There has been lots of discussion about Google going after Microsoft with a focus on collaborative office tools vs. siloed, desktop-oriented ones. I can definitely see a need for some of what Google has to offer particularly with the ease of use of unlocking data and analysis and sharing it with others. All that being said, I have a hard time viewing their offering as a replacement for Microsoft office. What I have always thought, however, is what Charlie Wood mentioned in his blog – that a partnership between Google and Salesforce.com could make sense . For more background, I suggest reading a recent Red Herring article and one of my posts from Oct 2004 about goffice and specifically about a Google/Salesforce partnership. My thinking has evolved over the last two years and while there may or may not be a partnership, I certainly envision a time in the future where Google offers an even lower end offering -think free, ad-supported hosted CRM and other simple ERP related apps for the SMB market. This would allow Google to leverage its strength – online distribution and a huge user community. Of course, customers and users will have to get over the data privacy issue but free and easy can be quite compelling. In addition as more users sign up, I could see Google offering APIs so that its own users could build custom templates for certain verticals ala Salesforce’s community approach. As the widgetization of the web happens, think how easy it could be for a SMB to have a hosted web portal that is password protected and a number of widgets like a sales pipeline, presence and one click communication for the employees, and certain financials embedded in the page with a few simple clicks. All of the enterprise portal infrastructure like Epicentric that used to cost boatloads of money and take months to integrate can now be used by many a SMB as we move towards a one-click world. I am not saying that free and ad-supported SAAS apps will take over the world but Google will eventually do it and it will be interesting to see how the market reacts to it. Ok-enough said on that.
Everyone knows that hindsight is 20/20. Back in 2003 when we were deciding whether or not to sell Expertcity (GoToMyPC and GoToMeeting) to Citrix or continue fighting the fight and attempt to take the company public 1 year later, it was quite a gut-wrenching decision. Ultimately we decided that the risk/reward ratio to sell at that time was better than going for the public offering. As it turns out, we all did quite well and it is great to see that a few years later that Expertcity (now known as Citrix Online) is continuing to drive the numbers that we believed we could do. When most people think of the poster children of SAAS, they think of Salesforce.com, WebX, and RIghtNow. As Phil Wainewright of ZDNet mentions in his blog, let’s not forget about the powerhouse that is now Citrix Online. According to Phil Wainewright:
Acquired as Expertcity in February 2004, the Citrix Online division is an on-demand giant in its own right, with trailing twelve month (TTM) revenues of $121.6 million to June 30th this year. That makes it even bigger than the number 2 on-demand CRM vendor RightNow Technologies, which reported a TTM of $99.3 million for the same period, and more than a third the size of web conferencing leader WebEx, with a TTM of $343.7 million (for comparison, on-demand poster child salesforce.com posted $396.6 million TTM with its latest results).
Even more impressive is the fact that the company grew from $35mm in revenue from the end of 2003 to around $121mm in revenue 3 years later – not too shabby for an on-demand play going after the SMB market. In addition, at the time of the sale, the company had raised around $30mm in financing but still had $16mm on the balance sheet when the transaction was completed. So it is hard to argue that the SAAS model if done right can be capital efficient and offer tremendous growth opportunities. In my mind, there are two ways to look at SAAS offerings – vertical market applications or horizontal plays. Of course the challenge is that many vertical market app plays may not be big enough and the horizontal plays have probably been done already and are quite competitive. All that being said, I am still quite interested in looking at companies offering a SAAS platform for Prosumers and SMBs. If you have any of these types of companies that you want to show me, I am all ears. I love the model and numbers like this show that the SMB market is really ready for these types of offerings. As Brett Caine, head of Citrix Online says:
"Companies such as Citrix Online and salesforce.com and lots of others are starting to demonstrate in a very real way that companies of all sizes are able to use services to meet their needs in a cost-effective manner," Caine told me. "I think SMB has fully embraced the services model. There’s no doubt about that. Companies of all sizes have started to seriously embrace the software-as-a-service model."
I know I am preaching to the choir as none of this is new, but I must admit that the growth is pretty impressive. As you know, SAAS will only get stronger as broadband penetration increases, as our wireless devices gain more processing power and better connectivity, and as the tools to access, share, and deliver timely data get even more powerful and easier to implement (think AJAX, enterprise mashups, lightweight integration with other apps, RSS for simple data delivery).
