Ed Sim's blog on venture capital, technology, the markets, and life in a connected world....enterprise seed, @boldstartvc
Author: Ed Sim
founder boldstart ventures, over 20 years experience seeding and leading first rounds in enterprise startups, @boldstartvc, googlization of IT, SaaS 3.0, security, smart data; cherish family time + enjoy lacrosse + hockey
\I had the pleasure of speaking with Harry Stebbings for the second time on the SaaStr podcast released today. On this episode we took a different tact, focusing more on the zero — 1 enterprise stage and how to get your first referenceable customers vs. scaling post Series B. Please listen here if interested in how to grow and gain your first Fortune 500 customers — show notes below.
SaaStr 190: Why SaaS Founders Should Not Sell Their Products in The Early Days, How Founders Can Build Relationships with Enterprise CIOs and The Right Way To Think About Discounting and Pilots with Ed Sim, Founding Partner @ Boldstart Ventures
In Today’s Episode You Will Learn: • How Ed made his way into the world of VC from one very meaningful high school lecture that changed his life and career path? • What does Ed mean when he says “founders should not sell their product to enterprise in the early days”. Starting from the ground up, what can founders do to begin that relationship building process with enterprise buyers and CIOs? What can a startup do to establish that trust in the mind of large buyers? How much of a role does VC backing provide in comforting enterprise buyers? • What would Ed advise founders contemplating the debate of going SMB up to enterprise or enterprise to SMB? What role should product play in this decision-making process? What are the leading indicators in testing the product that founders should observe for and guide their direction? Where does Ed most often see founders make mistakes here? • How does Ed think about discounting? Would he agree with a previous guest that “discounting is now table stakes”? Rather than the financial element, what does Ed believe the founder should really be looking to get from the buyer in terms of commitment? How does Ed approach and asses pilots? To what extent should they be free or paid? What can be done to set the benchmarks for success and ensure closing?
What does Ed know now that he wishes he had known in the beginning?
Quality or quantity of logos?
What would Ed most like to change in the world of SaaS?
We at boldstart ventures have regular dialogue with Fortune 500 IT and business executives who are at the forefront of creating more agile organizations. Along those lines, I’ve been exploring new storytelling mediums and have put together a few different Series on Medium (best on mobile) sharing some of our thoughts on how CIOs should think like VCs and move earlier stage to partner with startups. Read here for the full story…
Consumer companies are the ones that drive the headlines, that generate the most clicks on Techcrunch, and are top of mind for many in the tech industry. So I’d like to celebrate this brief point in time where the enterprise strikes back. While one of the darlings of the last 10 years, Facebook, is getting pummeled, the enterprise market is back in the spotlight.
Look at the Dropbox IPO which priced above its initial value and came out white hot at the end of one of the worst weeks in stock market performance. Couple that with Mulesoft being bought for 21x TTM revenue (see Tomasz Tunguz analysis) at $6.5 billion and Pivotal’s recent S-1 filing and you can see why the enterprise market has everyone’s attention again. However, I’ve been around the markets long enough to know that this too shall pass.
The real story in my mind is about what’s next. It’s true that Salesforce and Workday have created some of the biggest returns in recent enterprise memory. And with that, VC money poured into every category imaginable as every VC and entrepreneur scrambled to create a new system of record…until there were no more new systems of record to be created. My view is that we will see many more of these application layer companies go public in the next couple of years and that will be awesome for sure. There will also still be some amazing companies that raise their Series C, D and beyond funding rounds with scaling metrics. There will also be the few new SaaS app founders who have incredible domain expertise reinventing pieces of the old guard public SaaS companies.
