The story of SaaS is just beginning. The industry we see today is nascent. Its future shape will be different. Infrastructure and Enterprise software will be dominated by large global players. SMEs and other sectors will be served by a much wider variety of SaaS. Open platforms and integrations will allow many companies and models to flourish. The winners may already have been founded. But it is far too early to say who they are today.
We are till in the early days of SaaS. The scale and revenues of traditional licence driven software companies dwarf the new service based model. Yet all the innovation is coming from the SaaS sector. No-one doubts it will be the business model of the future. All those legacy giants are scrambling to change path.
As this nascent industry matures, what will it look like? Like all new industries it will be different. The early stage, unproven no legacy animal we see today will evolve. This will be the biggest shift in the structure and power bases of the B2B software industry in the next few years. Here are some ideas on how it might shape up.
Infrastructure will become the domain of true global giants. It will be high barrier to entry, unsexy ow margin business. Big institutions and funds will love it for secure returns and heavy use of investment. HP, IBM and Huawei could evolve into these companies. Google and Amazon may also get there. Some telcos may also be able to adapt and play in this space. Software companies will take it for granted.
SaaS Enterprise Software
Core enterprise software will also be dominated by a handful of players. There will also be large vertical players with less widespread brand recognition. These will emerge through consolidation of companies with large customers bases. But broken financial models. When funding becomes tight this process will kick in.
SAP and Oracle may be among the winners but no guarantees. Either way products that look like and integrated suite will come back into fashion.
The SME SaaS sector will also see consolidation. For this sector the big players will offer a portfolio of products. Rather than an integrated suite. There will also be room for a Mittelstand of vertical or functional specialists. Companies with few outside shareholders. Mid range revenues. And a trusted reputation right across their niche. There will be few geographic plays. Global will dominate even for smaller companies.
B2B SaaS will split between open platforms and walled gardens. Open companies will use APIs and other integration techniques. This approach is already emerging today. It will be easy for startups. Complementary software or even competitors to become part of the ecosystem. They will offer customers an option to plug and play any software they choose. Perhaps Zapier or its successor will be a software provider not just a connector.
The walled gardens will survive in the market because they offer customers continuity. When the current funding cycle turns down there will be a lot of pain. Some companies and the data they hold disappear overnight. Buying the latest thing will look less attractive even if recovery is quite straightforward. Reliable supply will become as big a concern as security for a while.
Winners In SaaS
The future leaders may already have been founded, maybe they are household names today. But this is harder than it seems to predict. Some of the big winners will be from India, China or elsewhere in Asia. At least one will be from Africa. Silicon Valley will continue to innovate and play a major role. But it will not be as dominant as it is now.
The SaaS Revenue Model
Tweaks and innovation in the revenue model will continue for a while. But in time 3 or 4 main models will become established. Software companies will flock to these arguing that this is how people buy. Margins will remain high. But GAAP profitability and strong predictable cash flows will also be important. An essential part of the financial story. Companies with these characteristics will appeal to investors. 10 year track records without dividends or profit will be less popular.
One day the numbers will have flipped. SaaS will be the only way to buy and use software. Then it will be time for the next disruption.
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There is a famous quote from Dwight D Eisenhower in his role as a General. “In preparing for battle I have always found that plans are useless, but planning is indispensable.”
I agree with this as do many others. Dave Kellogg, CEO of Host Analytics put it top of his list in this recent selection of quotes. The sentiment sort of chimes with my practical experience. It is one of those wise sayings. But quite hard to pin down why it fits so well with the real world.
The Joys Of Planning
Start with planning. I have spent a disturbing part of my life preparing, discussion and reviewing plans. Business plans, actions plans, personal plans, whatever. The process works well for:
Of course planning is also the best possible way to create a plan. But don’t let the disappointment of the end result put you off!
Don't Make A Plan For Your Startup
So why are plans useless?
Find time for planning. Invest in space and freedom to debate and discuss. Write down the results. Then enjoy a laugh about it when you look back. Don’t try to live by it. Use the process not the plan.
