APIs First

Lots of discussion about whether a service should be “mobile first” or “web first”.  I tweeted it actually should be “API first”, and I got a lot of reaction to that comment and asked to expand.

First let me clarify.  I believe mobile IS important and a huge emerging channel.  Source of traffic has shifted dramatically and I don’t have my head buried in the sand in that regard.  Across many of my companies, mobile origination (tablet included) comprises anywhere from 30-50%+ of traffic.  I recognize that access patterns have structurally changed.

When I say API first, I mean that an idealized service needs to start with a core infrastructure with robust APIs that is tapped into via any number of “front ends”:  web, mobile, and even 3rd party ecosystems.  If you look behind many “web first” companies today, including in our portfolio, you’ll see a very clean architectural split between the front end and the back end.  The back end exposes a range of services that allows the front end to innovate independently and be re-purposed in interesting ways depending on changing business needs.  The rate of change on the front end is usually a LOT higher than in the back; the scale and stability requirements on the back are far more demanding than on the front.

“Mobile first” companies really are just a front end selection accessing a solid API driven backend infrastructure.  The use case, the logic, and what the app is optimized for may be a subset or different than Web, and I think this is what Fred Wilson and others are focused on.

But as I look at the world, while point of entry may vary, I believe having all three elements of web, mobile and 3rd party are going to be table stakes in the future.  You CANNOT be one only.  Users want different experiences for their different point of engagement.  Mobile is about speed of access, much more transactional and timely, very much about getting something done.  The web is great for researching, deliberating, and exploring.  Both are different aspects of the same service, and I’d want both as a user depending.  Finally, enabling third parties is a realization of the web services and SOA manifests from the late 90s that allow for programmatic distribution and can launch powerful new economic models.

Facebook has already shown us the above and what a powerful, mature, winning service looks like.  They have their core site, their massively used mobile applications, and their various graphs 3rd parties access which gives them tremendous power, platform extension, and plata.  Instagram, normally cited as the poster child for “mobile first”, recently announced they intend to move consumption to their core web site.

So to wrap up, sure, there might be some apps that are best started purely in a mobile context.  But I’d bet 99% of the services out there will have to incorporate all three elements and that starts with building an incredibly solid foundation.  API first, front end second, all screens third.

Excited to Announce Artisan!

Sometimes the best journeys are the ones into the unknown.  I remember catching up with Bob Moul after he had left Dell late last year.  He had spent a lot of time focusing on Philadelphia’s startup tech scene, passionately working with the Mayor’s offices and programs like DreamIt.  The one area Bob kept coming back to was mobile – as a new frontier, a new challenge, and potentially a new opportunity.

He met Scott Wasserman, founder/CTO of AppRenaissance, and joined on as CEO.  It was a talented team of mobile developers building custom mobile apps for companies.  While the apps they built were really solid, to say it’s not an obvious venture investment was an understatement.  But we loved Bob and the great work he had done at Boomi (sold to DELL in November 2010), and were going to partner with him in whatever area he found interesting.  “Don’t worry, by working closely with customers we’ll find the product opportunity in here,” he said.  That was a few months ago.

Well, today I am thrilled to announce they found that product far more quickly than I anticipated.  Artisan aims to bring to the mobile app world the deep set of tools and infrastructure that exist on the web today.  The initial product is an A/B/n testing software, which allows companies to target specific users with a different look and feel, without requiring coding changes and resubmission to the app store.  Simple examples could be showing a Platinum color app for holders of an American Express Platinum card, while Gold for others, and Blue for those on that product.  One could test how button placements affect conversion.  Or explore user flows within an app.  Again, all areas marketers understand well, have done on the web, now available on mobile!

The best thing is that the platform will extend to a lot of different areas, ranging from advertising to personalization.  Lots more to come here, but I think Bob’s vision of building a large public software company out of Philadelphia is much closer to reality.  I’m delighted to partner with the team and sure as heck we took that journey into the unknown!

Democratizing Education Technology

Today, we’re announcing an investment in Schoology, a next generation collaborative learning platform that combines the elements of a learning management system, a social networking platform, and enterprise resource system all in one hyper-intuitive interface.

I’ve known the Schoology team for some time, having spent the last year getting to know them.  It’s a testament to the power of building enduring relationships.  We’ve had a clear set of mutual expectations of what we were driving towards and it all finally came together.  It is a fantastic team and I am amazed at the power and complexity of the system they have built in the short while they have been around.  The uptake has been tremendous for good reason.

