4 Things Enterprise SaaS Companies can Learn from Pokemon Go

pokemon go black 2

If you are anything like me, you have spent a little too much time over the last week capturing Pokémon. And you have spent less time working out and more time in the Pokémon Gym. And if you are in the B2B Enterprise Apps space, you might think that time was a complete waste. But take heart, if you read on, I will tell you what we can all learn for our Pokémon Adventure.

1.It’s a Mobile Only App

Pokémon Go is a Mobile App! It’s not a Web App with a subset of functionality for mobile. It’s not a mobile first app. IT IS A MOBILE ONLY APP! Sure it has website with some promotion and education material, but you can’t play the game on the web.

Nine years after the launch of the iPhone, Enterprise Tech is still struggling with the mindset of building great mobile apps. And while there may be fewer business apps that need to be mobile only, we really need to “action” the concept of mobile first. We talk about it, but we don’t do it.

We need to grasp these concepts. The primary computing device of most business people is a mobile phone. There are 2B active mobile devices connected to the Internet and connected mobile device numbers eclipsed desktop in mid 2013. (3 years ago!!!)

There are some jobs and applications that need a big screen, but they are increasingly the minority. I think most people still often feel they need to be a desktop or laptop to “get serious work done”. But IMHO, that’s because we make substandard enterprise mobile apps. Salespeople would adopt CRM faster if our mobile apps were better. Service applications would be better loved if customer service people could do their work on the phone. Marketers would use the Marketing automation systems more if the mobile apps did not suck so much.

There are a couple of enterprise apps that have a decent job here. Email for Microsoft and Google have pretty damn good mobile apps. Outlook is particularly good in my opinion. There are times when I am sitting at my desk with my laptop in front of me, doing email on my phone. Mobile is actually a better interface for quickly scanning, archiving and doing quick replies. Another shout out has to go to Expensify. It’s a very good mobile app that allows you to get the job down quickly. And lastly Slack. Great mobile app. Period. Full Stop.

 2. Pokémon Application Design is Awesome

No training needed for Pokémon Go. No Tutorials of video instruction needed. The app is intuitive in a way that great consumer and gaming apps are. The major functions are intuitive and all the functions are easily discoverable. I am not a gamer, but it was pretty clear to me that the game navigation was done through walking. I was not clear how the landmarks, gyms and Pokémon capturing worked, but you could easily learn it by doing. I clicked the landmark, spun the disc and then it became obvious to me that I could collect the Pokeballs and eggs. I tried to get in the gym, but the app told me I needed to be at a higher level to get in. Captured my first Pokémon after my phone vibrated and alerted me to its proximity. Throwing the Pokeball took my about 15 seconds to learn and once I captured my first Pokémon the app easily helped me discover the Pokedex and other functions you need to play the game. Lastly, one of the key usability features is that the game is easier at the beginning and harder as you play. If I immediately wandered into a gym or tried to capture a Pokémon that keeps bursting from the ball, I would have more easily given up on the game.

Lets face it. We don’t design Enterprise mobile apps like this. We tend to need tutorials; we cram a lot of features into the apps. Usability and discoverability are usually treated as second-class citizens to function and business process.

 3. Partnership was key!

Pokémon Go was created through a deep partnership between Niantic Labs and Nintendo. It’s actually more than a partnership; Nintendo owns a big part of the company that produced the game. The technology and application created by Niantic Labs is incredible, but this phenomenon does happen without the incredible worldwide Pokémon franchise built over the years. We know this for sure, because Niantic built a similar app without Pokémon. It’s called Ingress. It is by all accounts, a great game and it has a cult following. But it has 1M users compared to the 26M users of Pokémon Go built in only 12 days!

Enterprise software firms are not usually great partnering companies. We like to create our technologies, stacks and ecosystems. We like to keep things under our control and we have a hard time creating deep and meaningful partnerships that create new intellectual property.

4. It takes time and patience.

Enterprise startups and technology companies are famously impatient. We tend to launch products, measure them and if they do not meet with success, we move the engineering resource to another project.

Pokémon Go is being called an overnight success, but it was  a long time in the making. I remember meeting with John Hanke in the Google SF office 4 years ago. He had already been working on this geospatial gaming thing for a while. I am not exactly sure when he started working on it, but it was not built in June. He built an App/Game called Field Trip that I downloaded and tried. Field Trip lead them to other products and then to Ingress. And Ingress led to Pokémon Go.

It takes some time to build an overnight success. It reminds me when I was part of the Google Apps launch. We started with Apps in Education and then after we launched the commercial enterprise product, we did not sell a single license to a large company for 13 months!!!

I understand and support the concept of failing fast, but we need to remember that most initial product concepts will not have immediate success. We need to be able differentiate between failure and “market not ready” or “we are short of minimum viable product”.

So, if you in Enterprise tech and think you are just wasting time by playing Pokémon Go, take heart. Learn these lessons and it will more than justify your Charmander chasing time investment.

Microsoft/LinkedIn – The Greatest Large Tech Acquisition of All Time!

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Woah. $26.2 Billion. That’s a lot of money. Even in a world where we have become numb to “Uber” large numbers, this is a big deal. And most big acquisitions turn out poorly. Lets list a few: HP/Compaq; Autonomy/HP, Veritas/Symantec, Oracle/Sun, Google/Motorola….need I go on?

