Tag Archives: SaaS

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.

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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!

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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?

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GaaS – The Rising World of Games as a Service

In the enterprise world, since the advent of Salesforce.com in the late 90s, we have heard about this notion of software delivered from the cloud and offered as a shared, multi-tenant service to customers, with the web browser acting as the universal interface to access the application.  Over the past decade, SaaS based applications have become mainstream, and are rapidly being adopted by small and medium sized enterprises globally because of its alignment of service delivery and value.  Interestingly, the same concepts are now beginning to affect the gaming industry.

In the old world of gaming, there were large hardware manufacturers who built specialized consoles to run and execute CD and DVD based games.  Game developers would create games that were stored on DVDs, and distributed through a vast retail infrastructure.  The game would have a multi-year timeline, and the developers went off building a new version of the game, which would completely replace the old DVD (much like writing new versions of licensed software).  Over time, those consoles introduced networking connectivity, and services like Xbox Live were launched.   You still bought the DVD as a starting point, but game updates became available online and you could even download new games in entirety over the network.

Today, a new era is emerging.  It started with the incredible success of World of Warcraft, which showed that a game could be delivered over the web, onto a PC, and create a “services” style game that continually grew and upgraded.  There are over 11.5 million subscribers to WoW, nearly half of which pay $15/month to play the game in North America and Europe. While the premium subscription model has proven to be wildly successful in North America and Europe, over 5 million WoW players in China continue to play via prepaid game cards at a rate of $0.07/hour. As most Massive Multiplayer Online games (MMOGs) in China are still played within PC cafes, the primary revenue model continues to be through prepaid cards via a time-based pay to play model combined with in-game item sales through micro-transactions, the latter being another gaming trend that is fast gaining traction in western markets.

WoW’s success has led to a revolution in thinking game development and delivery.  There are many examples of PC based games launching that are a single instance, multi-tenant, shared game application with a monthly subscription price that customers are rapidly adopting.  Two recent examples include Lord of the Rings Online (developed by Turbine and published by Midway/Codemasters) and Warhammer Online (developed by Mythic and published by EA), two western MMOGs with that have attracted over 300k paying subscribers each paying $15/month to play those games. Additionally, after having great success in markets like South Korea and China, game publishers are now experimenting with new models that allow users to play games for free upfront, and buy virtual items and characters via micro-transactions and P2P trading within the games.  Want to get the Penguin Micropet in GoPets?  Pay $2.  Want a level 80 character in Everquest 2 without investing weeks of gameplay?  Pay $500.  Companies like Nexon (publisher of Maple Story, Kart Rider and Crazy Arcade) in Korea and have generated hundreds of millions of dollars in annual revenue with this free to play, micro-transactions based model.

In addition, game content distribution is going through a massive shift.  Platforms like Steam from Valve are changing how we think of buying and interacting with gaming content.  Steam is a digital distribution and digital rights management platform that delivers gaming content directly to gamers via a web connected client. Steam allows gamers to purchase games and receive game patches and updates in an entirely digital manner. Steam offers both first party games from parent company Valve as well as titles from third party publishers, and currently offers over 350 games to 20 million registered users in 21 different languages.

Underlying this is a significant shift that will put pressure on the largest publishers of games, and create some great opportunities for creative destruction in the gaming industry.  The highlights of this new “GaaS” based ecosystem will share many of the same attributes of the “SaaS” world we have seen thrive, and will have the following attributes:

  • Games will be sold and played over the Internet;
  • The game itself will be a shared instance, with foundational upgrades instantly being applied to all players;
  • Game titles will have “continuous” economics, as new levels, variations, and challenges can be dynamically inserted or purchased;
  • Free to play model will remove barriers to adoption and encourage initial and immediate game exploration;
  • Micro-transactions via web payments, mobile payments and prepaid cards will allow game publishers to monetize users instantly and directly;
  • Game publishers will have unprecedented ability to interact with their customers directly – measuring navigation and usage as one does the internet, creating unique 1:1 marketing experiences, and watch for dips or spikes in activity and modify the environment in response;
  • Game publishers will be able to collect real-time gameplay data to provide a better and more personalized gaming experience for gamers, leading to more accurate leveling, improved matchmaking and increased socialization within games.

At FirstMark Capital, we have invested in a number of companies that follow on these trends, and they are seeing tremendous success in the market.  Riot Games is a session based MMO based on the very popular DotA community, whose game is entering beta and is already getting exciting user feedback.  LiveGamer is an exchange for virtual goods, and has seen transaction volumes and activities rise as more and more publishers introduce virtual items into their economic stream.  We have a number of other initiatives under way, but I believe this notion of GaaS will be an exciting one for the next few years.