Going back to the earlier point on deciding to hold and go public or to sell at that time, with perfect information it is easy to conclude that we should have held on to the company and continued building it up. However the decision is not that easy as there was lots of uncertainy at the time – we were only a two trick pony at the time and had not launched GoToMeeting and did not know how successful it would be, we did not have a sales channel to leverage like a Citrix, the IPO window was virtually shut for 2 years and we did not know when and how big you had to be for it to open (Google was one of the few Internet companies to go out in 2004), our growth rate was slowing while our subscriber churn was slowly increasing from just the remote access product, and the price was quite attractive. Once again you can always question your decisions looking back with perfect knowledge but I can honestly say that everyone still feels that we chose the right path given what we knew in 2003.
Microsoft released its third quarter numbers the other day and while revenue growth was strong, the stock got hammered and dropped over 10%. Why? Microsoft plans on investing for the long term and putting another $2b into the Internet and other new technologies like the XBox. To sum it up, here is Rick Sherlund, Goldman Sachs’ Software analyst, "It sounds like you’re building a Google or building a Yahoo! inside the company."
Looking at the long term, I am quite excited about the prospects of all of this money coming into help grow the Internet sector and SaaS. First, having another big player push the concept of software as a service will only help further educate and soften the market, particularly business customers Secondly, this will mean that Microsoft will be aggressive with hiring and with acquisitions. I remember being at the Microsoft VC Summit a couple of years ago and hearing Steve Ballmer talk about his acquisition strategy. He would either do huge, billion dollar ones or look at acquisitions less than $20mm. That has been changing and will change rapidly with this renewed empahsis and focus. That only means good news for VCs and entrepreneurs. And as a VC, I wholeheartedly agree with Microsoft’s CFO, Chris Lidell when he says, "Today, we believe we face the largest array of opportunities for growth and innovation the company has ever seen." I certainly feel the same way from a VC investment perspective.
Whether Microsoft succeeds or not is another story, but $2b invested in new technologies will go a long way towards solidifying their position. I would say that they did alright in 1995 when they decided to point their guns at Netscape to make sure the browser and Internet would not circumvent their monopoly on the desktop. The problem is that once they won the browser wars, Microsoft became satisfied, fat and happy. And as we all know, fat cats don’t hunt. Others came around and outinnovated them – Firefox, Google, etc.
This is Round 2, which really started with Microsoft’s purchase of Groove Networks and Ray Ozzie last year. To refresh your memory, I suggest reading Bill’s email from October 2005 (also see the Ray Ozzie memo) where he leads the battle charge for the next generation web, the SaaS era.
Today, the opportunity is to utilize the Internet to make software far more powerful by incorporating a services model which will simplify the work that IT departments and developers have to do while providing new capabilities…..
However, to lead we need to do far more. The broad and rich foundation of the internet will unleash a "services wave" of applications and experiences available instantly over the internet to millions of users. Advertising has emerged as a powerful new means by which to directly and indirectly fund the creation and delivery of software and services along with subscriptions and license fees. Services designed to scale to tens or hundreds of millions will dramatically change the nature and cost of solutions deliverable to enterprises or small businesses.
And yes, it sounds alot like the memo Bill Gates wrote 10 years ago called the Internet Tidal Wave where he helped the big battleship called Microsoft reposition itself and point its guns at Netscape and others. Round 2 is no different from Round 1 but the stakes are higher and it will cost Microsoft oodles more cash this time to create a dent in this market. While we all know that memos often do not mean a whole lot, it is clear that Microsoft is quite serious as they are not afraid to piss off Wall Street and really put dollars to work for the long term position of the business. This will certainly be an interesting battle to watch over the next few years.
As I wrote last year, this "web as platform" gospel is starting to spread quickly from consumer to thoughts on the enterprise. In my mind, what has enabled this enterprise web phenonomenon has been two thoughts – lightweight and simple. Of course, lightweight and simple equals cheap and fast to implement. It is quite easy now for sophisticated users to find and download new software and run it themselves, for them to take simple scripts and tie together various web apps. We are quickly moving to a world where the end user on the edge can and has taken matters into his own hands rather than wait for IT to get something done for them. I call this the age of DIY (do it yourself) in the Enterprise. Why go through centralized IT and their processes when I can get something done with my own departmental budget? Linux, Jboss, and many of the open source opportunities started at the edges first before being brought into the centralized IT organization. As we all know, many new technologies are typically adopted by consumers and then pulled into the enterprise, not pushed. Amazon and other web apps started exposing their APIs and existed long before Salesforce.com.
