $15 million for Constant Contact, an email marketing vendor that targets small businesses and nonprofit organizations.   Huh?  Why would Greylock invest a sizable chunk of change in a space that is becoming increasingly commoditized and has low switching costs and barriers to entry?  Greylock is an extremely smart VC, right?  I mean they successfully invested in Doubleclick, Epsilon, and Red Hat among others.

My theory is this – Greylock invested in Constant Contact because –
• Small business is a hugely underserved market and small businesses are traditionally technology adoption laggards.
• Sinking disproportionate amounts of money in a market that traditionally grows organically allows them to “buy” accounts and build “value” rapidly.
• Email is just the first in a whole slew of services that the $15 million can build, package and provide small businesses.
• Once Constant Contact gains sufficient momentum it becomes a great merger or acquisition target yielding a nice return on investment for the VCs (Greylock!) who backed it.

WIM: Greylock got a lot of the company for its investment which means it will get good money when it sells.

As with any bet, this one has its risks – the market may never take off; small businesses tend to look for services locally and this market may stay fragmented; costs of doing business with small businesses may remain high; Google, Yahoo and/or Yellow Book may get serious about this market sooner or later which positions Constant Contact as a nice target.

So what do you think?  Is email evolving out of the commodity mode to something else? Is small business going to realize its potential as a huge untapped market?   

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