So there are many who will be skeptical, but here are three reasons why this will be the greatest large tech acquisition of all-time.

LinkedIn Data is a once in lifetime resource

Data about our professional lives is very, very valuable. As a businessperson, I live in LinkedIn and increasingly in their mobile app. Business is built on connections and every meeting or potential meeting starts with one question: “Do I know this person or do I know someone who knows this person.” LinkedIn is the only professional resource that can quickly answer this question. If Facebook deleted my account and connections, it would be inconvenient for me. But if LinkedIn deleted my account and my 2500 connections, I would be devastated. LinkedIn is mission critical to every professional. If you are hiring, marketing or selling, LinkedIn is a resource that you cannot do without.

Better yet for Microsoft, LinkedIn does not and likely will not have significant competition. The network effects of LinkedIn are too great. I mean would you join another professional network as an individual? Of course not! It would be too much hassle to maintain your data and connections on two networks. 

The Companies’ Products are Complementary and will be “Better Together”. 

Microsoft has at least three product areas that will directly benefit from some deeper LinkedIn integrations.

First, Directory Systems. Microsoft was the unquestioned leader in on premises directory systems and is moving that aggressively to the cloud. But LinkedIn is the real directory system of business now. We don’t need a business card, an email address or a phone number to keep connected now. If we are connected on LinkedIn we will always be able to contact that person. Creative product integrations here could be very powerful.

Second, Office 365 and LinkedIn could be very powerful together. Calendar integration in LinkedIn’s mobile app is already a killer feature, but infusing email, calendar, collaboration and documents with your external business network could open up a new level of functionality that others would find difficult to match.

Third. Dynamics and CRM. Microsoft is not the leader here and before this morning’s announcement it was difficult for me to see how MSFT did not continue to lose share to Benioff and Salesforce.com. But an integrated Dynamics/Sales Navigator platform could be a game changer. Sales managers love CRM, but salespeople don’t. Salespeople use CRM systems to record activities, but increasingly they use LinkedIn and Sales Navigator to connect with customers and prospects. Sales Navigator is still an early revenue stream for LinkedIn. It’s less than 10% of their revenues! Customers are clamoring for more integration between CRM systems and LinkedIn Data. If Dynamics has a first mover advantage on that, then it could really help in the battle versus Salesforce.com. Moreover, Sales Navigator could get a huge lift by leveraging the Microsoft corporate sales force. MSFT has relationships and contracts with every large company and can reach the mid market through its extensive partner network. Selling Sales Navigator through that network could provide the type of synergy that even the most aggressive investment banker did not model.

Artificial Intelligence and Machine Learning.

Do not groan. These words are the basis for most Silicon Valley jokes right now. But over the longer term, they are very important. And with all due respect to my LinkedIn friends, I do not believe they were positioned to be leaders here. It is very hard for LinkedIn to compete with Google, Amazon, Facebook and Apple here. And yet LinkedIn has a treasure trove of data that the world’s best AI and Machine Learning people would love to have. I would love to see more predictive features out of my LinkedIn data. They could start with better algorithms for my LinkedIn news stream. :-). But that’s the tip of the iceberg; applying AI to this data might provide insights for professionals that we cannot even imagine today.

So, that’s my take. Its bold- The Greatest Large Acquisition in the History of Tech! I hope that once the acquisition is complete that MSFT continues to break out revenue results for LinkedIn so we can track it progress.

And Congrats to both Microsoft and LinkedIn!

The Way Forward

B2B Cloud: 3 Steps to Aggressive Growth Without the Excess of the Past

3 steps

So the B2B Tech valuation meltdown of January and February has stabilized. After a dizzying fall for cloud companies that have gone public, the market has not only stabilized, but bounced back. The Bessemer Cloud index is now off only 16% for the year. Salesforce, Workday, Box have reported good quarters. And private companies DOMO, Slack and Asana bucked the trend by raising money at excellent valuations.

So can we all head back to the go-go days of lobster salad lunches and prolific spending is search of growth and market domination?

I mean you can if you want. But I hope that most sane people are taking the opposite approach. Raising private capital for all but a few select companies will remain hard and expensive. The public markets and now the private markets have sent a clear signal to those of us running cloud companies: STOP LOSING SO MUCH MONEY!

In retrospect, it is easy to understand how we got here. With interest rates at zero, an influx of cash flowed into our space that was unprecedented and made money almost free. Many startups were funded and spaces became more competitive than they would normally be in emerging markets. Startups in turn, spent that money on engineering, on sales, on marketing, on nice office space and on lobster salad lunches. Worse than that, funding and market capitalization became the outcome. Large rounds and high valuations became the metrics for success. Companies used them to establish themselves as the gorillas in each category and attempted to use that status to get the best employees and to win customers.

But enough is enough. If public companies are going to devalued because of their lack of profits, and private companies are valued at even higher multiples, then the need for change of direction has never been more clear: STOP SPENDING SO MUCH MONEY TO FUEL GROWTH

At the same time, to be clear, if you are a tech startup, you have to continue to grow. You can’t simply stop spending, fire staff, curtail budgets and see growth rates slow. Most startups will struggle to get anywhere near cash flow breakeven without growing to the point of critical mass. Those companies that have reached critical mass and could be cash flow breakeven, must grow to establish valuation multiples.

