Making predictions is almost as popular as making resolutions in January. Most forecasts tend to be static not dynamic. Thinking about the second order impacts can be revealing. Some of the events likely to happen in 2018 will mean long term change. In Scotland and other small markets this is what matters.
This struck me in force when reading Tom Tunguz predictions for the software market. Tom is one of the smarter guys in this area and his posts often make me think. So I am picking his ideas because they are better thought through than most not because I agree or disagree.
Tom made seven predictions. Here are my thoughts on the second order effects that might follow if his logic holds:
The tax holiday for repatriation creates one of the most active M&A environments of the past ten years
This makes sense from a US perspective. But that cash is being sent back to the US from other places, mainly Europe and Asia. In Europe, US investment dollars have helped. Both the volume and the risk appetite of startup investing have benefited. A reduction in this impetus could be one of the hidden effects of “America First."
The SaaS fundraising market remains ebullient through 2018 as vibrant M&A and an open IPO window trigger substantial liquidity for shareholders
I am with Tom that SaaS funding will continue to be strong. Despite some concerns raised by Clement Vouillon of Point Nine Capital. We may see that the corporate venturer share of this rises as VCs seek higher returns elsewhere.
Events already reinforce the IPO window point. Spotify and Dropbox have taken steps in that direction. I am not so sure. IPOs provide a liquidity event. As Travis Kalanick shows, this is great for founders. What about the VCs and institutions? Once you cash in, what do you with the money. Almost no other asset class looks attractive - see this article from the Wall Street Journal.
So maybe the pressure to exit is not so strong. Suppose SaaS and Technology investment continues to rise. Without a big increase in exits. Then the size of early stage investment as an asset class will go up faster than ever. That creates its own pressures and could lead to more of a flight from seed investing.
Machine learning fades as a buzzword
No doubt this is true. ML will go the way of mobile, VR and many other investing “trends.” Among knowledgeable investors this makes little difference. In many places early stage money comes from two sources. Angels with no tech experience or Government “schemes” in various forms. These sources can be naive.
The risk is that money gets diverted into “hot” sectors. And misses businesses with real potential. I live in Scotland and we need the technology sector to thrive. Its an uncertain business. Making decisions based on PR and buzz not fundamentals turns it into an outright lottery.
Blockchain in the enterprise takes the reign as the buzzword for 2018
The second order effect here is the logical extension of the previous point. I expect to see a lot of fantasy business plans for Blockchain related startups this year. This will be damaging. Blockchain has a future but in the main as an enabler rather than the raison d’être for a business.
Successful blockchains at scale will depend on global network effects. This is very hard for a company from a small market to achieve. Here we need to think about more targeted opportunities. B2B niches or public sector applications where the technology can do some good.
The classic open source strategy of the last fifteen years is abandoned because of the competitive threats from infrastructure-as-a-service (IaaS vendors)
I also agree with this prediction and it scares me. The same naive investing approach above places great store on defined intellectual property. This is false security. Open source is a great boon for innovators with limited access to cash. Placing walls around technology will make life much harder. Smaller or poorer markets will suffer most.
Everyone will lose in the end. Realising the potential of technology means developing applications that deliver real benefits to businesses and consumers. It may be harder to make money without protection. That is the reality of capitalism. Open Source is a bit like free trade. Introduce barriers at your peril.
GDPR becomes an important consideration in most SaaS companies
On a more optimistic note, this could be the start of something great. The right attitude to privacy and security changes the whole business culture. (See Estonia again). Perhaps founders will think more about real sustainable value in future. And less about the sales pitch.
The industry pendulum switches from fragmentation to consolidation in products as well as companies
Another credible prediction. This may offer a good exit for founders across the globe so positive in that sense. In the short term, it may also make life difficult for early stage companies. When size is the prize, startups don’t look so attractive. In time though, such consolidation is a damper on innovation. That will create new opportunities in the future.