However as a first check investor in enterprise startups, the companies that truly get my attention are more of the infrastructure layer companies like Mulesoft and Pivotal. We are at the beginning stages of one of the biggest IT shifts in history as legacy workloads in the enterprise continue to move to a cloud-native architecture. Being in NYC working with many of the 52 Fortune 500 companies who are undergoing their own migrations and challenges makes us even more excited about what’s ahead. The problem is that as an investor in infrastructure, it’s quite scary to enter a world where AWS commoditizes every bit of infrastructure and elephants like Microsoft and Google are not far behind. Despite that, it’s also hard to ignore the following facts:
Enormous spend and growth for public cloud and app infrastructure, middleware and developer software of $50b (Gartner, Pivotal S-1)
Rise of multi-cloud
Fortune 1000 digital transformation journeys still in early innings
Most legacy workloads are still locked on-prem and not moved to any cloud infrastructure
Every large enterprise is a software company which means developer productivity is paramount
Infrastructure market moves way too fast and more software needed to help manage this chaos
New architectures = new attack vectors and security needs to be reimagined
and many more threads which can create new billion dollar outcomes. Key here is tying this all to a business problem to solve and not just having infrastructure for infrastructure’s sake.
SaaS to Infrastructure, Salesforce and Mulesoft
Salesforce clearly sees the future and it’s in moving a layer deeper into the infrastructure stack, and combining the world of application with back-end and cloud with on-prem. The irony is that the company that led the “no software” movement is the one that bought Mulesoft, a company where 1/2 of its revenue is from software installed on-premise. What Salesforce clearly understands is that in the world of enterprise, integration becomes king as organizations constantly look to get disparate applications, databases and other systems to talk to each other.
“Every digital transformation starts and ends with the customer,” Salesforce CEO Marc Benioff said in a statement. “Together, Salesforce and MuleSoft will enable customers to connect all of the information throughout their enterprise across all public and private clouds and data sources — radically enhancing innovation.”
It’s a digital transformation journey, one that every Fortune 1000 is undergoing. In a world where Gartner predicts that 75% of new applications supporting digital businesses will be built not bought by 2020″, you can see why Mulesoft’s integration platform helps Salesforce future proof itself and embed itself in a future where developers rule.
The Pivotal Story and Digital Transformation
If you are looking for a story about how large enterprises digitally transform themselves into agile software organizations (to the extent they can), then I suggest reading Pivotal’s recently filed S-1 on Friday. Their ascent over the last 5 years mirrors many of the trends we are hearing about on a daily basis; cloud in all forms — public, private, hybrid, and multi; agility; rise of developers; monolithic apps to microservices, containers, continuous integration/deployment, abstraction of ops and infrastructure, and every Fortune 500 is a software company in disguise. Their growth to over $509mm of revenue from $281mm 2 years ago is a case in point. What Pivotal understood early is that there is no digital transformation and agile application development without infrastructure spend. Benioff clearly understands this which is why he paid such a high multiple for Mulesoft.
For those that don’t know what Pivotal does, here is what they do in a nutshell:
PCF accelerates and streamlines software development by reducing the complexity of building, deploying and operating modern applications. PCF integrates an expansive set of critical, modern software technologies to provide a turnkey cloud-native platform. PCF combines leading open-source software with our robust proprietary software to meet the exacting enterprise-grade requirements of large organizations, including the ability to operate and manage software across private and public cloud environments, such as Amazon Web Services, Microsoft Azure, Google Cloud Platform, VMware vSphere and OpenStack. PCF is sold on a subscription basis.
I’ve been fortunate to have a chance to watch closely through my first check into Greenplum many moons ago which ultimately sold to EMC and spun back out as Pivotal (along with some VMWare assets). I also remember the journey the founders were taking on when they decided to sell into P&L units at Fortune 500s charged with making a more agile company. Instead of selling infrastructure to IT, they were able to sell a vision of how P&L units could deliver on their goals faster. Difficult in the beginning, but proved out over time. These P&L units were the one’s charged with creating the bank of the future, the hotel of the future, the insurance company of the future, all centered around a better customer experience driven off of one platform that allowed developers to be more productive and delivered on any cloud.
My only fear about all of this enterprise infrastructure excitement is that like the SaaS markets of yesteryear, this attention will attract way too much venture capital, driving up prices, and reducing opportunities to create meaningful exits. It’s great that enterprise infrastructure is top of mind, but part of me prefers for it to stay in the background, stealthily delivering amazing results.