So, the way forward to clear. GROW WITHOUT THE EXCESS OF THE PAST. I mean really, what we were thinking when we have public companies who spend more on sales and marketing than they have in gross revenues! I mean, there is aggressive and then there is just plain crazy. The truth is, we startups have been acting like big companies. We have been raising large amounts of money and trying to brute force growth through spending on sales and marketing; No marketing event was too expensive, no campaign was too expansive. We hired Account Executives, Sales Development Reps, Sales Engineers, Account Managers, Industry specialists, Channel reps, Customer Success mangers and we layered on a good dose of management along with it. Lets face it. We just got fat! It was like a huge brunch buffet and we just pulled our chairs up to trough and kept gorging.

The good news is we actually know how to fix this. We are smaller, nimbler smarter companies. We can let the Ciscos and HPs of the world gaze at their navels and complete company reorganizations while we move fast. We know how to do this, we just forgot because money was free and somebody started a bonfire with a bunch of Benjamin Franklins!!!

Here are the concrete steps to take immediately in order to keep growing while spending like a startup.

  1. Stop Selling and Marketing to Companies that Won’t Buy 

Huge amounts of money were wasted by marketing and selling to companies that will not buy the products we have been selling. In our rush to grow into our valuations, we insisted that every company could benefit from our product and we started selling and marketing very broadly. We sold and marketed to small companies and mid sized companies, and to every large company. We sold to every industry and we expanded internationally quickly. We acted like we had never read “Crossing the Chasm” and we raced as fast as we could to broad markets.

Not only did this produce very high customer acquisition costs it also left us with a broad customer base to service. And if our product didn’t fit well in a certain market, we had low customer satisfaction and those customers are starting to churn. Yikes!

So here is what we must do. We must go back to tight targeting. Look at your customer base and segment that customer base by who uses and values the product. That will define your sweet spot. That is the segment that you have product market fit. Then focus your sales and marketing efforts on that segment. If you want to try other segments, select one or two and do some very targeted experiments to see whether you can penetrate that market.

And here’s another piece of advice. Be honest with yourself about how much engineering must be done to your product to reach a new market. Most companies want to expand to new segments by adding sales and marketing expense. But here is one of the lies we tell ourselves in startup land: “The existing product is great and we can expand to new markets without much product effort. If we get the right sales people, customers will get the transformative nature of our technology and not ask for frivolous features“.

Here is the truth of the matter. If you want to expand into a new markets, you need to do it with engineering first. If you want to be international, you need to do the work to make your product multilingual. If you want to sell to enterprise, you will need to build security, compliance and integration features. If you want to sell into specific industries, you will need to build features to fit that industry.

So, there is step one. Define where you have product market fit and concentrate your sales and marketing in that area. When you are ready to expand to new areas, lead with engineering and conduct some more pinpointed sales and marketing efforts.

  1. Make Sure you have the Right Sales Model

Lots of companies have not spent enough time on this. There are four predominate sales models: a) high velocity touchless sales, b) inside sales, c) field sales, d) channel sales. But also there is a lot of nuance in each model. There are multiple roles in each model, especially for those companies selling to large companies.  So this should be revisited for all companies with an idea of selecting the best model and optimizing it. See my blog post on this.

I think most companies are not wildly off on their sales model. But most companies that have not optimized each role within the sales process and many are using the most expensive models on market edges. You need to define the roles, key activities of each person in the sales process and ensure you have the right ratios. In the “free money” period we have tended to specialize too much in sales roles and mimicked complex and heavy sales models built for large companies. Here is a news flash: If you want to disrupt large companies, don’t act like them. Beat them with speed and flexibility, not the heft of your sales force.

In addition to getting the right sales model and role definition, you need to define the handoff and roles with marketing and customer success. In many companies marketing can own the lead generation and nurture function and in some cases take the sales process further down the path. Also, many companies can use customer success and post sales to do expansion and second product selling. Don’t be afraid to make customer success an integral part of your sales model.

Sales model definition needs more thought that we have given it in the past few years, where we have thrown money at the problem.. Not only are we wasting money, but many sales and marketing processes suffer from “school bus” selling where we load the vehicle with too many people on every sales call and sales step.

  1. Follow a Sales Process

Sales is not a random series of events. Most sales cycles follow a common set of steps that must be executed to win a deal. The failure to follow an agreed upon sales process has two catastrophic implications. First your win rate drops because you miss important steps in the sales process. Second you waste a huge amount of company resources doing hurried, unexpected sales steps that are not efficient. As a further negative consequence, sales organizations that do not follow process lose the confidence of the rest of the organization. In particular, product and engineering see the sales team as unorganized and reactionary. This, in turn makes them less responsive on the “real” opportunities.

You don’t need to hire a team of consultants to fix this. Your people actually know the optimal steps to win a deal, but most companies haven’t had the discipline to write the process down, train on it and find a way to make the process stick. A good sales process will define 5 things: 1) Sales step name, 2) Typical activities, 3) Owner and roles of each step, 4) Resources used and 5) Deliverables.

I always think you can build and define this in a couple of weeks and then iterate on it constantly.

So let me summarize. We are tech startups. We must grow aggressively. We have gotten too fat and undisciplined during the free money period. It is eminently possible through simple steps to aggressively grow without starting a cash burning bonfire.