The Chairman's View
Tom has produced the shortest and sharpest set of predictions I have seen for 2018. I am not as smart as he is so this article is a bit longer. Most likely neither of us is right but taking time to think about the future makes sense. By nature, entrepreneurs look forward all the time. Don’t limit your horizons to one year or restrict your thinking to the immediate next steps.
Rowan and Birch are both trees common in Scotland and the forests of Estonia. Estonians use these resources as a food source. Birch sap is a popular drink. Rowan berry schnapps a complex delicacy. No-one in Scotland does more than look at either tree. I have never heard of these species being used for food or anything else.
I learned about the potential of Rowan and Birch on a recent visit to Tallinn. Estonia is a little country of 1.3 million people. Our purpose was to find out what makes it one of the most talked about places in tech. Innovative use of resources is at the heart of the story.
Digital ID - The star of the show
The main character in that story is the Estonian Digital ID. Every citizen has a virtual avatar. It allows them to use public services, banking, health care and much more. Everything except marriage, divorce and buying a house can be digital.
Your digital ID is also your signature on any legal document. The digital version of a contract or agreement is regarded as the original. Anything printed and signed is treated as a copy. A total inversion of the way lawyer driven cultures like the US and UK operate.
This virtual self does not need to live in Estonia. You can create your own digital ID through the Estonia e-residency programme for only €100.
Ownership and openness - Two profound principles
It all works because of some fundamental principles. Two in particular struck me. First the citizen owns the data. And everything is open and transparent.
Citizen ownership is not an aspiration or a policy. It is a hard reality that changes the way the whole system works. In our culture security is a tool to build moats or fences or walls. The defences of corporations, banks and entire nations. In Estonia security is designed and built to protect the rights and privacy of each and every individual.
Turning security on its head provides a basis for trust. Openness and transparency cements this by offering a clean and simple form of control. Your digital ID lets you see everyone and anyone who has accessed your data in real time.
Imagine a couple. One is a police officer and the other an ordinary law abiding citizen. The police officer uses that privilege to review data about their partner’s digital behaviour. The partner sees this and asks the police for an explanation. Once the unauthorised access is discovered, the police officer ends up in jail.
This is not made up. Its a true story and every Estonian from the President down knows it. The consequences of being open are profound. Trust has deep foundations. Bottom up rather than imposed from the top. Confidence enables a whole host of digital services and value propositions.
We can all learn from this and apply it.
And the impact runs deeper. I met perhaps a dozen Estonian founders, entrepreneurs and investors during my visit. Every business I learned about was founded on integrity. Digital trust has transformed the entire culture. Both Government and business ethics reflect the highest standards.
How was such a transformation possible?
How did this happen? One of the highlights of the trip was hearing first hand from Linnar Viik. Estonia set itself free during the collapse of the Soviet Union in 1991. He was one of the team tasked with building systems for a whole new country. They had no money to spend and no legacy to build on. The innovative choices they made back in the nineties still form the base for digital trust today.
Its a great story and you can listen to Linnar tell it as To E or not to E. It would be easy to conclude that all this was only possible because of the absence of legacy. Estonia had it easy because they started with a green field. We could never do that here.
The Chairman's View
That is both arrogant and unfair. It reminds me of an old joke. Para Handy is sitting on a capstan by the harbour when a stranger approaches and asks for directions. His helpful reply is “Aaah well, you know, I would not start from here."
Estonia emerged from a long history of oppression, authoritarian rule and worse. You would not wish this on anyone. And the country still has a long way to go. Yet they have built a unique foundation with trust at its core.
Its a great reminder that user experience is as much about the road travelled as it is about the destination. We should not complain about the challenges of our legacy - rich developed country, excellent public services and the world’s oldest democracy is not such a bad inheritance. Let’s learn from Estonia and build a better society and better businesses for ourselves. No excuses.
I set off for Tallinn with high expectations. My goal was simple - to listen and learn. The place, the culture and the digital story far surpassed my hopes. My sincere thanks to Peter Ferry, Dianne Ferry, Neil Mathieson and Chris Martin for making it all happen.