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I first found this book during a course on strategic thinking. Held at a delightful seaside resort in Denmark. One of the sessions included a film of Arie De Geus. De Geus was head of strategy for the oil giant Royal Dutch Shell in the 1970’s. During this time he adopted scenario planning as a standard. He described his experiences during the oil shock of 1974. When the price per barrel quadrupled almost overnight. He was able to pull a plan for a similar scenario off the shelf. And help his CEO respond faster and better to the crisis. It transformed Shell’s standing.
I was stunned. Here was a man who had thought the unthinkable. And planned for it. Remember this is long before Black Swans became a thing. Before PC technology disrupted the world. Amazing. I had to know more. When I returned home I went to a bookstore (yes this is before Amazon as well). And found a slim volume written by the Dutchman.
The Living Company became my favourite business book. It is a classic in my opinion. Although not as well known as some of the works I have written about. And there is a twist. The message goes against one of the big founding myths of the startup world. It is about survival and sustainability. Not growth and fabulous valuations.
What Is The Living Company
During and after his time at Shell De Geus studied some of the world’s largest companies. He started from a unique perspective. The average lifespan of a multinational is just 40 -50 years. Less than a human being. For example between 1970 and 1983, one third of the Fortune 500 ceased to exist. Bust or taken over.
He wrote an article for Harvard Business Review called the Learning Organisation. And then published The Living Company. Both have a single theme. What makes the survivors different?
Long Term Business - Elephants Not Unicorns
The startup world today is like stock markets since the tulip mania of the 1600’s. It exalts the short term. The highest valuation or the most money raised today. Not yesterday and not tomorrow. We have even coined a word to describe these winners. The unicorns.
Yet the role models are Google, Apple and maybe Amazon. These look more like Elephants. Enormous, successful and long lived. Page, Brin, Job and Bezos did not start a business for the short term. They wanted to change the world.
I believe there is far too much attention paid to funding and valuation. We live in a day trading kind of world. Startups are still high risk. Those that survive even for 20 years will build a real business. When the boom ends the companies left standing will not be just those that have raised the most money.
If your aim is to be in that group, you can learn from The Living Company.
4 Lessons To Build Your Own Business
The book is not that long. But it is rich in examples and thought provoking angles. In the end there are 4 core lessons:
Sensitivity. Learn and adapt to the environment. Including markets, regulation and social expectations. Every startup needs to begin this way. You will not get off the ground if you don’t understand the market. Retaining that sensory perception and allowing to determine business strategy is a different matter.
Pivots are a part of sensitivity. Over the longer term a company needs to keep listening. And be ready to undertake a total transformation. The digital revolution is going to find out many established organisations. It will destroy those who are not able to change in response to a new environment.
There are also cautionary tales within tech. Look at the challenges facing Microsoft. It has been slow to react to the growth of mobile and the cloud.
Identity. Great companies are communities with their own culture, personality, rituals and traditions. This emerges. It cannot be set from the top. I have seen great business dying a slow death. Because consultants and CEOs demand strategic change. And declare victory as the house of cards falls around them.
Startups need to understand their own culture. This is a collective thing. It is not just the choice of the founders. But in the early days you can influence it. In ways that will not be possible once you start to scale. At all times you need to nurture and value your identity. Even including the parts that frustrate.
Whatever the size of your business, the one tool you have which can impact identity is hiring and firing. I worked for many leaders during my time in business. the single most successful did not change strategy. Or organisation,. Or goals. He looked at the top 100 people. he fired the 5 who were the worst fit. (note not the worst performing). And hired 5 new people. In less than a year performance improved by 20%.
As a startup, hire people. Check experience and qualifications. And pick those you want as part of the team. Nowhere is this more true than when hiring sales teams.
Tolerance. Long lasting companies work with their stakeholders. Governments, suppliers, customers, shareholders, teams, partners, communities, unions. Everyone and every group. They adapt to the ecology that surrounds them. Remember we are talking multinationals here. Tolerance also requires a decentralised approach. The ecology is different in different countries, markets or communities.
Startups need to empower people to build and sustain relationships. It is great to be data driven. But numbers do not answer every question. Command and control delivers short term results. It does not make a business sticky or sustainable. The eco system is not just something you give back to. It is the life force that sustains you.