Take a Deep Freaking Breath, The Cloud Still Wins!!!

Coping with the B2B Cloud Valuation Meltdown

Woman breathe fresh air

Businesses to Business Cloud Computing valuations have dropped off the cliff in 2016. And I mean a big cliff. Its bad! If your heavily invested in B2B SaaS, you have been puking on your shoes for all of 2016. The Bessemer Cloud Index that does a decent job of tracking B2B companies is down 33% year to date versus S&P500 being down 9.1%!! And the biggest independent SaaS companies are way down: Salesforce -24%,; Workday -42%, Splunk -47%; ServiceNow – 42%; Netsuite -49%. Athena Health -26%; Even market darling Atlassian is down 33%. If this were a prizefight, they would stop it! If cloud stocks were their own market, rule 48 would have been invoked in 2016 and circuit breakers would be getting a frequent workout.

Things have gotten so bad on valuations that revenue/market cap ratios for SaaS companies are similar to those of old line on premise software companies.

Now, I am an operator and company builder, not an investor or valuation expert, but this blog post is here to say that multiples of B2B SaaS companies should NOT be similar to old line on premise hardware software companies.

Why? Because the new B2B SaaS companies will eventually get a majority of the old line hardware/software company’s customers and revenue. Cloud computing is simply a vastly superior way of delivering value for clients.

So it’s worth revisiting why cloud computing wins over the old paradigm. I gave the “Why cloud” speech hundreds of times, while I was evangelizing the cloud for Google in 2007-2013. In these troubling times, it’s worth revisiting my old notes, which are more true and relevant today.

Cloud Computing has four incredible, mind-blowing benefits over the traditional on premise hardware and software model. I will list them in order of importance: 1) Speed of deployment 2) Elasticity, 3)Security and 4)Cost.

Speed of Deployment

On premise hardware and software programs are unbelievably slow to write, deploy and update. And by unbelievable slow, I mean we measure cycles in increments of decades!!! No, I am not sh*ting you here. It is highly typical for companies to take 5-10 years to deploy new applications or even new functionality on existing applications. Don’t believe me. Read on!

The best software company in the world is undoubtedly Microsoft. There are other great software and hardware companies, but none is a good as Microsoft. They have ~$100B in Annual revenue, Earnings of ~$25B; Market Cap of $400B. There is a reason Gates is the richest man in the world. His company has the undisputed king of the on premise software world.

Now how fast was Microsoft with on premise software? Fortunately we can easily track how fast they developed software because they did us a favor my naming their products by years. Here are the major release cycles of the world’s most popular application program, Microsoft Office:

  • Office 95
  • Office 97.
  • Office 2000,
  • Office 2003,
  • Office 2007,
  • Office 2010,
  • Office 2013,
  • Office 2016

So, on average they release software every 3 years. Every 3 years!!! And that’s from the best software company that the planet has ever known

Worse than that, customers would not or could not easily deploy new software, and they would often be years behind those release cycle.

When we launched Google Apps in 2007, I went to see General Electric. This company is the hallmark of management practice, an example for all of how to run companies. GE bragged that it spent $4B on IT. Surely they were faster. Nope. When I went to see them in 2007, they were using Office 2000 products and would do so for another 3 years. GE users were forced to use software that was 7 years old. Can you imagine using technology that is seven years old? Can you imagine a mobile phone that is seven years old? Would you buy from Amazon if you were using their website from 7 years ago!!!!

Ever wonder why, it takes the United agent, 500 keystrokes to change your flight or your seat. Its not the agent’s fault, he is using on premise reservation software that was originally written in the Nixon Administration!!!

The cloud allows massive improvements in speed of development, deployment and end users get functionality quickly and seamlessly. Applications design and development is less monolithic. Cloud applications can be updated in real time, you don’t’ batch up features and release them every three years; you introduce them as they are developed. At Google we could put new features in every day or every week. Secondly, because true cloud applications are essentially centralized version NOW, multi-tenant instances, they are orders of magnitude less complex to deploy.

I could go on, but you get the point. End users are now accustomed to constantly updated cloud applications liked Facebook, Google, Amazon, Snapchat, etcetera, they are not going to put up with using enterprise software that is a freaking decade old!!!!

Elasticity

Cloud applications, at least properly architected applications ones offer the ability to cheaply and easily build applications at scale that can withstand heavy loads without significant performance degradations. Better yet, you can rent the computers and software stack from cloud vendors and only pay for what you use. If your application is a flop and there is not much usage, you don’t pay much. If you application is a hit, you application won’t crash while you are ordering hardware and installing software.

This is especially important for your most crucial applications, your customer facing applications. These applications might need to scale to hundreds of thousands or millions of users and have very spiky workloads. On premise hardware and software model was largely designed for internal applications – those used by company employees. In the pre-cloud days, only GE, Wal-Mart and GM type companies had to worry about scale on applications. But when the cloud age hit, many companies delivered computing to their customers where scaling is paramount, and performance is critical. Further the Internet age was accompanied by globalization, so for the first time IT departments had to build globally scalable applications. Most modern cloud applications come with built in global scalability, if you build on premise applications, you will be building data center capability globally.