We are thrilled to announce our investment in Snyk, which is a developer-first security solution that helps companies use open source code and stay secure. We couldn’t be more excited to be leading this new round of capital again with Canaan Partners and including Heavybit, FundFire, and Peter Mckay (Co-CEO of Veeam) (see Techcrunch for more coverage).
Our initial journey goes way back as we were investors in Guy Podjarny’s previous company, Blaze.io, which sold to Akamai in 2012. For the next few years we collaborated on several co-investments and what ultimately attracted us to Guy’s new company (along with co-founders Danny Grander and Assaf Hefetz), was their bold vision to create a new platform for securing open source components with a dev-first focus. At the time we seeded Snyk in late 2015, open source library usage was growing significantly and solutions were either security first which slowed down dev or dev first but not with enough security built in. With the movement towards continuous integration and deployment, it was clear a new solution was needed.
In a little over two years, Snyk has gone from “founder market fit” to “product market fit” and this new round will allow the company to build out is product offering and expand its Fortune 500 customer base.
With over 120,000 developers using the platform, 100,000 projects protected, 350,000 downloads per month, and notable partnerships with Heroku, JFrog and Microsoft Sonar, Snyk has proven it can get developers to fully adopt a security solution, and the importance of having the strongest database of known vulnerabilities in open source
Funding rounds are always a great opportunity to look back and see how the company’s initial thesis has held up and what has improved or changed. See below for Snyk’s initial vision from late 2015, much of which remains the same today; developer velocity increasing, security isn’t dev-friendly, how do you bridge the gap, esp. in open source world where much of it is third party code.
There have clearly been some tweaks to the model since then, but what is most exciting for us is watching Snyk go from idea and vision in a non-existent market to one where the question of how developers are securing open source components is becoming mainstream. And given some high profile security breaches like Equifax in Sept. 2017 where it was due to unpatched open source vulnerabilities, you can see why the interest in solutions like Snyk’s are gaining rapid adoption.
While the need for dev-friendly open source security may seem obvious today, especially with the stats above, how did we frame our initial investment? Here‘s what got us excited back then, much of which has come to fruition in the 2 years since:
Solving a huge pain point in an emerging but potentially massive market — we were witnessing the move to continuous integration and deployment spreading to the enterprise combined with the growth of open source and third party components; the thinking was that if you could make it dev-friendly then it could be a massive business
Dev first business model with budget from security — we love bottom up, organic models but always question where the bigger budgets are coming from, and what we saw in Snyk was an opportunity to go bottom up with developers and then access the security budget for bigger dollars.
Founder-market fit — GuyPod previously was Chief Architect at Sanctum/Watchfire Security, developers of one of the first web-app firewalls, ultimately sold to IBM. Danny Grander had significant security engineering experience starting in the IDF where he met Guy and into Skybox Security and as CTO of Gita Technologies. Assaf had a Sr Research role at Skycure which Symantec bought last year. This team had the technical and product skills and understanding to go after this opportunity.
Repeat founders — we are always thrilled when founders we backed previously give us thefirst shot to invest in their new company. In this case, we had backed Guy before when he co-founded Blaze.io which was sold to Akamai. He eventually became CTO of the Web Experience Unit at Akamai.
We like to work with founders well before they leave their current roleand start a new company. In Guy’s case we had regular dialogue over a couple year timeframe to both brainstorm and also vet the idea with our Fortune 500 relationships. We also introduced Guy to fellow founders like Tom Preston-Werner from Github (see blog post on Snyk) to help refine the story.
Time to value — incredibly easy to get up and running, authenticate via github, bitbucket and Snyk starts scanning, monitoring, and suggesting fixes
We love being able to help accelerate time from “founder-market fit” to “product-market fit” to which we accomplished by helping Snyk secure some of their early on-prem Fortune 500 customers.
We are purpose built to double and triple-down in our portfolio as they hit milestones and scale their GTM team.
Once again, we couldn’t be more excited about leading this new round of funding and look forward to continued success for the team.
2017 was another year of growing, learning, investing and partnering with amazing founders. Once again, we are grateful to have the opportunity to work with so many amazing founders, advisors, co-investors, and other collaborators to bring the boldstart family together.
