Blurring lines in enterprise SaaS; the race to own customer data

I’ve written before about the competitive nature of SaaS and the amount of entrants in every category.

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.

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Why I love and fear AWS

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:

  1. Amazon Quicksight (launched 10/15) –  fast, easy to use business analytics at 1/10 the cost of traditional BI Solutions
  2. 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
  3. Amazon Workdocs (1/15) – fully managed, secure enterprise storage and sharing service, users can comment on files, share, etc – box, dropbox watch out

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Enterprise Collaboration Wars Lessons for SaaS startups

It’s going to be fun to watch the enterprise collaboration wars and how each company is approaching the market! In my mind it is a microcosm of many battles being played out with startups versus incumbents. Do large enterprises go for “best of breed” providers or the “one throat to choke” model? How does the bottom-up model work versus the traditional top-down enterprise sales model? As for collaboration, here is a view of some of the players:

  1. Slack – bottom up, adding enterprise features, but not on-prem yet, many early adopter enterprises but can they bridge gap to more traditional
  2. Microsoft – Teams, product not as fleshed out but starting with bases of thousands of enterprise clients due to enterprise company licenses, does that mean adoption?
  3. Box/Dropbox – coming at it from a technically commodity base layer of file sharing and storage, trying to add stickiness on top with Paper by Dropbox and Notes from Box
  4. Google – has Gsuite for Google Cloud – do they add a collaboration layer or do they just buy someone else?
  5. Salesforce – has Quip, do they keep adding layers on top?

and many others…

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Thoughts on SaaS in 2017

When we started boldstart in 2010, a core thesis of ours was to invest in next-gen SaaS which we called SaaS 2.0 at the time and best highlighted in our end of 2015 review:

SaaS 2.0, reinventing for the mobile first workforce will continue to remain robust. We also see older school SaaS companies being rebuilt with more flexible back-end technologies like microservices and reimagined with a more responsive and beautiful UI.

While we continue to be excited about opportunities in SaaS startups, it is clear that the game has changed substantially since 2010. Despite the amazing productivity gains from open source, AWS, microservices and other new technologies, we have seen the time to launch extending and the cost of getting a minimally viable product (MVP) out the door increasing. So why is this the case?

  1. Most SaaS categories have multiple players and to build a transformative SaaS app means the bar to what a “minimally viable product” is much higher than it was 5 years ago. In other words, a MVP of 5–6 core features may now need 8–10 core. This takes more time, money, and resources. Founders need to make tough decisions on what their definition of feature parity is and what that one unique product angle will be to rise above the noise (more to come in a follow up post).
  2. The competition for talent has and continues to be fierce so as tech costs go down, human capital costs continue to increase.
  3. Cost of getting message to market has increased due to the noise from the many competitors in a particular space.

So what can a founder and investor do in this changing world?

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2017 will be big year for freelance economy Linkedin/Microsoft allowing users to hire freelancers in-app

When Microsoft announced the purchase of LinkedIn an overlooked element of the story was how they planned to give users the ability to find experts while inside of all office apps. Imagine being in powerpoint and having a sidebar to find expert designers who are connected to you for hire or sitting inside of Microsoft word and looking for some editing help from a contact of yours. This is going to be big and disruptive.

One of the key trends we have observed in our portfolio is that larger enterprises are looking to augment their teams using on-demand/freelance labor. We are seeing this across the board in companies like Wonder (on-demand research), Workrails (on-demand software consulting), Emissary (on-demand sales intelligence) and Crew (best freelance mobile designers and developers). We must all be wary of linkedin but I do believe there will be opportunities for incredibly focused startups to thrive in this space as LinkedIn and Microsoft make this more mainstream in the business world.

Startups and financial models for SAAS companies

The other day I met with an entrepreneur I was advising as he prepared to raise his next round of funding.  In the meeting, he wanted me to narrow in and focus on his financial model.  Financial models for startups are important from a big picture perspective, but I never like to get mired in the full details as things always change in the early stages.  So first and foremost, I let him know that while it was nice to have a well thought out spreadsheet, that the most important thing was getting the product developed and the right team in place.  I don't invest based on detailed spreadsheet models – getting comfortable with the team, the problem being solved, and the market opportunity are more important in the early days.  Secondly, what is most important for me to understand is the expenses and what milestones will be achieved with this first round of funding and whether or not it would be suitable enough to raise the next round of financing.  Finally from a big picture perspective, I like to understand the unit economics of the business – can this really scale, is the company capital efficient, and are there high or low gross margins.  While the revenue model may change as well, I like to at least understand going into the investment that the entrepreneur's head is in the right place and that the economics work right from the start.