In the on premise world, we would estimate workloads, build capacity for peak demand, deploy hardware and software into multiple datacenters and hope the application was a hit. If it was a hit, our servers crashed and we scrambled to build more expensive infrastructure. If the application was not a hit our software and servers sat idly by, burning up cash by the minute.

In the cloud, you can let others worry about this. Hardware and software infrastructure are much more elastic. Build the application, run it in cloud and forget about estimating workloads, determining server capacity and factoring in lead times for hardware and software deployment.

Security

It is still sacrilege to say this. But I said it in 2007 and I will keep saying it. The public cloud is much more secure than traditional on premise software and hardware. Security is a benefit of the cloud, not a liability.

I am not saying that you should not do deep security due diligence on your cloud vendor. You should. You can build crappy cloud apps, but most people don’t and securing cloud applications is much easier than securing on premise applications.

The reason that cloud applications are more secure than premise applications is that security for on premise applications is a virtually impossible task. Let me explain how impossible it is for even the richest and most competent IT organizations.

Everyone will agree that all software is vulnerable. It must be continually patched. We are now paying outsiders to continually hack our software, identify vulnerabilities and then quickly issue fixes and parches for that software.

So the key to secure applications is the ability to patch quickly.

Traditional on premise applications are highly decentralized. They exist on many servers. We are talking 10’s to 100’s here. And software is deployed to desktops where there are 100’s to 1000’s of those computers. So even with virtualization and automated patch systems the task is massive. If you are Fortune 1000 company, you may be able to cobble the resources together to be half way decent at this. But if you are a mid sized organization, you cannot hope to be able to handle this. (I have a great story from an old customer on this, but that’s another blog post)

Secondly, the application stack that most companies deploy is incredibly complex. Operating systems, database, application servers, countless layers of middleware. It is very complex. And those layers don’t typically come from one vendor, so when one vendor identifies a security vulnerability and sends you a patch there is no guarantee that you can deploy that patch because it may not work with the other layers of software. They will likely need to wait until other vendors catch up before they can deploy the patches. And patches are further delayed because IT departments need to do testing on the application to ensure that the patch does not break something.

Lastly, most on premise software applications are not designed to be patched and updated without “taking the system down”. This is mind boggling to young people. They can’t believe this. Amazon updates it software without closing its store, Google updates it software without taking search down, You never go to Facebook and see a message that says “the system is down for routine maintenance”. But that is how we live in the on premise world. We have to take applications offline to patch them, but our maintenance windows are getting very tight. Business is 24/7 globally, and applications are now critical to the functioning of the business. No applications, no business. So many organizations, just batch up their patches and roll them our periodically in order to ensure application stability and reduce downtime.

But that means your systems have known vulnerabilities for extended periods of time. Forget about zero day exploits, the bad guys can hack systems by using known vulnerabilities.

With on premise hardware and software, deployed in the traditional fashion, it is virtually impossible to keep your systems highly secure. We know this in IT we just don’t like to talk about it.

Cloud based systems are highly centralized, easier to patch and typically designed to be patched and updated with no downtime.

Cloud based vendors also have extremely large and competent security teams. I am not saying they are perfect, but they are usually larger and better than the IT security teams that non–IT companies can build. Security specialists are in short supply and do not come cheap. You can do your best at building a great IT security team, but in the end, on premise IT systems are like storing money in your mattress. You might feel good because your data is at your location, but its only safe if you can vigilantly protect your house. Might be better to store your money at the bank where they have professional security.

Cost

Everyone talks about this as he the main benefit of cloud. It is a benefit, but it is fourth of my list because you should do cloud, because of speed, flexibility and security. Lower cost just happens to be a side benefit of cloud and a pretty damn nice one at that.

When we introduced, Google Apps in 2007, we charged $50 per user per year. The average loaded cost of a Microsoft Exchange email box was $500 per user per year. Our systems were 1/10th the cost of on- premise software! And much of that $500 expense was not going to Microsoft license or maintenance fees. It was the cost of hardware and an increasingly large IT staff that are need to deploy, maintain , and secure internal IT systems.

Its not just Google Apps, Workday is cheaper than PeopleSoft or SAP, Salesforce is cheaper than Siebel, Netsuite is cheaper than Great Plains software. ZenDesk is cheaper than Remedy

It is not only less expensive to buy and run cloud software, but it is less risky to procure. Price entry points of traditional software are very high as large perpetual licenses need to be bought, followed by 20%-25% maintenance fees. On premise software is so expensive and risky because of its high upfront costs. On top of that, large deployment and customization charges are typical in the on premise world. And once you have deployed software, switching costs are very high. So the vendor has a lot of power in price negotiations. Maintenance fees were about 12% when I got in the business in the mid eighties. They are now 20-25%.

Cloud based software is purchased annually with no exorbitant upfront costs. If you don’t like the software or your needs change, you simply don’t renew. You don’t need to marry your cloud software, you can just date it.

The cloud will win. It is a simple matter of fact. I don’t know what is going to happen with valuations, but I do know who is going to win this battle.

So if you are an investor, entrepreneur or employee of a B2B cloud company it is ok to hyperventilate or puke on your shoes. But take a deep breathe because the cloud wins!

Atlassian or Box.com; Is “Sales Light” or “Sales Heavy” the right model for you?