Jeff Nolan points to an interesting post from John Hagel which highlights this changing enterprise world. What has been deemed as the agile enterprise driven by SOA has actually turned into anything but. The enterprise version of "lightweight" called SOA stands in stark contrast to the next generation web perspective of lightweight. As John correctly points out, enterprise lightweight in the form of SOA means plumbing, it means expensive, it means complex, it means lots of consultants, and it means lots of dollars. In contrast, next generation web technologies are easy, incremental, and driven by the edge and focused on people, not plumbing. While some of these next generation apps may not scale, there is clearly something that centralized IT can learn from the edge, their frustrated internal customer, that things can get done more quickly and more cheaply. As these two philosophies become more tightly coupled we will have some interesting opportunities to invest and make money. While not directly related to this SOA/web mashup discussion, one of the companies I have always found interesting is Splunk which is bringing a Google-like approach to network management. It is downloaded, driven by the edge user, and then pulled into the corporation from the bottom-up rather than the top-down. It stands in stark contrast to EMC’s (Smarts) and IBM’s (Micromuse) way of selling and using their respective products. There will be many more opportunities like this in the enterprise as enterpreneurs leverage user interfaces and technology from the consumer world in the enterprise. Of course, this means a whole new way of reaching customers (frictionless sales), selling to them, and supporting them but this is saved for another future post. The good news is that this new age of DIY in the Enterprise is not going away and is only getting stronger everyday. This also means the creation of many more disruptive enterprise software opportunities in the next 5 years. I agree with Jeff that this is an interesting area to watch and is beyond web mashups-rather, it is a philosophy enabled by all of this new technology, the philosophy of DIY in the Enterprise.
The hype cycle for grid computing started many years ago, and today it is mostly relegated to uses in bioinformatics, financial services, and 3d modeling (think crash testing, oil discovery, etc.). With yesterday’s announcement, Sun is making this grid infrastructure available to anyone, anytime, and on demand at Network.com. As Jonathan Schwartz points out, consumer plays have been driving the surge behind massively scalable web services. Think Google, Yahoo, eBay. On the enterprise side think about any dozen of SaaS vendors like Salesforce, LivePerson and Rightnow. Rather than building your own infrastructure, imagine being able to create your app or service and deploy it with no wires to pull, no datacenter or storage infrastructure to manage, and all with the frictionless use of a credit card or PayPal? Pretty interesting thought? I haven’t done the ROI analysis of $1 per CPU/hr (would love to see someone’s rough cut at this including operating overhead) but this certainly levels the playing field for scalable backends. Imagine if you are a startup and can’t get VC funding but have a killer app to deploy. Without any upfront capital expenditure, why not throw your service on the grid, pay per use, and build from there. That is a big concept, if it works. I believe this is the beginning, the very early beginning, of on-demand utility computing. With Microsoft moving behind software as a service, I see them deploying their own grid on their own stack on a rent per use basis. IBM will too. Competition will breed even better pricing and more opportunities for startups to focus on their apps and product and less about the back-end. I don’t see startups rushing to deploy their whole infrastructure on the Sun grid right away, but it certainly is worth looking at and monitoring over time. What has changed from 10 years ago is that the focus is not on corporate computing (those guys still want their own grids) but as Jonathan so aptly points out, the long tail-the renegade departments who don’t want to wait, the many startups that have new web services, etc. Ironically it was Sun that printed money from the VCs and startup community during the bubble-our checks went to a startup and they bought a Sun, Oracle, EMC backend. Well today the open source wave has killed that business and maybe this is another take for Sun to get at this capital. So how about that ROI analysis?
As I have written before, most of the talk about this next generation web has focused around consumer applications. I, however, have always believed that we should not forget the enterprise. This resurgence of web-based and loosely coupled applications has been driven by consumer-based innovation but there are many pockets of opportunities for the enterprise to take the best of the open web. As you look at the adoption of technologies in the enterprise much of it has been driven by a push-pull mentality where a vendor tries to sell enterprises something they don’t necessarily need. On the other hand, with the growth of the web and broadband over the last five years, it has made it easier for vendors to leverage the pull-push mentality where a single user begins using a service or downloads some code, hacks away on it, and then pulls it into the enterprise. All of this make sense-consumers are web-savvy, broadband is everywhere making it an enjoyable experience, web-based services vs. client applications are driving growth in communications, sharing, storing, and collaboration—these same consumers also work at enterprises and "pull" some of their best practices and learning from the consumer world into their everyday working world. Let me give you an example.
A friend of mine heads up IT architecture at a large health care organization. One of the big initiatives is to reorient the company to focus on the consumer (sounds like they hired too many consultants). What that means for IT is how to do they integrate thousands of different databases to figure out all of the information about a particular doctor? Sure, some of this is an exercise in enterprise data integration but you have to remember that probably 75% of the real information is in the form of unstructured notes about the particular doctor. Think about how much data gets put into CRM systems which is not structured. So naturally he asked me about what was happening in the consumer blogosphere, about tagging technologies, about RSS and turning every application into a publishing system, and how he could potentially integrate this into his enterprise. The pain was large enough that he was looking for new and better ways, think loosely coupled ways to solve his problem.