This may prove the biggest challenge to today’s tech giants.
Conservative Financing. Tis is definitely not part of today’s startup culture. In reality every entrepreneur needs to take some financial risk. But the long term financial strategy is not to keep multiplying that risk. Over time high financial risk will expose any company. The goal of investment is to get your company from nothing to a stable sustainable base. Becoming self financing is the object. Not reaching for an even higher valuation.
Massive injections of funds to sustain cash and profit negative growth can only last so long. This is a statement of the obvious but it seems forgotten. Memory will return fast when the current investment cycle turns.
Read the book and learn. There is something of value on every single one of its 238 pages.
Start Your Own Business - Become An Impala
There is another lesson from The Living Company. Most founders are not starting the next Google. Or even a short term unicorn. So what. Mobile and digital are changing the way we work and do business forever. We are going to shift from a corporate dominated economy to a more diverse and fragmented structure. The future will be about making a living not just having a job.
The impala is the most common antelope in southern Africa. Around 150,000 in the Kruger National Park alone. Yet each individual is a beautiful, fragile survivor. And the species succeeds in large co-operative herds.
This is the future we need to build. Not just start your own business. Help create large numbers of long term, sustainable businesses. None enormous. Working together to create communities and economies that help everyone live a better life.
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Recent market turmoil and a KPMG report showing a slowdown in the UK Tech Sector raise some concerns. Is this a pause or is the technology boom coming to an end? It could go either way but there are more reasons than you might think to be pessimistic. Startup CEOs should be prepared.
KPMG released their respected quarterly Tech Monitor on 19 August. It shows a slowdown in both business activity and employment growth for the UK Tech sector in Q2 of 2015. KPMG’s analysis suggests this may just be a pause in the onward rush of the industry in the UK. They blame the May 2015 General Election. And the continued concerns over the Euro area economy for the slight stall.
The report also includes some indicators of great optimism. The authors believe that UK Tech will put the foot back on the gas and power ahead soon. 57% of respondents to the survey expect an increase in activity over the coming year. And 49% expect this will be accompanied by employment growth. KPMG also cite economic tailwinds from a strong UK economy as a reason for optimism.
The Economic Risks
I hope they are right. But we have reached a stage of the economic cycle where the main risks are on the downside. The upswing may have longer to run but the end is closer than the beginning. On a macro level there are four reasons for this:
1. The UK economic boom is a bit of a myth. Things have gone well over the past couple of years but the fundamentals are still weak. Productivity and wages have only just started to grow. By tiny margins. Government spending and borrowing are still high. Despite all the heat and noise about austerity the real picture is different. The recent budget also chose to take some risks with the employment picture. In the form a big increase to the minimum wage.
2. As we have seen this week China is in trouble. At best this will be a major drag on the world economy. At worst there will be enormous disruption and a significant recession across Asia. Brazil and Russia are already in deep economic waters. The BRICs engine of growth is stalling hard.
3. The Euro area remains a challenge. Greece may not trigger a collapse in the short term. But several countries are on an economic knife edge. Political upheaval could bring many to the brink. Elections are due in France, Spain and (first up) Greece yet again. Unexpected outcomes are certain.
4. Protest as much as you like but we are all affected by the US Tech scene and Investment picture. The numbers here are still growing fast. Near as fast as the number of commentators warning of an impending bust. If this happens the impact will be felt across the world and strongest in the UK.
Small Business Consulting Advice For Startups
Every Tech CEO needs to be aware of the risks. Startups don’t have the resilience or resources to create reserves for such an eventuality. Yet there are a few things you can do even when cash is limited.
This happens because of some fundamental truths about the business cycle:
When a real downturn arrives, be ready to survive. Try to build a position that allows you to take advantage of the opportunities. At least you will be able to disrupt and innovate as hard as you can. Your customers will be searching for new ideas when their markets are shrinking. If possible be in a position to invest against the cycle. You will then reap the rewards when the cycle turns again. You will build a greater business in the bad times if than you can ever achieve in a boom.
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Kenny Fraser is the Director of Sunstone Communication and a personal investor in startups.