This article is a summary of my most powerful first reflections. I aim to write more about the lessons and the ways I can apply them in the weeks to come. You can see a little more about the trip in Tartan in Tallinn. If you get the chance to go yourself, grab it with both hands.
Africa gets in your blood they used to say. I have been infected for more than a quarter of a century. So this is a bit of an emotional column for me. 6th March 2017 is the tenth anniversary of the launch of M Pesa. The original mobile money system improves the lives of millions every day. And has been the catalyst for the leading innovation ecosystem in Africa.
You may notice that this year is also the tenth anniversary of the launch of the iPhone. Over that decade, smartphones have been the defining technology in the developing world. Yet mobile money is more innovative and helps tackle a much bigger, tougher problem.
We seem to have lost sight of this idea in the tech industry. UBI (universal basic income), taxing robots and so on are the ideas du jour. Many of our leaders seem to believe the priority should be advising Governments on how to solve the problems they expect the technology industry to create in the future.
Where did that come from?
How did renaming and retreading the failed social and economic planning experiments of the 20th Century become a thing?
Why do we want to risk the consequences if (sorry when) these plans fail? The pain and suffering that will be inflicted on billions of the world’s poorest.
How have otherwise smart people convinced themselves that the future can be foreseen, designed and planned for on a grand scale?
“Now all my lies are proved untrue
And I must face the men I slew.”
Let’s take a step back. AI, robots and the rest will transform the way many jobs are performed. Its hard to predict what will emerge from such a transformation. One things is certain.
The outcome will be to unleash a huge wave of human potential.
Over the next 20 years technology will be automating manual work, replacing routine clerical tasks and maybe rendering lawyers and tax accountants obsolete. No-one should shed any tears. Least of all the those who live by innovation and entrepreneurship.
Nor should we indulge in scaremongering and exaggeration. The machines are not about to take over the world. The brilliant philosopher Daniel Dennett summed it up in this week's Lunch with the FT.
"All we are going to see in our lifetimes are intelligent tools. Superintelligence is logically possible but it is a pernicious fantasy that is distracting us from far more pressing technological problems."
Tech has an opportunity and a responsibility.
Technology does not solve real world problems on its own. Coupled with innovation, it can. And we need to get on with it.
Nothing illustrates this better than the PR storm which surrounded the relaunch of Nokia’s iconic 3310 handset at MWC last week. This is retro chic in the West. Meanwhile in Africa, M Pesa and its imitators are still creating new value from the original technology.
We are on the verge of a further revolution in information technology. There will be losers. People and communities will suffer when such a fundamental shift takes place. Governments should focus on dealing with that transition.
The Chairman's View
The tech industry needs to remember how Vodafone, the UK Department for International Development (DFID), Safaricom CEOMichael Joseph and his team started out. They sought out the most disadvantaged and excluded in Kenya. And used the technology they had available to create a product that would make a real difference. They worked as a team. They observed how their customers used the initial product. And they were not afraid to think big when the opportunity emerged.
Yes, the leverage provided by M Pesa helped Safaricom build and maintain a dominant position in the mobile market. But the openness of the platform and the sheer utility and simplicity of the concept were the inspiration for so much more.
A decade on, lets draw inspiration from that example.
To learn more about M Pesa and the mobile money story:
Watch this brilliant 6 minute video featuring Michael Joseph The M Pesa Story
Be a scholar for an hour and read The Long Run Poverty and Gender Impacts of Mobile Money
Keep learning and being inspired by the story at GSMA Mobile for Development
Or get out to Africa and see for yourself....
Am I alone in finding something a bit weird about the rise of equity markets since Brexit/ the election of Trump? Its true there are financial dynamics at work. Increased spending on infrastructure and the fall in the pound have some immediate benefits for some large companies.
But this window dressing obscures a fundamental underlying message. A big part of the populism that is driving today’s political agenda is rage against multi nationals. In the US the talk is of trade barriers that will disrupt low cost global supply chains. In the UK and Europe Governments and citizens demand “fairer” tax contributions. Extracted from the profits generated by global companies. Used to prop up public spending.