Before diving into yet another year and list of predictions for enterprise in 2018, we’d like to recap a few thoughts and moments from 2017.
Thematically our new investments include 4 targeting the “Rise of the Developer,” 3 in “Intelligent Automation,” and 1 in “Decentralized Computing;” geographically 4 are in NYC, 3 in Bay Area, and 1 in LA (more on our themes)
6 portfolio companies raised Series A financings including Manifold, Hypr, and 4 unannounced, 1 raised a Series B (unannounced), and Security Scorecard raised a $28mm Series C.
2 exits including yhat (sold to Alteryx — AYX NYSE) and init.ai, one an early investment in a data science platform and the other on NLP for developers.
We co-founded MState (fka hyperfab, read Coindesk article) with Rob Bailey to help bring enterprise company building expertise and Fortune 500 connections to the blockchain community. Our partners include IBM and one unannounced Fortune 50.
We built out our CXO advisory board and further cemented our Fortune 500 relationships to help our portfolio cos scale from “founder-market” fit to product market fit in an accelerated timeframe (meet our advisors). This resulted in tons of collaboration with large enterprises ranging from product feedback to pilots and customer relationships.
“The Law of Accelerating Returns” by Ray Kurzweil is truer than ever before: the rate of change in a wide variety of evolutionary systems (including but not limited to the growth of technologies) tends to increase exponentially.
In other words, today is the slowest rate of technological change you will ever experience in your life and doing nothing is worse than doing something. Keep this in the back of your mind as you think about the biggest transformation in enterprise tech; the re-platforming of corporate America from legacy to cloud/hybrid cloud and monolithic software apps to microservices driven development. With this pace of change accelerating, everyone will have to move earlier in the food chain; corporates will need to work with earlier stage startups (we are experiencing that phenomenon in our portfolio) and VCs will have to go earlier to invest in those founders before they take off.
NYC has deep enterprise tech: the NYC you imagine that is full of ad tech and media is not the NYC that we see. Some of our latest investments in NYC include founders building companies in serverless, open source data streaming, decentralized biometric security, splunk for customer data, and developer productivity for dynamic code testing. There will be more deep enterprise tech startups founded, funded, launched, and scaled out of NYC in 2018. The talent base is improving, the customers are here, and the west coast VCs are paying attention. A sidebar is that NYC is and will continue to be one of the best places to launch any crypto-related company with Consensys as a base, the large number of fin tech entrepreneurs in NYC, and also with IBM in close proximity, one of the leaders in the enterprise blockchain. That is why we are also so excited about Mstate.
Continued barbelling of VC will continue in 2018:. Either we see lots of smaller or seed funds at one end of the barbell or mega funds on the other end. It’s increasingly becoming tough to be caught in the middle to maintain ownership in your winners, and we will see more established VCs like Sequoia raise mega funds to counter the Softbank Vision effect. As for us, we are continuing to double down on our old school VC model, first check in, leading or co-leading, and rolling up our sleeves.
CIOs are the new VCs: this is the year that Chief Information Officers start acting more like VCs. Corporate America is pressured to decrease costs and improve customer interactions and every Fortune 500 is a technology company. Expect this trend to continue and what this means is that CIOs will take a portfolio approach, make some bets, and double down on their winners. There will be lots of room for startups to wedge their way into large corporates and they will have every opportunity to turn pilots into production. This speed of adoption of new tech will accelerate at the largest enterprises, and they will be reliant on early stage startups to do so.
Rise of the developer in the Fortune 1000: According to Gartner 75% of app development supporting digital business will bebuilt, not bought. There are more devs, more corporates who need more dev tools and services, and we are seeing continued adoption in the largest companies. Tied to this will be a need for a hybrid, cloud/on-prem deployment and we are excited about portfolio companies like replicated that play to this future.