(Special thanks to Jason Yeh for his contributions to this post.)

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Is Cloud Computing Stupid?

This was the supposition of Richard Stallman, founder of the Free Software Foundation.  As a venture investor hoping to invest in businesses that are ultimately profitable, with strong customer stickiness, and sustainable defensibility, you might be shocked to hear that I find some of Stallman’s assertions to be quite reasonable.   The cloud does have the potential to create lock-in under a certain set of circumstances, and can be called proprietary development platforms.  Where I disagree is that as a result of the above, customers should stay far away from cloud computing platforms (such as CPUoD, SaaS, and PaaS, as defined in my last post).  In fact, I believe given the rise of open systems, APIs, and standardized data access and retrieval layers, customers can enjoy all the benefits of a cloud platform, while maintaining sufficiently healthy competitive dynamics between vendors to keep them open and honest.

There is the obvious issue in Stallman’s position, which is that only 0.01% of customers have the expertise and resources to build one’s one server farm using all open source components and manage a fully controlled applications and data environment.   Putting that aside, I’m focused on the rest of the customers out there, large and small, that only have time to focus on their own value proposition, and where time to market makes use of clouds a very seductive option. 

Most SaaS applications today can be decomposed into forms that collect data, links to connect to data, workflow that pushes data to people in the right order, analytics that repurpose data “A” into new data “B”, and presentation to display data.  These SaaS applications are “multi-tenant” in nature – meaning there is one version of the application that all customers use.  While there are customizations, 90%+ of the app looks the same from customer to customer.  IF an application boils down to a calculation and presentation layer between various “rest states” of data, and a single application is fungible to many customers, then “uniqueness” lies in the data, not the application.  Therefore, the primary inhibitor to switching to a different application revolves around the concern for one’s data.  The easier I can get my data into and out of an application, the less beholden I am to any one vendor.  And if I am not beholden to a vendor, I can insist on the value proposition I need when purchasing the application.  Thus, to me, the argument all boils down to data portability. 

As a very simple consumer analogy, let’s pick the fun world of photo upload applications.  If I could easily extract all my Flickr photos and pump them into any other competing service (Ofoto, Shutterfly, Picasa), then I can feel fairly comfortable that Flickr is highly incented to offer best functionality at best cost.  If they do not, I take my photos out, and push them into the superior offering.  While many services do not provide such photo portability, I believe those that will win long term will be those that do, as savvy consumers will flock to such services.

In the old days, data was stored in proprietary formats that could only be read by the application writing the data.  In fact, way back, the physical storage of data to disk was proprietary!  Things have come a long way with the advent of standards such as SCSI, SQL, ODBC/JDBC, and XML, as well as published ways to extract the information via APIs via a ubiquitous transport layer in TCP/IP.  Data is isolated from the application, and able to be extracted via a variety of methods.  Almost all of the major SaaS suppliers today offer APIs (perhaps of varying quality) to push and pull information out of their application.  Many also allow connectivity at the database layer, and have built in export functionality.  The means to get at the data are provided for by the in the application provider, and I would expect this to increase significantly over time.

The next challenge after being able to access the data is to be able to take data on one side and make sure it is intelligible to any other application one might want to use.  Fortunately, there are a number of vendors who offer data integration and migration capabilities in the “cloud”.  As an example, FirstMark has an investment in a company called Boomi.  There are others.  These companies build software that takes the “taxonomy” of one application and translates it for other applications to use.  These can be comparable applications, to migrate from one to another, or they can be complementary applications, so that one set of data can be leveraged in multiple dimensions and avoid data input redundancies. 

If data is portable, then customers benefit greatly by leveraging a “cloud”.  Cloud vendors have extraordinary leverage in CAPEX, one that few companies can match.   The bandwidth and storage consumed by users of EC2 & S3 now exceed that from Amazon.com and all its other sites combined!  Quite a striking example, and it’s hard to fathom matching that kind of purchasing power.  In addition, the people and software investments to scale the infrastructure, the processes and procedures, the knowledge, all are very costly to duplicate.  If done right, clouds can be a much cheaper place to operate and allow customers to focus on their core value proposition as long as they insist on data flexibility.   

The above is also true for PaaS vendors.  Most PaaS vendors go out of their way to note that applications built on their platform have APIs built into the application out of the gate.  Now, it is true that ISVs choosing to use a PaaS platform are buying into a proprietary programming style.  In addition, they are at the mercy of the viability of the PaaS vendor, and that the PaaS vendor will not jump into the SaaS game by building competitive applications.  But ISVs have the same data portability options as an end customer.  If they choose to build on another PaaS, they simply have to ensure their PaaS vendor allows them to pump data from one platform to the other. 