This is just one example but you could easily think about that customer pain and extract it to a number of enterprises. Data and application integration continues to rank either #1 or #2 in every CIO spending survey but going for the expensive $1mm plus point to point integration methodologies is not the way to go. We just have to be creative and think about new ways to unleash the massive amounts of data in the enterprise to make the workers more productive. Think of the easy-to-use technology used in search, RSS as the new publish subscribe, and loosely coupled applications as a new wave to hit the enterprise in the next few years. Obviously all of the buzzword du jour technologies are just enabling technologies and it is incumbent upon the startup to find the problem, figure out the market potential, and understand how to sell it. It is quite early in the process but this next-generation web will have a huge impact in the enterprise as well as in the consumer space. It will just take some time because while many of the startup companies I speak with understand the opportunity in the enterprise, they are rightly focusing on the market opportunity with consumers first. Many of these entrepreneurs do not want to be seduced by the big dollar figure type deals that are out there knowing that it costs a lot of money to sell to the big boys and a whole different kind of support infrastructure. In addition, most enterprises are not ready for it yet, but trust me, the early adopters are already out there trying to figure out how to use wikis, RSS, and other successful consumer technologies in their shops. This means it is a good time to be looking so if you are an entrepreneur bringing some of these new technologies into the enterprise, let me know as I would like to speak with you to learn more.
Adam Bosworth has an interesting post on the evolution of software and why software delivered as a service will be the business model of the future. As you know, I have always been interested in this trend since my first post in October 2003 and since I invested in a number of companies in 1998 and 1999 like LivePerson and Expertcity (GoToMyPC) that subscribed to the ASP business model. What I have learned and what Adam points out is that it comes down to the customer experience, making a product easier to use for a customer and evolving it as quickly as possible to meet the customer’s needs. Software delivered as a service enables that and packaged software does not. In the time it takes Microsoft to deliver an application (went from 1 year to 5 years), a company delivering software as a service can deliver 60 iterations of its product. As Adam points out, “things that breed rapidly more quickly adopt through natural selection to a changing environment.” I have never thought about software in evolutionary terms, but it certainly makes sense.
From an evolutionary perspective, the ASP business model is quite interesting to examine. While every piece of software should not and will not be delivered as a service, it is also quite clear that customers are tired of buying expensive software products with large upfront licenses, expensive hardware to purchase, manange, and maintain, followed by expensive professional services to get the product up and running. From this backdrop, it is easy to see why reducing complexity and simplifying technology for customers is a big driver to more rapid adoption of products. It is also easy to see why reducing complexity for the customer also helps reduce complexity for the vendor, lowering the friction to sell and deliver its product. This means a more capital efficient business model, one which would hopefully scale much quicker and cost less to build product, sell, and support customers. For the vendor, it makes it:
1. Easier to sell
-shorter sales cycle-do not have to test extensively in a customer’s environment
-lends itself to telesales, can demo over phone and web, do not need a huge sales infrastructure to close deals (just need quota bearing reps without a huge staff of sales engineers and professional services guys to get the job done)
-not a capital expense, usually sold as monthly or annual subscription which can many times be taken out of business budget as opposed to IT budget
2. Easier to install
-no messy installation process, long testing process, or even waiting for hardware to be delivered to customer
-can leave a customer and simply point them to a URL, train them over the phone, and get them up and running
-all of this means that the business can scale rapidly
3. Cheaper to support
-browser-based delivery and richer client interfaces like DHTML make it easy to use for the customer=less training=less customer support costs
4. Easier to integrate
-standard APIs make it easier for software delivered as a service to integrate disparate systems
-once again, reduces costs to deliver product to customers and also removes obstacles to getting customers
5. Cheaper to build
-versus a few years ago, you now have much cheaper bandwidth, storage, servers, and software
-think Linux, Intel boxes, cheap bandwidth, commodity software stacks, and smarter entrepreneurs changing the economics of building and delivering software as a service.
-the economics speak for themselves
Given this, it seems to me that the ASP business model will only get more attractive with time. The ASP model makes it easier for vendors to sell and get customers up and running, lending itself to a more scalable and profitable business model. While I am not suggesting that every product will evolve this way, it is clear that simplicity rules. The ASP model is certainly one way of accomplishing simplicity. Appliances are another way. Packaged software with huge installation costs is not.