GDPR is the next Y2K:GDPR kicks off in May 2018, and we are convinced it is going to be a massive problem and will sneak up on many enterprises.GDPR is all encompassing and focuses on protecting a customer’s PII (personally identifiable information) and hits every segment of the data pipeline from how developers access data as they create new apps to finding and monitoring all of a company’s PII to eventually allowing end users the right to be forgotten. This will be a huge boon in data and security spend in 2018 directly tied to this.
Enterprise blockchain will prove itself: Cryptocurrencies are hot but the tech powering this, blockchain gets less attention. 2018 will be the year that many Fortune 500s that are piloting this tech will bring applications into production. There’s been lots of buzz for the need for a shared, distributed ledger but 2018 is the year we see production level use cases in the wild.
Rise of Chief Data Officers: As the value of an organization’s data continues to rise, we will see many more Fortune 500s create the Chief Data Officer position. This is a trend that kicked off over the last 2 years and will only accelerate in 2018. This role is crucial as companies look to consolidate to a data lake (cloud or hybrid cloud) to prep for a future driven by AI and machine learning. Investment opportunities will abound as data ops becomes the new dev ops and the need for pipelining software to go from raw data to prepped data increases. This Chief Data Officer will also be responsible to manage the impact of GDPR (see above).
AI is not a market, AI is embedded in every application: AI is not a market, it’s an enabling technology just like Java, wireless, and blockchain are. We said this in our predictions last year for 2017 (AI is table stakes) and this will accelerate in 2018. Some call this “ambient AI” and I just call it software. The real enterprise use cases that will continue to scale is the automation of the back office and the move away from robotic process automation (RPA) to Intelligent Automation (cognitive layer) and the continued move from AI in the back office and moving to the front office in every industry.
Move to cloud accelerates, serverless hits early majority: We are still at the tip of the iceberg as enterprises move from legacy to cloud or hyrbrid/cloud. AWS has dominant market share but multi-cloud becomes a must-have for most Fortune 1000 organizations. This includes choosing best of breed by cloud vendor (Google for tensorflow, AWS for s3 and serverless, etc) and also distributing workloads over multiple clouds. With this, serverless and event-driven workloads will continue to proliferate as companies move beyond AWS Lambda and start using Google Cloud Functions and other solutions.
Dev Sec Ops is the hot topic in security: With the velocity of software development and the reuse of software components, building in security at developer level becomes a must have. Securing open source dependencies like our portfolio co Snyk, managing service to service authentication and policy, encrypting traffic and more become hot areas in 2018.
Quantum dabbling: We will hear about more and more enterprises explore the use of quantum. In 2017, new languages were created from companies like Microsoft and IBM to take classical algorithms and help repurpose for quantum, and this will accelerate in 2018 as the Fortune 500s start building out skunkworks teams to explore use cases. We are still a few years away from having a quantum computer perform calculations faster than a classical machine but once that happens, there will be tremendous opportunity for startup activity.
I’ve always loved investing in companies that can become platforms but not investing in platforms. What does that mean? Well, to be succinct, it’s quite hard to sell a platform. You need to show users/customers how your platform can solve problems. Every platform needs a killer app to demonstrate the power of the platform – show don’t tell. Going back to webmethods, it was how DHL used WIDL (precursor to XML) to embed tracking information in other websites. For twilio, it’s first big opportunity was becoming the SMS provider for Uber. For the blockchain, it’s bitcoin and for ethereum and smart contracts, it’s Cryptokitties. Yes, cryptokitties.
It’s taking over the ethereum blockchain and despite all of the ideas for enterprise smart contracts and tracking assets on the blockchain, cryptokitties is the first killer app (outside of the currencies) showing end users how they can create unique assets on the blockchain and create, share, track, trade and sell digital goods. To date, estimates have transaction volume of over $10mm and individual kitties selling for over $100k. Yes, those numbers sound insane but my point is that decentralized apps like this open the world to the power of the ethereum blockchain.
According to the crytokittie site:
CryptoKitties is one of the world’s first games to be built on blockchain technology—the same breakthrough that makes things like Bitcoin and Ethereum possible. Bitcoin and ether are cryptocurrencies but CryptoKitties are cryptocollectibles. You can buy, sell, or trade your CryptoKitty like it was a traditional collectible, secure in the knowledge that blockchain will track ownership securely.