Given my experience with SAAS based companies like GoToMyPC (Citrix Online now) and LivePerson (Nasdaq: LPSN), we also spent some time discussing key financial metrics for SAAS businesses that he should pay attention to as he ramped up his business.  Once again, no startup spreadsheet is going to accurately predict the future, but it is imperative to understand some of the key variables that will drive your business so you can prepare early on to have the right people in place and the right focus.  In my mind some of these key variables include new bookings, growth of deferred revenue, churn rate, cost of acquiring new customers, and obviously cash.  New bookings are a better indicator of sales growth for a SAAS company because typically contracts are signed for 1 year or more and the revenue is recognized monthly as the service is delivered.  So if a SAAS company signed up $1.2mm in bookings for December, it may only recognize $120k each month.  The remainder would go into deferred revenue.  Another area that is quite important is churn rate.  If your company churns or loses 5% of customers every month, then during the course of the year the company will have to replace a significant number of customers just to maintain status quo.  What this tells a company is that they while focused on adding new customers, they also have to make sure customer satisfaction is up to snuff and that they keep their existing customers happy.  Also if your cost of acquiring a new customer is high and breakeven is longer than the contract length, then your company will never be financially stable if you cannot keep your customers on board.  Finally cash is an important metric for all startups – watching the burn rate and being proactive about it can keep you fighting through the lean times and prepared for growth.  While many SAAS companies may collect cash monthly or quarterly, some collect annual fees by offering discounts by paying upfront.  This is a great way for SAAS companies to keep the cash coming in earlier so they can use it to fuel growth.

The Googlization of IT

Today I took a sales team from a portfolio company to meet with a couple of senior IT executives at a major retail company.  Towards the end of the meeting, it started to become quite clear to me the effect that Google and the web has had on IT to date and where it was going. In an oversimplified way, it seems that there have been 3 distinct phases to how the web and Google have impacted the enterprise, first starting at the app layer and increasingly diving deeper into the core infrastructure.

Phase 1 – Consumerization of IT – all internal corporate users are consumers first and then employees second.  we have all seen how consumers have gotten used to using browsers and SAAS-based applications and how successful startups have been able to provide web-based applications that users can pull into the enterprise environment starting at a department level rather than having to go out and sell and push technology into enterprises.

Phase 2 – Rise of open source – I would call Phase 2 the rise of open source software over the last 10 years – most of which is hardcore infrastructure type software such as databases, virtualization software, and the like.  IT folks leveraged the web and Google not just for applications but also to download core software to help run their internal operations.

Phase 3 – Googlization of IT – have as much of your infrastructure as you can run like Google's – distributed, commodity-based, and in the cloud on a private basis.

Phase 1 and 2 are ongoing and Phase 3 is where I see a few of the more forward-thinking IT departments I have met with over the last few months going.  I am not just talking about Google Apps (like email, etc) but about how companies can run their infrastructure internally like Google.  If Google can deliver a number of highly scalable web-based apps by clustering commodity servers, then how can enterprises do the same for themselves.  This is not about getting sucked into buzzwords on the cloud but really understanding the cost savings and performance benefits a company can get from transitioning some of their infrastructure to a Google-like model. 

One company in my portfolio that is leading the charge in the data warehousing space is Greenplum.  A customer can buy our data warehouse, cluster commodity servers like Google, and get petabyte scale and much better performance for less than the cost of maintenance of many existing solutions on the market today.  In addition, large global companies can have these nodes accessible to anyone anywhere in what we call the Enterprise Data Cloud.  One of our large customers said that data was a strategic weapon and that he wanted to make the cost of a running a new query zero.  In today's world and without the enterprise data cloud initiative I can tell you that running new queries in a global organization is an expensive and time consuming task of replicating data, creating data marts, running the processes, etc that can take months to get going and days to run reports.  Another company in which I am an angel investor is called Eucalyptus Systems whose tagline is your hardware, your data, your cloud. Eucalyptus is an open-source system for implementing on-premise private and hybrid clouds using the hardware and software infrastructure that is in place, without modification.  Eucalyptus adds capabilities such as end-user customization, self-service provisioning, and legacy application support to data center virtualization features, making IT customer service easier, more fully featured, and less expensive.  Yes there are public clouds like Amazon EC2 which is now also offering virtualized private clouds.  But the reality is that many large IT organizations want to control their own data, find ways to make it more easily accessible to everyone, significantly reduce infrastructure costs, and be able to launch new apps or services quickly and cheaply.  This is where I believe many IT organizations will be headed in the next 5 to 10 years creating private and hybrid clouds for existing and new applications, a phase which I call the Googlization of IT.

I want it NOW, I want it REAL TIME

I was recently asked by a friend if he should get his son the new Nintendo DSi.  This would be an upgrade from the current DS and also add the photo capability.  As I thought about my own son's usage of the device, I said no.  Once my son got an IPod Touch for music and now games, he never looked back.  While he loves the music, the real reason is because of the App Store and ability to instantly download any game for free instantaneously.  While the DSi does have a Wi-Fi connection, the IPod Touch is just so easy and frictionless.  And as evidenced by the rise of the Internet and the ability to download movies, music, and games instantaneously, it got me thinking more and more about the fact that we live in the "Now" or "Real Time" Generation.  Yes, it has been happening for awhile but we finally have the broadband speeds and ubiquitous connectivity that we craved for the last 10 years.  We also have better pricing and better products to be able to download those movies and games anywhere and on any device.  In addition, you can just see the rise of Twitter as another example of this new culture of real time.  People no longer want to wait for anything any more – if you have something to say, say it on Twitter or Facebook.  Products and friends are just a click away.