In every country and all sides of the political debate, inequality is seen as the defining economic and social challenge. And nothing represents that inequality more vividly than the pay of Fortune 500 CEOs and their ilk.
2017 will be the year when some of this anger translates into real challenges. Corporate giants are right in the cross hairs. The US President’s remarks about the pharmaceutical industry are a straw in the wind. The actions of the new US administration and the fallout from the UK leaving the EU will have consequences for big companies.
Hitting the enterprise where it hurts
In a sense these are symptoms of a wider trend. Anger and frustration at the profits of global corporations is widespread. Business practices and networks are also in the spotlight. This is an issue which appeals to all politicians. One of the few areas of common ground between left and right, populist and technocrat, democrat and dictator.
Expect meaningful action in areas like:
The SaaS opportunity
Your view on the politics and economics of this is not important. Enterprises large and small are entering a period of unprecedented disruption. At a time when there is also severe pressure on profits. For a B2B SaaS company this is a once in a generation opportunity. Global corporations need to change. Improved adoption of digital technology must be part of that change. This broad theme was reinforced by McKinsey this month in Measuring B2B’s Digital Gap.
The enterprise software landscape is also shifting on the ground. I was fascinated by Tom Tunguz’s $100m ARR Deal. The headline number is eye catching. His analysis of the implications for Workday is interesting in its own right. But for me the big message is that this was a straight fight between the SaaS alternative ERP company and SAP. No better sign that SaaS will be a big part of the solution for enterprise companies.
The Chairman's view
These trends are important for setting the scene. Yet the big picture offers no direct link to revenue growth. Generalisation can help you identify targets. Winning deals depends on specifics. Enterprise sales depend on three things:
Success with enterprise customers is not about a high volume of leads and conversion rates. Nor is a brilliant sales team the key factor. Focus on qualifying which opportunities to go for. Analysis and insight followed by patient pursuit is the winning formula for enterprise SaaS.
The value of the biggest B2B SaaS companies has been growing. But not at the epic rates experienced by B2C software. At the same time, the number of B2B SaaS startups also keeps rising. Is there enough potential revenue in the market to justify the level of SaaS investment?
Jason Lemkin wrote a fascinating piece on SaaStr a couple of weeks ago about the SaaS Decacorns we need by 2021. His conclusions were optimistic. He believes both that the market as a whole is big enough. And that there are companies there with the potential to become the mega leaders of the future.
I am not going to comment on the latter. But I share his optimism about the overall market. We are only scratching the surface of the opportunity for B2B SaaS. Reaching this potential demands great products which solve real business problems. SaaS companies must also help customers execute change to realise the benefits. All in the face of strong resistance from multiple vested interests.
It will not be enough just to wait for the market to come to you. B2B SaaS companies need to take the lead in finding strategies to overcome these challenges.
The scale of the opportunity
The simple fact is that traditional on premise, licence based revenues still account for the bulk of the enterprise software market. You can fill your boots with various projections and analyses of this topic. For starters check out this Forbes collection.
However you look at the numbers this makes no sense. SaaS is an ideal platform for innovation and increases the speed of change. It offers much greater flexibility and agility. Integration allows for rapid adoption of best in class. And its cheaper.
The question is not whether the market opportunity exists. What bugs me is why progress is so slow.
The one word answer is change.
SaaS does not bring any of the benefits listed above to business. It provides a tool or a platform to improve a business. To realise the gains, the business must change. Businesses of any size find it hard to execute change. An established business is different from a startup in two major ways:
Your customers internal opponents are not the only losers. Growing SaaS by a factor more than 20x will do damage to the traditional software business.
The big enterprise vendors are the tip of a large iceberg. They are the visible part of an ecosystem that includes consultants, systems integrators, lawyers, training providers, independent software vendors, project managers, change leaders, corporate IT careerists and a raft of other specialists who have carved out a niche that is built on SAP, Oracle and the rest.