Teachers can sign up for the platform in under a minute and have the best in modern technologies available to them, for free!  Teachers can easily invite students into the system using a unique access code.  From there, the sky is the limit.  Teachers can build a curriculum, create lesson plans, build tests and quizzes, have students submit homework into a dropbox, grade assignments, see classroom analytics, encourage students groups formation for peer learning, and much more.  In addition, teachers can collaborate with one another and share content.  Pushes us one step further towards the notion of Open Educational Resources.  Teachers can also add apps, such as plagiarism checks, directly into their workflow.  All this with a Facebook like interface that requires no training.

The best part of the system is that technology selection has been completely democratized to the actual users.  Schoology does not spend months and years convincing heads of a system as to whether the technology suits their needs.  Users simply adopt it.  Upon seeing users within a system grow naturally, Schoology has the privilege of notifying districts or universities about additional capabilities available to them with a few clicks of a button.  Schoology can also enable powerful integrations with existing legacy systems.  No more promises of what can be, no vaporware, no millions of dollars spent on configuration and changes.

The platform also has transformational capabilities.  Because it is social at its core, it benefits from powerful network effects.  With nearly 1 million users already on the platform across 18,000 K-20 and higher education schools, you can bring the power of a developer community to build on the platform.  Content can be built, shared and purchased directly from within.  Teachers can be given micro-credits to personalize the system for their needs.  Parents can be invited to participate in the educational process.  It is truly a radical shift.

And it’s not just schools that can leverage the technology.  Any institution that views training and learning critical is a potential customer.  In addition to schools, corporations have signed up to use it internally.  One of the largest corporate users is Groupon, which uses the platform for field sales training.  They have their proprietary materials that need to be mastered and tested and revisted regularly to ensure a well trained team.

The next generation of education will bring stark changes: transition to digital textbooks and content, movement towards adaptive learning, advancement of the flipped classroom.  But most powerful of all is potentially the technology platform that connects it and us all together.  Schoology represents just that.  We’re thrilled to be involved with the team.

Education: A Call to Arms

Busy days at FirstMark, on the heels of announcing a seed investment earlier in the week, I am very excited today to announce our investment into StraighterLine.

StraighterLine is an online, low cost, subscription based provider of general education courses that many take in their  first two years of college (Algebra, Biology, Calculus, US History, etc). The courses are ACE Credit recommended and can be transferred for credit to various degree granting institutions (25+ automatically transfer today, over 200+ universities around the country that have accepted post review, and growing). What does that mean in lay terms? Well, you can flexibly and cheaply take a variety of high quality courses at a much lower cost than anywhere else, transfer into institutions that accept StraighterLine’s courses for credit, and bring your blended cost of a degree down dramatically.

The two charts below summarize well the drivers for an investment like StraighterLine:

  

Costs have skyrocketed faster than healthcare over the last few decades. Student debt has ballooned to over $1 trillion, surpassing credit card debt according to the Federal Reserve Board of New York. StraighterLine’s students pay $99/month and $39/course for their pay as you go service or $999 undiscounted for a Freshman Year equivalent. Against even public two year institutions, StraighterLine offers very significant savings for the student.

In addition to pricing, there are other issues lurking beneath the surface. Funding for public education is getting slashed. California’s 112 community colleges are having their budgets slashed by hundreds of millions of dollars. The system is having to turn away students because it is no longer able to find enough space to service them. The unfortunate incidents at Santa Monica College — where the school tried to create a higher priced system for the most in-demand courses in an attempt to balance with supply instead led to riots and maced students/children — underscore this point.

Taxpayer funding aside, the federal government is looking much more closely at graduation rates and successful job placements at institutions that accept students with federal aid.  As institutions begin to trim enrollments and focus on academic quality, their acceptance criteria will continue to grow more selective.  An institution like StraighterLine can be an effective partner in preparatory coursework to ease the transition and improve a student’s chances of success prior to formal enrollment.

Finally, as we think about structural unemployment challenges, the ability to easily access new learning, complete coursework in a flexible manner, and base competency on outcomes of learning and not on time spent in a course (ie, “credit hours”) will be a key part of solving the country’s labor issues.  The influx of non-traditional students (older, single mothers, workers retraining) is expected to grow at a much faster rate than traditional college students, and we will need institutions that can cater to this class.

StraighterLine offers a scalable solution to these challenges, where all parties benefit – easing the burden on taxpayers who fund institutions, saving money for students seeking to improve skills, improving student selection for institutions seeking to raise academic performance, and democratizing access to education for a newly mobile work force.  The ambitions of StraighterLine do not end there. Burck Smith, founder & CEO of StraighterLine, has been a passionate advocate and visionary in the education space for many years. His last company, SmartThinking, pioneered post secondary online tutoring and student support services and was acquired by Pearson.