I have always been a big believer of the hosted software or ASP (application service provider) model since we made our first investment in LivePerson in January 1999. One of our main competitors of that era was Kana, which at that time, did way better than LivePerson in terms of customers, revenue, and market capitalization. I wrote a post months ago showing how far Kana had fallen, and how LivePerson stuck with its hosted software model and finally hit profitability. Back in those days, the sales people at LivePerson and Kana were not only fighting a product battle but also a religious war of enterprise licenses versus the hosted model. And back then, many large enterprise customers were not willing to have their data hosted with an early stage, private company. The world is changing. Recently Kana announced its new “on-demand” model jumping on the hosted software bandwagon. Comments from the Kana release sound familiar-Siebel and others are increasingly talking about an “on-demand” model and customer flexibility. RightNow Technologies is another company in the CRM space that is delivering an “on-demand” solution, filing for an IPO last month. So why is the hosted or ASP model coming back strong from its near death experience during the Internet boom?
First and foremost, without customers there is no business. Today’s customers are increasingly getting over data hosting concerns and are warming to the pricing and flexibility of subscription pricing and “on-demand” software. They are tired of the traditional enterprise license model, the lengthy implementation costs, paying for site licenses instead of on usage, and failed projects. Secondly, the cost side of the equation has changed dramatically. Hosted software vendors have learned from their erroneous ways and no longer need to build a data center for unlimited demand. Additionally, the pure costs of building a data center and using bandwidth have decreased significantly. Finally, the “on-demand” model is proven as a number of companies are already profitable-look at Salesforce.com, RightNow, and a couple from my portfolio, LivePerson and Expertcity (GoToMyPC).
Given these trends and the success of some of the companies above, it is clear that the new “on-demand” wave is just starting, and we will continue to see enterprise software companies like Kana move in this direction.
So I was at a New Year’s party recently and overheard a great grandmother and grandmother waxing poetically about the wonders of Net2phone and VOIP. Both of them happened to also have children/grandchildren living abroad and the cost savings from using VOIP is tremendous. While the penetration of VOIP is still quite modest compared to the traditional phone system, it really got me thinking that 2004 could be the breakout year for the technology. As the New Year brings about predictions, I have included some from Voxilla regarding VOIP.
I am also currently researching the use of VOIP for my office. My team is in the processs of moving from Greenwich, CT and back to NYC, and I have unfortunately been designated CTO for the transition. My first goal was to outsource as much as possible, particularly our phone service and email requirements. For a small office, it really makes no sense to build and maintain Microsoft Exchange onsite or to buy a huge PBX. Regarding VOIP, I found a number of interesting companies that only serve businesses and host the VOIP infrastructure in their own data center where all of the phone equipment, gateways, and interconnects would be located. VOIP equipment is more expensive than PBX so this way we could reduce the upfront capital cost of equipment by sharing it with a number of other customers. All we would have to do is get a direct T1 connection to their data center and buy some VOIP-enabled phones. On the messaging side, I came across a handful (not alot) of companies that offer hosted Microsoft Exchange for monthly service fees.
In general, most of the VOIP business service providers and the hosted Microsoft Exchange companies seemed to be pretty small players. What I did look for and did not find was a company that offered small and medium sized businesses an outsourced messaging platform for both VOIP and email (sounds like a big opportunity for me having just researched the build/buy decision for my office). It would be great to get all of my messaging handled through one vendor where all I really had to do was plug and play to get my office up and running. AT&T recently announced that they will offer VOIP, and rumors are that they will soon introduce a hosted Microsoft Exchange play. Trust me, I am not going to be running to AT&T any time soon for my business needs. If any of you know of reliable companies that offer both of the above services, please do let me know. Until then, my office will be one of many that take the plunge into the world of VOIP in 2004.
Congratulations to Expertcity and Andreas, John, and Klaus. It has been great to work with you from a board level over the last 4 1/2 years. When the transaction closes, I look forward to writing a little more about how you were able to persevere through some tough times, launch new product, stay focused on leveraging the core screen sharing technology, and build a high growth business in a completely new market. Not only were you an early player in remote access, but you also were one of the first ASPs out there.
Expertcity is not the only ASP making headlines today. Salesforce.com filed to go public and raise $115mm. As I mention in an earlier posting about Google and IPOs, pre-bubble, it took companies 4-6 years from their first round of funding to IPO/acquisition. During the bubble it took 1-2 years. While I am excited about today’s announcements and other recent deals like VMWare (bought by EMC) and Zonelabs (bought by Checkpoint), it is obvious that we have returned to a pre-bubble mentality and the companies that will be significantly rewarded are the ones that embody the philosophy of building real businesses with real revenue and cash flow. Well, isn’t that just business 101? Yes, and this is great news as it is something we can all understand.