Category: SaaS

Cloud this, Cloud that – the word cloud is clearly an overhyped word and reminds me of the beginning of the hype around hosted models and ASPs (application service providers) in the late 90s and the term SAAS today.  Anyway, as I look at announcement after announcement released about cloud computing platforms, one thing is pretty clear to me from an investment perspective.  First, I am not going to invest in the next hot cloud computing infrastructure service that will compete against Amazon, Rackspace, Microsoft, and every other large tech vendor in the world.  This is suicide and far from capital efficient.  Secondly, while everyone looks in the consumer space, I want to look at how software companies can deploy new enterprise-based applications in the cloud, particularly for small/medium sized businesses.  In other words, show me the arms merchants with a recurring revenue model and frictionless sale and I will definitely be interested.

Some of the companies that fit this parameter include Rightscale (founded by Thorsten von Eicken, a cofounder of former portfolio company GoToMyPC) and one that I am looking at in the email archiving and compliance space which has a number of OEM partners reselling its service. Rightscale is an on-ramp to Amazon EC2 and other clouds and provides automate systems management.  It kind of reminds me of a next generation Tivoli or Openview.  The beauty is that the whole sales cycle is quite frictionless and all web-based which means an oppotunity to scale quickly.  There are a number of other recent players I have seen including one for BI in the cloud (not exactly sure what the killer app here is yet) and many others.  Of course the trick here is not to get enamored with the word "cloud" but to really understand the business problem that is being solved and why leveraging a cloud computing platform offers better economics, scale, and competitive advantages.  As I dig deeper into some of these companies, it is clear to me that software purpose-built from the ground up to live in a cloud has a huge advantage since it is hard to retrofit off-the-shelf software to leverage all of the benefits offered by Amazon, Rackspace, and the like.  Secondly, many of the better companies have built some slick tools and services to solve difficult problems like how to make customers feel like they have their own privated, dedicated systems while still keeping costs low.  Finally, from a go-to-market perspective, a number of the companies I have spoken with have not gotten the question of whether or not they could scale as they quickly point to their backend provider and move to the next objection.  So, if you have an application targeted at the SMB market that is taking advantage of cloud economics, please feel free to contact me.

I have written a number of times about frictionless sales and how on-demand companies have a huge opportunity to reduce their sales and marketing costs and subsequently scale their business more efficiently.  Here is an excerpt from a prior post:

Frictionless sales means reducing the pain for customers to adopt and use a service/product and consequently reducing the cost of sales and marketing to get a customer and generate revenue.  As I mention in an earlier post, "The less friction you have in your sales and delivery model, the easier it is to scale. The easier it is to scale the faster and more efficiently you can grow." The lowest friction sale can be a user clicking on a web page and the content owner getting paid for it.  The highest friction sale is spending lots of money on marketing and trade shows and having a large, direct sales force of expensive reps pounding the pavement for months trying to close a large deal with an enterprise customer.  Follow that with a 3 month implementation process to get the customer happy.  There are various grades of friction between these two extreme points like open source business models, software as a service, and reseller/OEM-type models as other forms of packaging and delivering a product/service.  And of course, each of these models requires a different methodology and way of marketing and selling to a customer. Ultimately what you want is sales leverage where every $1 you spend on sales and marketing equals multiples of that in terms of revenue.

The perception that it is much easier to scale definitely holds true if you are selling to consumers, small businesses, and workgroups within large organizations.  However, it seems that many public on-demand vendors are feeling the pressure to deliver growth and ultimately need to feed the revenue machine by going after larger customers.  And what many companies are learning is that no matter how on-demand your software is, if you are selling to huge enterprises you are going to have to spend huge dollars in sales and marketing.  Sales cycles are long no matter how you slice it and even if there is no massive hardware and software installation, many large companies want to have their service customized and integrated, even lightly, with other systems.  in other words, many of these high flying on-demand vendors are starting to look more like the old software companies they are trying to replace.  As per a Wall Street Journal article today, it seems that many of these public on-demand companies are finding out the hard way that no matter how frictionless your sales process is, the bigger the company you sell to, the more it is going to cost you. 

There is nothing to install, so workers can start using online software without the aid of the tech department. That makes it easier for companies that sell online software to get into a business than their on-premises competitors.