With the round, we will invest heavily in building out a unique platform and set of services that innovate on behalf of students, embracing all of the things an online, data driven platform can do. We are working with a number of providers to build assessments to help the industry shift towards a competency based view of learning.  And we are also engaging the employer community, to create better linkages between the education students receive and the more tangible successful outcome of employment.

Stay tuned for more, but suffice to say there is a fantastic opportunity to use technology and innovation to leapfrog America once again to the head of the global class! We are delighted to play a small part and partner with a great team in doing so.

————————-

1 [Source: New York Times, Lewin, Tamar.“Higher Education May Soon Become Unaffordable for Most in U.S.”]

2 [Source: LiveScience]

New Investment: Shopify

One of the key trends we have been following at FirstMark is next generation retailing and e-commerce.  We’ve seen rapid adoption of consumers buying online across categories, and it’s no longer controversial that people are willing to buy even complex items physical sight unseen.  We’ve seen new business models like flash sales, Netflix-style rentals, and direct producer to consumer relationships blossom.  The Internet allows for sourcing, curation, and selling on a level unparalleled.  All in all, we are in a golden period for retailing online. 

With this renaissance in e-tailing, we noticed most of the e-commerce platforms out there were significantly dated.  Many had not changed for over a decade, offered very little flexibility, and did not take advantage of the incredible advances in software we have seen in that period of time.  But we found one – Shopify – which we are extremely excited to announce as our latest investment

Shopify is a unique retail platform company that allows merchants to have an online store up and running in 20 minutes, but with a unique app store model that allows it to also service the highest end commerce providers.  There are some interesting applications on the platform today, but the goal is to rapidly build out the ecosystem so a retailer can find everything they need to run their business – online marketing, billing, inventory, logistics, supply chain, mobile, etc.  With this approach, we should satisfy any retailer from small to large with a consistent platform and a best of breed set of options.

Shopify was founded by Tobi Lutke several years ago as he and his friends wanted to launch their own snowboarding store.  They found most of the alternatives out there very kludgy.  Fortunately for the rest of us, they are renowned Ruby On Rails core contributors and developers, and so they decided to build their own store.  They opened the platform for others in 2006, and have surpassed $100MM in Gross Merchandise Value with over 10,000 active stores on the platform a few years later.  It’s a real business that is poised to power the next generation of retail.

We are excited to partner with Tobi, the Shopify team, Bessemer and Felicis on this investment.

A Reflection on Boomi

This was a long overdue post, but it’s been a busy year.  Fitting this comes as we head into Thanksgiving.  Our investment in Boomi came at an interesting time.  There were plenty of scars from the legacy integration 1.0 and EAI worlds.  Those companies were marked by significant services implementation relative to license sales to deal with unique customer environments.  That made integrations complex, costly and brittle.  Companies like Grand Central, Bowstreet, and others had all tried to ride the Web services, SOA, and interconnected enterprise wave in the early 2000s.  Most were way ahead of their time, leaving lots of dead companies on the road of venture capital.

We believed Boomi’s timing was different.  The emergence of cloud compute services and the growing maturation of SaaS was a stark change from the past.  Both were important backdrops to answer the question “what had changed”.  We’ve had a thesis on how the cloud would require the re-writing of various middleware services.  While the team had a long history in EAI, they decided to bet the farm on the cloud in 2007 and wrote an innovative forward looking platform from the ground up.  They launched in early 2008, and we invested in the summer 2008 on the backs of healthy customer activity.  The business wound up growing very rapidly 300%+ CAGR, continued to launch new innovation upon innovation, won major awards, struck some good strategic partnerships, and eventually got purchased by Dell in an outstanding result for us as investors and for the employees.  From the outside, it was how you’d script it.  But there were definitely things we learned along the way.  Below are a few of them:

•         SOA and Web services (WS) are foundational, not competitive with integration.  Many had a view that as a result of the maturation of Web services, integration was built in and no longer needed.  In fact, turns out WS were foundational to doing integration in a flexible, repeatable manner.  It allowed us to connect more easily to systems, but you still needed a platform to orchestrate, move, transmute, and connect these WS ports.  We believe we are finally, after a decade, scratching the surface on how SOA will empower and impact applications going forward.

•         It takes time to find your sweet spot in the pyramid.  Boomi launched with incredibly disruptive pricing, which led to a lot of customers quickly adopting.  Early on, it turns out many were very small businesses only looking to connect two low end applications, where the value of the platform was less obvious and there were simple alternatives in the “point to point” world.  The value of an integration platform grows non-linearly with the number of points connected.  We pivoted to focus on companies with slightly greater needs, where our platform value would be clear and our innovation led to high stickiness. It takes time to tease out who the *right* customers are for a new category product.  Once we understood that, it helped clarify decisions around product roadmap, hiring, sales model, etc.