The strident voices of direct competitors are easy to deal with. Corridor whispers by trusted advisors and “independent” experts are much more insidious. So be careful. Resistance is everywhere.
The Chairman's View
I share Jason’s optimism about the scale of the SaaS opportunity. That’s one of the reasons I love working with B2B SaaS companies. The winners will have great products and fantastic teams led by brilliant leaders. They will also have an effective strategy to overcome the barriers to change.
Each market opportunity and in some cases each deal will need different specifics. The outlines of any successful approach will include:
And do it all with confidence. The market is moving toward B2B SaaS. Let's help it along.
A serial mega entrepreneur who overcame a tough start in life to become one of the world’s richest men bought a world leader in the highest of technology last week. You may have missed this story because it was painted in the red, white and blue of Brexit. Or cloaked in the fog and fudge of a nationalist industrial strategy.
Multi billion dollar deals for unique companies are like America’s Cup yachts. SoftBank's bid for ARM is a great example. It is a one off. A product of its time and circumstances for sure. But at the cutting edge. An example to learn from and a template for the future. Not a symbol of the present.
The mindset of a startup not a global corporation
Masayoshi Son is a second generation Korean immigrant to Japan. He grew up dirt poor in the distant South West of Japan. A background that is the definition of social and economic exclusion. And the antithesis of the conservative, corporate Samurai we typically associate with Japanese business. He built Softbank through his own entrepreneurial talent. If Son San was American or Chinese he would be one of the heroes of the startup world.
He has made his name and his fortune through a series of high profile investments in the internet and mobile sectors. His hallmark is a combination of Warren Buffet long termism, Steve Jobs vision and venture capital willingness to make big bets for great returns. SoftBank is an investment vehicle not a trading multi-national. The loose technology theme links together holdings in Sprint and Alibaba with Yahoo and Vodafone in Japan.
How does ARM enrich and invigorate this empire?
ARM is the leading designer and developer of microchips for smartphones and mobile devices. This is huge global business. The Cambridge group’s leads in both intellectual property and market position. These advantages will ensure strong revenues for many years. Attractive for sure. But the era of explosive growth in mobile device markets is over. Is the annuity enough to satisfy a risk taker and 30 year thinker like Mr Son?
This deal only adds up if we think about the future. IOT, virtual and augmented reality and artificial intelligence will all drive demand for microprocessors and storage chips. Buying ARM is a bet that the company can be a leader in these new markets.
Entrepreneurial logic not industrial strategy
And that means a wager on brain power. ARM does not make semiconductors. All its past, present and future value is wrapped up in research and development talent. Like any creative or service based firm, ARM’s assets walk out of the door at the end of every working day.
Seen in this light, SoftBank’s strategy to double the number of UK jobs becomes clearer. ARM can only maintain its lead by continuing investment in the best people carrying out the best research. Smart people are sensitive to the culture and support environment in which they operate. So doubling down on Cambridge as a science base makes complete sense.
This is my kind of protectionism. An overseas investor with a compelling strategic motive. Committed to keeping the UK at the bleeding edge of a vital technology. If you want to reference a recent deal, the Tata acquisition of Jaguar Land Rover is much more relevant than HP’s ill fated purchase of Autonomy. With the bonus that the ARM deal also gives a bunch of investment funds a big exit. And the opportunity to recycle some of that cash into exciting future opportunities.
An example for startups and entrepreneurs
That money will make no difference to the UK economy or the global technology industry. Unless the recipients raise their game in response to the ARM acquisition. One final unusual aspect of this transaction. Both parties offer inspirational lessons for entrepreneurs.
Rather than striving to fit the deal to today’s agenda, learn from these examples to build a better business for the future.
Silicon Valley has become an icon (or a cliche depending on your taste) for innovation, entrepreneurism and technology. Cities and Governments all round the world seek to imitate its success.
Scotland has long since harboured similar ambitions. Is imitation the sincerest route to success? Or should we learn the lessons and then map out our own route? What are the unique opportunities available in this Northern outpost?