Seizing on this, investors bought into online-software companies in a big way. During the first 10 months of 2007, shares of 15 online-software companies tracked by Thomas Weisel Partners increased in value 61%. Since then, however, these companies have lost about a third of their value.

Wall Street has realized that it isn’t enough to simply offer online software—you have to have a sales strategy that can make your offering a corporate standard. It is possible to get individuals, project teams or small businesses to buy online software through word-of-mouth marketing, but it is hard to make money from these groups—at least the kind of money necessary to become a billion-dollar company.

In order to get there, they can’t operate like an Internet start-up, letting their technology spread virally as end users hear about it. They need to sell to the same executives and information-technology professionals who made purchasing decisions before online software was an option. Businesses have a lot riding on the decision to use one product or another. And while having pockets of workers advocate for a particular piece of software is a plus, the execs who sign the big checks still want to see demos, vet the seller and do all the things they have always done when they buy software.

So if you are an on-demand vendor, either stick to your focus of scaling with SMBs and consumers which requires a completely different sales and marketing approach more rooted in traditional online budgets and telesales or be prepared to spend some real dollars if you truly want to go after the big guys. 

The first time I heard the term Red Shift was from my portfolio company, Greenplum.  Greenplum has used red shift to characterize the nature of the existing database market where exponential data growth driven by network computing and internet applications have outstripped the capacity of existing mainstream vendors.  Hence, a new approach was needed (our database software running on commodity clusters) which would allow companies to load and query terabytes of data at 10-100x performance and scale over traditional vendors.  Ok-enough of the sales pitch.  Moving on, it is clear that red shift data requirements are only a fraction of what’s necessary to meet this exponential growth as it will put tremendous strain on the existing IT infrastructure consuming ever-increasing amounts of CPU cycles, energy, storage, and more.  If you want to read more about this red shift theory, I suggest checking out a great article by Richard Martin in Information Week.  Martin neatly summarizes Red Shift as defined by Sun’s Greg Papadopoulos to be:

• Red Shift refers to companies experiencing exponential growth in demand for raw computing power
• Red-shift companies tend to be Web 2.0 focused like YouTube and MySpace, or big financial, energy, or pharmaceutical companies
• Those companies, Sun CTO Greg Papadopoulos says, will experience similarly high levels of growth in users, revenue, etc., while blue-shift companies will grow relative to GDP
• Along with the cost of powering and cooling in-house data centers, the red shift is driving a surge in utility computing and software as a service

Based on my experience with both consumer Internet and companies selling infrastructure, I can say that this all feels right to me.  It is also no wonder that virtualization which helps IT consolidate servers and increase capacity utilization and utility computing are top of mind again.  Think about Amazon’s S3 and EC2 which I have written about before as utility storage and processing for the masses. I am definitely meeting more and more startups which are starting to offload some of their computing requirements to these services.  And of course, while Greg Papadopoulos is pushing this vision of the red shift, he has put Sun in a great spot to execute on this with new platforms and ways of keeping up with this exponential demand.  The only question as Mark Anderson points out in the article is not if there will be an exponential increase in servers sold but how many of them will be Sun servers running Solaris versus open systems.  Either way, it looks like the stock market has been voting with its feet as Sun has been performing quite well as of late.  And as a VC whether you believe in the red shift or not, we would all like to find companies experiencing hypergrowth where one of the main uses of capital will be for scaling the infrastructure to meet demand.  That is what I call a good problem to have.

Last year I wrote about the newfound productivity of the prosumer, the consumer who is bringing technologies into the workplace in a DIY (do it yourself) fashion.  If IT can’t or won’t get something done, users can simply check the Internet for the latest web-based service or software download to help them solve their problem.  In this month’s CIO Magazine which landed on my desk somehow, the cover article is titled "Users Who Know Too Much and the CIOs Who Fear Them."  The subtitle is "They’re smart, productive and using IT you didn’t provide.  How to manage the modern user."  I think we are at the very beginning stages now of IT’s recognition that the world is changing and like Jeff Nolan says the balance on the continuum of systems and people should move more towards a people-centric vision of technology.  What do the people want and how do we provide them the ability to get things done while at the same time balancing our need to keep a safe and secure environment?  Sometimes these issues are directly competing with one another.  It is still quite early in the CIO’s recognition of a user-centric IT world but the fact that CIO magazine is focusing on this means that it is becoming more critical to its readers.