To get onboarded, we need to start with a Metamask.io plugin to connect our browser to the ethereum blockchain and the world of distributed apps. It’s pretty simple and once you get up and running, you need to add some Ethereum to your account via Coinbase or direct transfer. Once you have Ether in your account, you can buy a kittie and enter the world of blockchain without even knowing it.
So despite all of our discussion on putting car titles, real estate titles, and other unique assets on the blockchain, cryptokitties, a fun and addictive game, is the one application showing how powerful the blockchain can be for asset tracking and ownership. And it’s not so far a leap to think about what other enterprise digital assets can be similarly put on the blockchain.
Lately after every conversation, I feel like the world is being divided into two camps and there is a massive battle going on in terms of who is going to own them and how. To oversimplify, I’ll call it pre-customer and post-customer domination. And there are companies looking to blur both of those categories as well.
It’s pretty hard to create a new system of record these days as Salesforce, Marketo, Gainsight and the like are building tighter lock-in around their products. That’s not to say it can’t be done as those companies have larger fish to fry, mainly huge enterprise customers and $1mm + deals. Opportunities abound in the SME (small, medium enterprise), and we’ve seeded a number of founders going after that space.
The AWS launch of Amazon Connect (see techcrunch article) got me thinking about the current state of play in SaaS. Amazon Connect is a call center in a box, the same tech it uses in-house for their current platform. With that release, companies like Talkdesk and others have much to fear. While I see partnerships with companies like zendesk, salesforce and freshdesk to integrate voice with chat and email, I also firmly believe that it is just a matter of time before AWS continues to extend outward and deploy their own chat/email customer support system to go after their partners. Trust me, it will happen.
I fully acknowledge and love AWS for the opportunity to fund so many amazing founders who are fully leveraging the power of the cloud platform and services. What I also greatly fear is that Amazon and AWS have proven that they are amazing at taking markets that become hyper competitive and just blowing them up overnight with the lowest cost and good enough offering. AWS has also proven that it will continue to move upstream in the stack from the pure infrastructure layer to the application layer.
Here are a few examples:
Amazon Quicksight (launched 10/15) – fast, easy to use business analytics at 1/10 the cost of traditional BI Solutions
Amazon Chime (launched 2/17) – frustration-free online meetings with exceptional audio and video quality – companies like gotomeeting (Citrix) made a smart move selling to LogMeIn
Amazon Workdocs (1/15) – fully managed, secure enterprise storage and sharing service, users can comment on files, share, etc – box, dropbox watch out
I finally had a chance to take a quick read of the respective S1 filings for AppDynamics and Mulesoft. While the growth for each company is quite amazing, two thoughts jumped out at me.
As we move to a cloud-only world with instant-on capabilities and low friction in onboarding customers, why does professional services revenue keep increasing year over year for these enterprise cloud businesses. Secondly, as the world continues to move to the cloud, why does on-prem software exist any more?
Looking at both S1 filings, it’s clear that AppDynamics and Mulesoft have caught on to what Salesforce already knows – if you want to be a massive business you also need to sell professional services. As these tech companies get larger and larger, their target customer also increases in size as these vendors look to move from 6 to 7 figure deals. In order to support continued ARR growth upstream, some of the best companies successfully use professional services as a weapon and make implementation, support and training part of the sale. See Jeff Leventhal’s post (boldstart venture partner and Workrails cofounder/CEO) on why services continue to matter for cloud vendors.
Same goes for why on-prem. In both S1s, we can see Mulesoft and AppDynamics discussing the need for multiple delivery models as many larger customers have regulatory and compliance needs, esp. in banking, insurance, and health care. On-premise and hybrid cloud deployments are not going away despite the continued adoption of the cloud. There is a whole world of what being enterprise ready from a product perspective looks like, and how SaaS companies can use new technology like Docker to have the best of both worlds, SaaS and on-prem without multiple code bases. If interested, take a look at EnterpriseReady.io curated by Replicated (full disclosure: boldstart is an investor).