Of course we should start by thinking about what works elsewhere in the world. For example, the Bay Area is not the only cluster for exciting new business activity in the US. Innovation That Matters is just one recent report. It looks at cities that stretch from sea to shining sea. It concludes that Boston is best prepared for the digital economy. Not San Francisco or Palo Alto or New York.
Specialise for success
I am not going to argue with that conclusion. My interest is in the factors that drive future success. One in particular. The report highlights the need for specialisation. It will no longer be possible for any city or ecosystem to lead new technology across the board. A strong reputation in specific sectors or technologies is needed.
And the authors identify one sector at the forefront of this trend. Digital health comprised 60% of all startups in the 25 US cities studied. More significant health was also the focus of 60% of the fastest growing companies.
Embracing our diversity
Taken together this analysis offers some ideas for a different startup world like Scotland. We need to start by recognising and embracing our differences.
A new era of opportunity
Recent years have added to this mix. We have seen an amazing rise in talented people starting businesses of wonderful potential. But it would be foolish to deny that the depth and scale of our technology sector is tiny. In comparison to many US locations and even Europe, Africa or Asia.
And the new era of digital and mobile is a chance to overcome our traditional disadvantages. Distance and isolation are no longer a barrier. Scotland can be at the heart of global ideas and the the global economy. Positions we have not occupied since the Enlightenment in the 18th Century. And Second City of the Empire days of the late Victorian era.
Health is our greatest challenge and our best opportunity
Specialisation has to be the way forward for a small country. And health could be a great platform for Scotland. Life Sciences are a vigorous sector of our academic and business life. Our areas of wilderness and our range of wonderful fresh produce offer a rich choice of healthy lifestyles.
And yet… life expectancy in Scotland is 2 years below the UK average. Almost 3 years less than England. The City of Glasgow has the lowest life expectancy in the whole UK for both men and women. No satisfactory social or economic reasons have been advanced for this.
We have a genuine problem in Scotland. The skills and desire to tackle it are in place. Our Government and citizens are wholly committed to devoting resources to finding and implementing solutions. All we need is a platform for change.
Learning from the history of Silicon Valley
Here is my suggestion. We spend over £12 billion per annum on the NHS. Public and media debate centres on this as a cost. Willingly borne to be sure. But viewed as a drain on our finances. An ever rising burden which we fret about our ability to support in future.
Perhaps we can break this cycle by learning a lesson from the past. Remember the root of Silicon Valley’s success? It was Department of Defence spending in California during the post war decades. The US Navy was the customer that challenged smart people with big, difficult problems. And provided the market for the solutions.
We cannot and should not replicate that today. But we have an alternative - the NHS budget. Change the culture and the approach. Use that £12 billion as the catalyst for innovation. In digital technologies and life sciences of course. But also in service delivery, care standards, sustainable building, rural health and a thousand other areas.
Thinking about this idea reminds me why I got into the information and communication technologies in the first place. Tech has the power to change the world. By tackling the biggest challenges.
I think we could turn this principle full force on local and global health challenges. How can we transform the NHS from a cost centre into our greatest opportunity for change? I would love to hear your ideas.
If you have not already read Bill Gurley’s article on the dangers of the Unicorn financing bubble then you really should. He outlines current financial exposures. Created by the fashion for mega round private finance in the last couple of years. And sets out how each main group of stakeholders are at risk. With some excellent cautionary advice for founders and employees in startups.
As Bill points out, many well funded companies are still hungry for cash. Massive burn rates mean that even the largest funding rounds evaporate fast. Much of this cash goes on sales and marketing. Direct sales teams, commissions, distribution channels, advertising, content and all the rest. This creates an ongoing demand for finance. And also raises a couple of other questions.
Puncturing the investment assumption
Everything and everyone takes it for granted that the big money flowing into startup companies is investment. Companies raise investment. Angels, VCs and institutions make investments. Governments ease and enable investments. What happens when this (implicit) assumption is jettisoned?