5 Questions to Guide You

Atlassian is about to go public in what might very well be the best Enterprise Tech IPO since Workday. On top of great products and profitability, the headline of this IPO is their sales model; or better stated – there lack of a sales model. Here is the paragraph of their F1 that everyone is talking about. I have added the highlights for emphasis:

We founded our company on the premise that great products could sell themselves and we have developed a unique approach to the market that is centered on this belief. We begin with a deep investment in product development to create and refine high-quality and versatile products that users love. We make our products affordable for organizations of all sizes and we transparently share our simple pricing online. We pursue customer and user volume, targeting teams in every organization, regardless of size, industry or geography. To reach this expansive market, we distribute and sell our products online without traditional sales infrastructure where users can get started in minutes without the need for assistance. We focus on enabling a self-service, low-friction model that makes it easy for users to try, adopt and use our products.

Wow! Talk about disruption They are selling $319M or Software and SaaS with no traditional sales force!

As a result, Atlassian sales and marketing expenses are only 12-21% of their revenue. Compare that to other Enterprise SaaS companies who spend between 50-100% of revenue on sales and marketing. See Redpoint Ventures Tomasz Tungus’ excellent analysis of Atlassian’s Superior SaaS metrics.

Now let’s look at Box.com who went public this spring and is doing quite well.  Revenues are growing at 38%, losses are narrowing and profitability is on the horizon.  That having been said, they are the polar opposite of Atlassian. Sales and marketing expenses are still 81% of Box revenues and at times they were spending an astounding 200% of revenues on sales and marketing.

So, can we all just copy the Atlassian flywheel model. Can we finally dispense with a golf playing, wine drinking, first class flying, face to face field sales force and let the computers do the work?

It’s easy to look at the Atlassian and Box numbers and declare Atlassian the winner on not only efficiency, but in effectiveness. It is a larger company than Box ($319M vs @280Mish in trailing 12 months revenue). And Atlassian is growing faster (46% to 38%)

But before we rush to any conclusions, it is also worth noting that the undisputed heavyweight champion of SaaS, Salesforce.com, uses a “sales heavy” model and is fact now headed by Keith Block and Tony Fernicola. These Oracle alumni are industry veterans of the “sales heavy model”. And it’s not just Salesforce and Box. Most of the leading Enterprise SaaS companies use a “Sales heavy” model. Workday, ServiceNow, Netsuite, Marketo, Eloqua, Concur and Successfactors all employ a lot of salespeople. And even companies who target the lower end like Hubspot spend a lot on sales and marketing.

As for other good examples of “Sales Light” models, we should look at Amazon Web Services. They have sales people now, but a lot of their business was built in the low cost frictionless sales model. Another example would be the Google At Work unit,that I ran for eight years. We certainly had lots of salespeople, but large sections of our business were designed to be low touch frictionless sales and mid market and enterprise units were run below industry average expense levels. The other non-public examples of sales light model would be Github who has grown to 10M users worldwide. But even they hired a VP of Sales 18 months ago and stated that their latest $250M fundraise will be used in part to expand sales.

 

So, what is right? “Sales Light”, like Atlassian or “Sales Heavy” like Box.com and Salesforce? The answer of course is: “It Depends” and “You may need more than one sales model”.

 

HiRes

But I am not going to cop out with the ubiquitous “It Depends” answer. Let me give you 5 factors to consider when making your decisions about your sales model

Factor 1: What is your target customer’s buying process?

We talk a lot about sales process in Enterprise Tech, but in a hyperconnected world where buyers possess access to almost infinite information, we need to think about how customers buy, not how we sell. You need to ask how they have traditionally bought and how they are buying in the new normal.

Small businesses have usually bought quickly and with smaller levels of consideration. Frequently there is a single decision maker and they are focused on ease of implementation, low cost and end user simplicity. They are not often interested in competitive evaluations unless it helps drive price down.

Large enterprises have traditionally bought slowly with very high levels of consideration. There are many stakeholders involved in buying technology. They often have established and cumbersome procurement rules that must be navigated. They will have very complex decision criteria and will focus more on total cost of ownership and ability to integrate with existing complex infrastructure. They will almost always require a competitive analysis as part of the buying process that involves significant dollars.

Medium sized business is traditionally a mix of the above- more than one decision maker, but not hoards of people; Some structure in the buying process, but not too much.

Buying processes also differ by industry and region in the world. Buying processes in government and regulated industries (Finance, Healthcare, Pharma) are even more stringent. European buying processes can differ from American ones and Asia Pacific buying processes are clearly different.

So, the general rule is, if you target large companies and regulated industries you will trend towards sales heavy and if you target smaller companies and less regulated industries, then you can trend towards “Sales light”.

Lastly, you should consider who your target buyer is within the company. The sales light model has worked well for Atlassian partly because they target engineers and developers. This target buyer is highly skeptical of salespeople and marketing claims. Taking them golfing is not likely going to help the sale move along. They want to see the product, look at the nuts and bolts and decide based on hands on work. Furthermore, developers can often choose tools individually or in small groups without engaging with a large team of stakeholders. And once, you convince an engineer or developer about your product, they are likely excellent sources for word of mouth referrals. If you are selling compliance software to the CIO or Chief compliance officer, you are much more likely to need spend a lot more sales time doing belly-to-belly meetings.