•         Don’t be afraid to raise prices.  Related to above, low price, high quantity led to a lot of early customers, but it didn’t scale exactly the way we wanted or attract the best fit customers for our product.  But it led to a lot of buzz.  As we realized our best customers were a little further up the pyramid, we worried that increasing pricing would also mean losing the very small business segment and perhaps impact buzz.  We spent a lot of time thinking about the tradeoffs, but decided it was more important to align with our target customer.  We increased prices three times and the business didn’t skip a beat (in fact inflected upwards).  If you find your spot on the pyramid, align all parts of the business to it.

•         SaaS delivery model changed everything.  Unlike the legacy world, which was plagued by high services and one off implementations, true SaaS allowed us new functionality and velocity the market hadn’t seen before.  We could do exciting things like using multi-tenancy to figure out what most people do when connecting applications, and auto recommend process maps.  This eliminated 90% of the manual work in integration.  Our platform could be opened up, allowing people to build connections and make them available to the entire community.  We could get reasonably complex integrations done quickly and reliably.

•         SIs say they love SaaS but it’s hard to break economic incentives.  We worked with a number of larger SIs who individually loved what Boomi was doing, but collectively found it difficult to leverage the product.  It broke the model of “billable hours”.  “Easier to configure” made for efficiency, but not more revenue.  Some newer more progressive SIs, like WDCi out of Austrailia were great, but bigger shops found it hard to change.

•         Indirect channels are hard to predictably scale early on.  In addition to SIs, we also worked with dozens of ISVs who were go to market partners for the Company.  We began to see success but that came after years of effort.  Mark Suster has a great perspective that fits our case pretty well.  No one could care about our success as much as us, nor did it matter that much for others versus us.

•         Conviction is important.  When we first invested in Boomi, we planned to split the round with a co-investor and introduced the Company to a few shops.  Most folks could not get there, so we decided to write the entire check.  After the market collapse in 2008, we told the guys to just focus on the business and be smart with cash, which they did a great job of.  There was constant inbound poking given the profile, but mostly off and on distracting conversations.  We decided to write an additional check so the team could focus entirely on the business.  And it was ever so rewarded!

Looking forward, we’re always sad to see a market defining company go.  The team did an outstanding job and I’d work with them in a heartbeat.  We are glad to have been a part of it.  We think there continues to be a huge opportunity in cloud infrastructure software.  The strategic interest in Boomi underscored that.  Dell has a fantastic opportunity to own one of the cornerstone building blocks for public or private cloud offerings, and exploit that as a real differentiator versus others out there.  Meanwhile, we’ll go back and look for the next great company to back!

LTV: Another Metric in SaaS?

I recently had an interesting conversation with a very smart hedge fund buddy of mine.  We were of course talking about investment ideas, given many of us were holding either cash or gold, and I threw out Salesforce.com.  It is generating 15-20% free cash flow margins, growing revenues at 30%+, with a solid recurring base.  This led to a discussion of valuing SaaS companies.

As venture folks trying to build companies, we tend to focus on operational metrics like Annual Contract Value (ACV), Monthly Recurring Revenue (MRR), Average Selling Price (ASPs), and Churn.  Both Byron Deeter of Bessemer and Will Price formerly of Hummer Winblad have done very nice posts here.  My friend’s perspective was entirely different as a public market buyer.  He looks at everything through the valuation lens.  He said the metrics above are all interesting, but he and his peers tend to focus on Lifetime Value of a Customer.  Essentially wrapping many of the components above to look at the DCF value per customer.  It is very similar to how analysts look at cable companies on the overall value per subscriber.  An obvious point he made, but framed from an entirely different angle, was that small changes to churn assumptions would lead to drastic changes in the overall valuation and associated multiples of a company.  While one can focus on the revenue or FCF multiples, it’s really the LTV that he cares about.

[UPDATE: Many searching for specific LTV calculations come to this site - a great summary of the formulas to use can be found here by Joel York of Chaotic Flow].

As a venture investor, I had never really thought about the public market perspective on my companies.  But it got me thinking about adding it to the key list of metrics our SaaS CEOs think about, because someday, we hope they will be selling that LTV metric to the Street.  Its component parts are made up of all the metrics we track, but creating an explicit metric often generates focus, and it’s probably one to think about early on in building value.

What do you think?