All that cash was paid for shares. Then spent on building up market presence. Customers, brand and reputation in other words. Great if those stick when the dollars stop flowing. But for many customer loyalty may fade and the revenues will drift away. Because some companies need to keep spending just to stand still. Never mind grow.
Turn off the spending tap and there will be real separation between the good, the bad and the ugly. Companies built on good products will survive and thrive. Those that have built a track record of value and a loyal customer base.
Reputations created by spin, PR and heavy advertising spend will fare less well. Expect many more well known names to be tarnished.
And the losers will have nothing on the balance sheet. Nor any intangible assets of substance. Even a few lines of code will look like a solid asset by comparison. There will be some angry investors around when this emerges.
In more conservative investment ecosystems this could have a devastating long term impact. I already see a lot of investors who believe in patentable IP as the only solid basis for a technology business. A bunch of stories about "smoke and mirrors" startup growth will not help. The persuasion hurdle may be even harder to clear.
A potential SaaSastrophe
SaaS sales & marketing companies will suffer the greatest exposure. Tom Tunguz is the ultimate authority on SaaS data. He points out that Sales (=1st) and Marketing (5th) are 2 of the top 5 business functions for spending on SaaS products. In another piece he looks at the 1875 SaaS marketing companies started by 2015 (2014: 947).
I think we all know that every startup uses one or more of these products. They are the vehicle for all that advertising spend. The day to day tool for the sales and marketing teams. And further chunk chunk of investors cash is going to pay all those subscriptions.
This market is honestly crazy. Yes there are a handful of SaaS that I see everywhere. Hubspot and Intercom are prominent. In the enterprise space Salesforce has a strong position. And I know plenty of companies that generate real value using these products.
But I also see a new product every week. Ranging from the doubtful to the out and out flaky. On top of this I get sales e-mail from new startups most weeks. Offering services which grow more niche and less clearly defined by the month.
We have travelled from fragmentation to saturation to glut. Investment will soon be in short supply. Revenue will take a harder hit. There will be casualties. And desperate throws of the dice. It will not be pretty. In short, SaaS sales and marketing is a bubble waiting to be burst.
I will not shed many tears. The proliferation of sales and marketing “solutions” has infected the whole SaaS market. In all categories and verticals there is too much focus on sales. And not enough on delivering real value to customers. We need to rebalance.
A couple of simple precautions
If you are a startup (or indeed any company) using some of the products what should you do? I would not get too stressed about it. Keep two simple things in mind:
Contraction in the startup funding market is inevitable. The big dollar losses will be in unicorns that have raised or are raising gigantic private rounds. These are concentrated in the US and in the startup mega clusters. But everyone should beware the ripple effects.
We had the annual budget statement in the UK this week. Chancellor George Osborne focused on the macro risks which face the global economy. Continued weakness in the Eurozone. Slowing growth in China. Turmoil in many emerging markets. Wherever you live you are familiar with the narrative.
The startup world has caught the bug. Many investors believe that the so called bubble in valuation is deflating. Blogs and analysis are full of advice about how to weather the storm. Cut costs. Focus on profitability. Use your cash to survive. This routine is just as well known. I was going to count all the articles I have read with this type of advice. But I ran out of fingers and I couldn’t be bothered.
Because this is bulls**t. Sure if your business is weak a downturn will kill it. Then again if you don’t believe you are building a great business you should end it yourself. But if you do have that belief, an economic downturn is going to be the best opportunity you will ever have.
The only way to make sustainable gains in market share
First, a shrinking market is the only true time for any business to gain market share. This truth about business strategy is often lost in startups. New businesses gain market share. Or create new markets. All the time. It is part of the cycle of innovation and disruption.
However in a growing market established businesses also survive. And grow! Look around in strong sectors and the old world companies are rising. Just not as fast as new entrants.
Take a look back also into some “ancient history”. The iPhone launched in 2007. As the new device started to gain traction, the world entered its worst economic recession since the 1930’s. Much of the tech explosion was the new mobile ecosystem taking advantage of that downturn.