Factor 2: How Mission critical is your product?

Every company wants their product to be called mission critical, but be careful for what you wish for. Mission critical is often defined as “Will the business stop if this application is down” or “Will there be significant impact if this application is down“. ERP software for manufacturers is mission critical, Patient record systems are mission critical to hospitals; Websites and ecommerce systems are critical to online companies. Points of sales systems are critical to retailers.  Email and Payroll systems are usually mission critical for everyone. But there are a whole host of important software that is not mission critical.  If you are selling “succession planning software” or “recruiting software” or “e-meeting software”, then you fall into the important, but not crucial category.

The sales model implications are as follows. Mission critical software requires a more sales heavy approach and important, but not mission critical software can trend more towards sales light.

Factor 3: Is your first sale a “Bunt single” or a “Grand Slam”

Certain software sales are an “all or nothing’ sales proposition. Customers decide once. There is usually a large upfront sale for all users. If you win, then you are golden. If you lose then you are likely out of the account for a very long time. Salesforce.com is a good example of this. People make decisions about CRM, Service and Marketing automation once and then work very hard to succeed with it. They do not revisit that solution every year, nor do they allow departments or divisions to deviate from the corporate decision

Other software is bought is small chunks. It can be bought by a department or as a corporate trial. Customers make a small purchase, they watch how adoption goes and then expand use over time as they see value.  File sharing software from Box.com, Dropbox would be a good example of this. E-meeting companies like Webex and “Go to Meeting” are another example.

If you are a Grand Slam company, you will trend more towards Sales heavy and if you are “Bunt Single” company, you can trend more towards sales light.  But be aware if you are sales light, you likely need to invest more in customer success than the Grand Slam company.

Factor 3: How Viral is your Product?

Viral is an overused and poorly defined term. But I will use a simpler definition. How much effort is needed by your company to spread usage of your product? If it a lot, then you are less viral, if it is almost none, then you are very viral. Some products are not naturally viral. ERP and Patient Record systems are not viral. They take a large amount of resources to “get live” and then the company mandates them. No viral success needed. Other technologies like e-meeting software are more viral. Customer buys some limited amount of licenses, they start hosting meetings, people have to have access to software to attend meeting. Other departments or divisions see you using software and want to come on board. This is a really good model if you can make it work. Unfortunately we have many potential enterprise software categories that are viral in nature, but whose products are not user friendly enough to go viral in a big way. I mean have you ever left a Webex meeting and said “Wow, that was great, I can’t wait to do that again.” So be careful here, if you want to get the effects of viral distribution you have to have the right product and it has to “delight users”, not just meet requirements. Another way to say this is that you need “Net Promoters” at the end user level- people who rate you 8 out of 10 and above. And it has to be at the end user level, not the IT or support level. Most Enterprise companies are doing net promoter stuff now, but they are surveying the wrong people-Central IT or Project Management staff.  You need to survey the end user.

So bottom line on this factor, if you are viral, you can trend toward more sales light. Use a sales force to land the big account and let the product and customer success teams/process take it from there. But be careful, if you are not truly delighting end users, then you will need heavier investments in customer success than your CFO will like.

Factor 4: How competitive is your market?

Every market is competitive, but some are more competitive than others. If the customer has many alternatives in your space, then the sales model will need to be heavier. Customers who perceive that they have many choices, fear making the wrong decision and want to make sure they get the best price. If your product is a newer category, where customers perceive uniqueness, then you can be more sales light. To use a consumer example, If you want to buy a luxury sedan, you will feel required to look at BMW, Audi, Mercedes and then likely Infiniti and Lexus, GM, Ford and Chrysler. But if you want a luxury electric vehicle, you will stand in a (virtual) line in a get a TESLA.

Factor 5: How hard is to implement your product and What is the time to value?

Products that require lots of professional services to get started are tough to sell in sales light environment. If the customer cannot take some very quick steps to get live and start getting value, then you will need a much heavier customer engagement model. Some products are naturally heavy in implementation services because they require configuration and business process design. These products usually fall into the “Grand Slam” category because customers cannot “trial implement” them or adopt them in chunks. You will need a sales heavy model to assure customers about your solution because it will cost them money and time before they see value. There is higher risk, so they need more belly-to-belly time. On the other hand, solutions that can be quickly implemented and do not require a lot of expense to get value, can trend towards a sales light model because customers will perceive lower risk. If it doesn’t work or users don’t like it, we are not out much…so let’s just buy it”

Please note that as you move up the stack to sell to the largest companies it is not likely that you will be “full self service implementation”. You will be required to integrate into to the customer’s proprietary environment like directories, single sign on systems, mobile security systems and archiving systems, just to name a few.

Conclusion

There is no one right answer to the Atlassian vs. Box.com question. But there are clear questions that you can ask yourself to determine your sales model. Further, if you plan to tackle the whole market from small to large and across many industries and geographies, then you are likely to have more than one sales model.

I also recommend that you stretch the boundaries of the sales light model as far as you can. Sales light can be used beyond small business and there is evidence that it can work much further up the food chain, so don’t default to sales heavy too soon.

You can also deploy hybrid models. In the mid market in Google Apps , we used a sales light model for the first step of the buying journey, but deployed a team based field approach to the final step of the sales process. That change had a big impact on our close rates.