Over the next couple of years, it will be interesting to watch how the battle between top-down, conservative IT and bottom-up DIY employees gets resolved.  IT wants control, security, and compliance while users just want to get things done.  As the article advocates, the smart CIOs will figure out how to balance the needs of their users and the role of IT.

This will require CIOs to reexamine the way they relate to users and to come to terms with the fact that their IT department will no longer be the exclusive provider of technology within an organization.  This, says Smith (Gartner analyst) is the only way to stay relevant and responsive.  CIOs who ignore the benefits of consumer IT, who wage war against the shadow IT department, will be viewed as obstructionist, not to mention out of touch.  And once that happens, they will be ignored and any semblance of control will fly out the window.

Whether or not CIOs get it, does not really concern me as the nature of sales for many of these DIY apps and services should be focused around the end user vs. centralized IT.  Given this, the sale should be much different, less costly, and with much less friction.  If a user wants to track his sales force productivity, they can go online and sign up for Salesforce.com or create their own through a SugarCRM download.  There is no on-site installation as the web helps deliver the product efficiently.  From a sales perspective, as these companies grow over time, much of their sales can be done over the telephone or through a WebX or GoToMeeting session with only the large accounts reserved for an expensive direct sales rep.  Given this bottom-up, web-based model of selling and delivering software, it will be interesting to see how the incumbent vendors respond.  For example will users adopt a collaboarion platform from IBM that IT has pushed down on them or would it be better for CIOs to figure out what their workers are using and standardize on that?  Does this mean that the smarter incumbent software vendors look to buy startups that already have bottom-up traction versus building their technology from scratch?  As I was writing this post, I just noticed that IBM just signed a deal to pipe Google gadgets through its Websphere portal. 

"These sites are not just valuable to consumers. Businesses want the same content. Why would we keep these two universes separate?" said Larry Bowden, vice president of the IBM Lotus division for portals and Web services.

While Internet access, and thereby Google Gadgets, may be easily available to consumers, many businesses restrict access to the latest Web applications for security reasons, to make network management easier and to limit employee distractions.

By allowing Google Gadgets to work within its WebSphere Portal, IBM is making it easier for companies to give employees access to popular Web applications while keeping control over how they are used. Companies can decide which Google Gadgets they can see.

"The end user decides: We no longer need to go off and call a technician," Bowden said. "The power has been turned over to the people who know best. You know best."

It looks like IBM gets it and is trying to help its IT customers strike the delicate balance between control and giving users what they want.  All I can say is that the intersection of the enterprise and the web-based platform will be an interesting space to watch over the next few years and it is clearly heating up.

It is not a surprise that Google officially launched Google Apps Premier which is a bundled package of their hosted offerings for word processing, spreadsheets, email, calendaring, and instant messaging.  I wrote about this in the fall of 2004 when Adam Bosworth joined Google from Microsoft and wrote a lengthy blog post on the web-based platform.  Google has clearly been executing on this vision over the last two years, but I do not see this as a Microsoft killer.  While I am huge fan of web-based software and data in the cloud, there is one big problem – you always need to be connected.  For the last two weeks I have been living in a web-based world as I had to send my laptop back for service.  While I could do everything I needed to do, I must admit I was about 60% as productive as usual.  This lack of productivity partly came from clicking and waiting in my web-based Exchange offering and partly due to lots of travel which meant I could do absolutely nothing on the airplane.  What I see Google Apps doing is breaking the market into two segments – those who want to easily share and collaborate information with others in a lightweight manner and the power users who live, eat, and breathe in their productivity applications.  I certainly see myself using Google Spreadsheets to post some information on my blog but it will be a long time, before I even think about replacing my desktop productivity applications. In the meantime all of this is great for consumers as competition is forcing Microsoft to rethink their whole application strategy by incorporating a SAAS component into most of their offerings.  I can only assume that Microsoft will get better at this and make it easier for their users to work online and offline in a seamless manner.  In my web-based world, disconnected applications with an online component will rule.  Let’s see what the Adobe Apollo platform brings to the world later this year.

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.