So now is the time to attack the established players in your market. And the biggest opportunity lies with B2B SaaS. About a year ago Tom Tunguz pointed out that legacy companies still generated 93% of revenue in the software sector. The first mobile revolution was consumer led. Now is the time to change the face of the business IT market.
Offer your customers more hope not less pain
For B2B SaaS the best way to take advantage of this opportunity is to offer your customers growth.
Every business from the leaders of the Fortune 500 to the corner shop will be hearing the same advice we are hearing in the startup ecosystem. Cut. Fire. Save. Survive. The biggest consultants are polishing cost reduction methods as we speak. The corporate finance guys are dusting down asset disposal proposals. All the experts know what to do.
But companies don’t suffer because of high costs. When the market is tough the struggle is to find customers and close sales. The cost base looms up in the management reports because revenue is squeezed.
And cutting costs is horrible. Firing people is inevitable. Letting go of cherished projects. Or eliminating positive stuff like benefits, training and that sales conference in Disneyland. Just talking about it wears management down. Another day of poring over spreadsheets. Trying to forget the people and products that lie behind those red numbers.
Don’t join the circus. Make your SaaS different from the market. Think about how your product helps grow revenue. For example, maybe your software helps your customer save time. How can the buyer use that time to increase sales? Or offer a better service to customers? Or improve their reputation in the community?
Two things will happen. Your customers will want to talk to you. An hour of positive news will be an island of joy in their schedule for the week. And they will start to buy.
SaaS is the future
SaaS is perfect for this environment. There is no upfront cash cost. Business needs to change to meet new challenges anyway. So the hidden cost and barriers are reduced. Offer a positive, revenue growth message. And use this opportunity to change the enterprise software market forever.
In the midst of chaos, there is also opportunity.
Right now investor focus is on SaaS companies that can deliver hyper growth in customer numbers. And revenues. Profits and cash are secondary considerations. Look at the giant of the SaaS world. Salesforce.com doesn’t yet turn a profit. This makes sense as a land grab in a growing industry. Which is the exact place we are today. It is not sustainable as a long term investment strategy.
SaaS is going to be real. A major sector of the technology industry for many years to come. With good earnings and high (ish) margins.
What Happens When SaaS Goes Mainstream?
As we approach this phase we can see what type of SaaS business will be attractive to mainstream investors. The type of institutions and funds that drive the NYSE, Nasdaq, London Stock Exchange and other global bourses. There will be different sizes and specialisms. But the companies the main markets will love are going to have:
SaaS Is Not Just About Startups
Right now SaaS is seen as near pure startup play. It is all about exposure to explosive growth and high risk/ high return dynamics. That is fine. Startups like this will always exist. And the fashion (or asset allocation in the jargon) for this investment class will rise and fall.
SaaS is going to create a big sector of companies that are a solid and secure investment base. Far removed from the startup world of VCs and Angels. We are talking pension funds, income funds and hedge funds here. Revenues will range from $100 Million to $100 Billion. The common factors will be cash flows, margins and predictability.
One day we will be able to read the story of how SaaS led the Tech sector into the established world. Away from the wild fringes of the market. Into the ranks of cyclicals, defensives, growth stocks and the rest.
Unicorns and valuations in the stratosphere are wonderful. Building sustainable business that changes the world will be much more fun. Look out for the companies that transition to the next phase of SaaS. Excitement will be lower but achievement will be much more widespread.
We will see more IPOs. Indices that look at performance over a quarter, then a month and even real time. Specialist funds will emerge that invest in portfolios of SaaS businesses. Market analysts will develop expectations of margins and cash flow. Investment ratios. Churn analytics. Drama will be replaced by strong regular income.
SaaS will be a vital part of the long term, established economy. Integral to technology but also an element of almost all sectors. And of course new startups will emerge to disrupt the SaaS model!
Keep following the best ideas to build great SaaS businesses. Sign up for our newsletter below.
Kenny Fraser is the Director of Sunstone Communication and a personal investor in startups.