None of this is easy.  Data movement has always been challenging.  But I believe we are now in a permanent era where you cannot “hide” data behind layers upon layers of proprietary code.  Customers and ISVs must insist that any cloud vendor they choose provide easy and standardized means to access and move their data.  If we all do a good job insisting and asking the right questions, the winners in the cloud battles will be those that embrace openness and portability, and who focus on retaining customers by having the best application instead of by scaring them with lock-in.

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What is Cloud Computing?

Given Larry Ellison’s recent objections to the term “cloud computing”, and that I will likely write about the space often, I thought I would take a shot at defining things that get lumped into the term. 

I tend to agree that “cloud computing” is an abused term, but I believe if you parse the various definitions, I think you come out with four categories:

·         Co-location and web hosters:  The forefathers of the cloud computing space.  They created specialized data centers with redundant infrastructures (such as power, network connectivity, etc) for third parties to leverage.  Customers were separated by cages, where they could put their own servers into racks (or lease the hoster’s servers).  Applications and data were technically outside the offices of the customer, and accessed via IP protocol and the Internet cloud.   Put Internet cloud together with computing elsewhere, one could play the game and conceptually call that “cloud computing”.

·         CPU/Storage on demand (“CPUoD”):  These players start with their own data center facilities and servers, but have leveraged the explosion in hypervisors to virtualize server pools.  They then layer on standardized OS environment, web servers, load balancers, databases, etc.   The application must be built for that run-time environment, but if it is, one simply focuses on the development of their application and can buy compute/storage that executes the software and stores the data in a usage driven pricing model.  Some folks optimize for specific languages, such as Google’s AppEngine in Python, while others provide specialized diagnostics and monitoring services on top of their cloud to differentiate.  Some are stateful, some are stateless, some with persistent storage, some with dynamic storage.  But at the end of the day, it is a standardized operating environment that one pays per GHz and/or GB running ANY application.   I’d view this as the basic “brick” in cloud computing.

·         Software as a service (“SaaS”):  On the other end of the spectrum, software as a service providers build all the way up through the application/UI layer to offer a business function to the end user in a shared, multi-tenant, recurring revenue model.  While extensible and customizable, it is one instance of the software that serves many customers.  It is often lumped into cloud computing because the data center cost (where the software executes and data resides) and assumed scalability are bundled into the cost charged to the end user for the application.  The vendor can either:  1) take their own racks, cages, and servers (as in first option above) to build their own internal CPUoD environment and write their application on top of their own controlled stack, or 2) the provider can use a CPUoD provider and write their application for that environment.  The end user pays for an application that scales by usage of the application (which may or may not need more compute) but the scalability and cost of the infrastructure is hidden from the user.  From the customer’s standpoint, this is a “cloud” + application.   But buyer beware, as Bob Moul of Boomi points out, many things calling themselves SaaS are not.

·          Platform as a service (“PaaS”):   This is the newest category.  It began when Salesforce realized that their SaaS application could be decomposed into more basic units that could be building blocks for any application.  Forms, tabs, and links, tied together with workflow logic and wrapped around data.  Force.com is a generic representation of an application – no data, no logic, but all the means to present, push, and pull information.  To build an application, one “programs visually”.  Customize a form, create a workflow for the application, specify the data types via fields, and your app is built.  PaaS removes the engineering level concepts in writing code in computer languages like C++ or Java (compiling, de-bugging, inheritances, message passing, etc), and incorporates the infrastructure scalability of CPUoD.  Like SaaS, the purchaser of an application built on a PaaS platform pays an application fee that assumes the infrastructure scales transparent to them.  Unlike SaaS, PaaS creates multi-tenancy across applications!  There is a single shared instance of a platform that supports multiple applications running on one or many CPUoD infrastructures.

Where’s the opportunity for startups?  Well, building and running clouds are a complex and costly activity.  It’s hard to envision as a young company having any comparable buying leverage on the CAPEX side.  One cannot hope to get anywhere near the same discount as Google on CPUs and motherboards.  And people use Amazon because it’s cheap.   The only hope I see for companies to make it are 1) in differentiated scaling systems that drive down the OPEX cost equation, 2) such a differentiated coding/support environment that people are willing to pay a real premium, or 3) gaining critical mass in a specific ecosystem of diverse applications that generate a network effect to one’s cloud.  The other area I like are plays that ride on top of clouds providing value added services on top that are gaps for the CPUoD/SaaS/PaaS provider .  That shifts the game from economic capital to an intellectual capital exercise, where nimble innovators thrive!

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