Sure, we can clearly see the impact of the Now Generation on consumers and new web applications.  A substitue product or application is just a click away.  If you don't like the user interface, if the product loads too slowly, or if the registration process is too burdensome, you can do another Google search and instantly find a substitute.  But what does it mean for the enterprise, for the corporate IT professional and startups selling into these companies.  I have always believed that the old way of selling enterprise software products with expensive sales forces and complicated installations is dying.  Buyers no longer want you to push software that they may or may not need.  They are empowered and can easily do their own Google search and download open source software or fill out a short registration form to trial a web-based app.  They, like my own son and his friends, are increasingly seeking instant gratification.  They are not just consumers but prosumers who are pulling new products into their departments and potentially into their enterprise.  I wrote about this instant gratification in 2006 and it is happening faster than ever.  The kids who were in college 5 years ago are the very same ones in the IT department tasked with coding new products.  They are used to doing more for themselves, doing their own research, and being able to trial new applications in real time.  If you are an entrepreneur selling into an enterprise and don't see this trend now, you will be toast in the future.

Pioneers get arrows in their backs

Pioneers get arrows in their backs – I have experienced it firsthand from an active investor's viewpoint and written about it in the past.  Being early in a market is great but being too early can be deadly.  Just like the settlers in the westward migration, entrepreneurs who are too early will get arrows in their back.  It doesn't matter if you have a rock star CEO (Bill Coleman who founded BEA) and $100mm of funding from some great investors.  If you are too early and have to spend lots of money educating a market and get engaged in long protracted sales cycles and pilots, you are not going to be able to spend your way to success.

That is what it seems like is happening to Cassat Software. Forbes has an article about Cassat nearing the end.  On the surface it seems like the company was built for the right place at the right time helping enterprises save tons of money and run their internal data center like a cloud.  However the first funding went in 6 years ago and has totaled around $100mm since then.  Here is a quote from their founder and CEO:

For many years, Coleman acted as something of a prophet for cheap computing via the cloud, but he also thought it would mean a sharp drop in pricing with which the big companies would not be able to compete.

"The big guys copied my story," says Coleman. Cassatt, he adds, was upended by a slowing economy and by customers skittish about closing big orders or changing existing ways.

"What frustrates me is my own naivete," Coleman told Forbes. "I thought I could give companies something radical that had a proven return on investment, and they would be willing to change all their companies' computer policies and procedures to get that. Right now, it's hard to get people to get beyond proof-of-concept tests or a data center energy analysis."

He will be right eventually but will not have a lot to show for it.  A couple points to make – raising too much money too early can be harmful as it puts huge expectations on a company before it has proven itself and selling million dollar plus licenses into enterprises has gone the way of the dinosaur as only the biggest companies can afford to do this and it is extremely expensive to do.  Remember some of my old posts about frictionless sales and leveraging the web for sales/marketing and inside sales?  Having just participated as an angel in the recent Eucalyptus funding led by Benchmark, we are hoping to avoid this fate leveraging free download model which has generated over 14 thousand users, many of whom are corporate customers.  In addition, we have signed partnerships and are bundled in the Sun cloud computing initiative and the new Ubuntu enterprise Linux release.  Got to love leveraging partners and downloads to drive sales leads and sales.

Hybrid clouds are coming

Amazon has taken off with its cloud compute infrastructure but there still have been some limitations from an enterprise perspective.  Mainly, some enterprises are concerned about keeping their data private, about reliability, and storage costs over time.  Any enterprise looking at potentially leveraging the cloud would love to have a hybrid solution which allows them to manage their own internal cloud and then burst over to a public cloud for either automated failover, extra storage, or to port an application over after using an internal platform for development.  Sun seems to get it as evidenced by their announcement today to offer their own cloud computing platform.  Key here is that it will be interoperable with Amazon S3 and its platform.

"Sun anticipates that the cloud scene will feature many clouds, both public and private, that are interoperable and driven by different application types. Applications eyed for deployment on Sun Cloud include Web 2.0 applications, social networking systems, gaming applications, and anything that needs the scale of the Web, said Tucker. Departmental applications are envisioned as well.

"What we're introducing in New York here is we're talking about our public cloud," for developers, Tucker said. Sun has seen a lot of interest in cloud computing from enterprises, he said. "It’s getting very rapid uptake at least in the large enterprises today," said Tucker.

What is interesting is that their is a little known startup with great open source technology called Eucalyptus which is helping drive some of this initiative. Eucalyptus will be the software that will allow the Sun cloud to interoperate with other platforms and services.  With this open source platform, companies can now deploy apps on their own cloud and use Amazon or other cloud services for high availabilty or extra storage without vendor lockin.  Congratulations to Rich Wolski and team as they have made tremendous strides during the last 6 months.  I was just with them in New York yesterday and believe they are on to something big.