Lastly, your sales model is not a standalone business strategy. It is very closely linked to your product strategy. The simple fact of the matter is that Enterprise software has been so horrifically bad that sales light was not an option for most companies. If they saw or understood the software without a thick and expensive sales force translating it for them, then there was no chance of a sale or adoption. We simply must make better enterprise software.

Your sales model strategy is also tightly tied to your customer success strategy. In the past,we didn’t call this customer success, we called it support. We published a 1-800 number, we fixed bugs and we let third parties implement our product. We are now developing robust customer success departments that do implementation, end user adoption, project management and support.  And we are learning to do customer success functions in a high velocity, frictionless environment as well. If you are a “bunt single company” that depends on land and expand, then you will often need to invest more in customer success than your “grand slam company” and you will have to work hard on your product to ensure sales expenses are simply not replaced by customer success expense.

So there you have it. Picking your sales model is not black magic. It also should not be a religious war between the wine drinking golf playing, first class flying old guard and the “all on line” new guard. Answer these five questions and pick the right blend of sales models for your product and target markets.

Recruit and Retain Employees by Answering this One Simple Question

Why Does our Company Exist?

 

The last 5 years in the tech industry have been a very competitive labor market to say the least. When I have sat around with my management and recruiting teams over the last few years, I have referred to it as the Global War for Talent. If you are running any tech organization, you are competing with the big guys like Google, Facebook, Apple and the new big guys, the Unicorns and Decacorns. And frankly we have also been competing with people going to start their own thing in an environment flush with funding.

We have spent a lot of time debating and honing, pay levels, equity percentages, vesting schedules and refresh grants. We have spent an even greater time talking about benefits and perks including the number of web enabled beer kegs and the breadth of the selection of flavored waters available in our newly remodeled employee kitchens. And we have spent a lot of time establishing and maintaining the right culture. I am not making fun of those things. They are very important. But I think we have not spent enough time on answering the most important question that employees will eventually ask.

That question is simply. “Why does this company Exist?”. They don’t ask it that way. In fact, I have never had an employee/recruit ask it outright. But almost everyone is searching for and crying out for meaningful work. It is not just millennials. Everyone wants his or her work to matter. If they do well and the company does well, what will we have achieved? Will it have been worth it? We are all going to spend an inordinate amount of time, talent and treasure to try to achieve something. There are going to late nights and early mornings, redeye flights, brutal competition,  and demanding customers. There will be incredible highs, but also soul sucking lows. And when your recruits and employees are exhausted and down. They will ask themselves “ Why am I doing this?”, Why don’t I take a cushy job at Hewlett Packard or IBM and catch the company bus home at 4:30pm. And when they ask that question, their compensation, flavored water and autonomous culture won’t keep them going. They will have to answer in their hearts “Is this worth doing?” and when they get to that point they should know in their hearts the story of why our company exists. And why the mission we are on is meaningful and important. If what we are simply achieving is moderate improvement in the status quo or something even more esoteric like “creating shareholder value”, then why bother?  Why not just punch a clock somewhere else?

But few companies, founders and executives are really good at answering the question: Why does our company exist? And those who do, tend to distill into down into a meaningless mission statement that will be discarded by employees even if you go through the trouble to laminate it on nice paper stock.

What is needed is a compelling story to answer the question. It can be put into a few powerpoints if you like, but it is best told off the cuff and from the heart.

Over the past 15 years , I have been called on the deliver the “rally the troops” speech many times or have  been asked to help close the star recruit or save the key employee who has a bigger offer. And over that time through hundreds of speeches and even more one on one chats, I realized there was a formula for telling the story and answering the question “Why do we exist?” So here is my formula. It is not scientific, it was not developed at any prestigious business school, but it has worked for me. So let me share it and feel free to give it a try.

Step 1: Identify the Problems of the Paradigm that You are Trying to disrupt.

We are good at this in tech. We founded and run new companies to burn down what was have built before. We are never happy with the status quo. So describe the status quo in painstaking detail and get good at telling others how intolerable that status quo is. Here’s an example from Uber. If I were developing their story several years back it would have been easy to talk about how bad the taxi industry was. Dirty, poorly maintained cabs; poorly trained, unmotivated and rude drivers. An intolerable dispatch system or sidewalk hailing system that was unbearable. Poor payment systems. And a complete mismatch of supply of cabs to demand especially in peak periods, Need I go on?

You need to develop you own horror stories of the status quo. Make the list long. Punch it up with humor and concrete stories. Make everyone feel the pain of the status quo.

Step 2. Develop Concrete Impact Statements on the Consequences of the Status Quo

Simply listing the problems of the status quo is not enough. If you are not careful your long list of problems will seem trivial and unworthy of serious pursuit. They might ask “A better taxi service, really? Is that it?” Is that what I really want to write on my headstone as my major life accomplishment? So you need to take it the next level. Let me continue with the Uber analogy:

The taxi industry is so bad, that X% of the population uses their car even when they know a taxi would make more sense. And that causes: a) greater traffic congestion, b) chronic parking problems and most importantly c) increased carbon emissions of X %. Also, the unreliability of the taxi industry causes business lost productivity of Y %. And perhaps most importantly, the incompetent taxi industry causes many people, especially younger people to drive their cars after drinking. Drinking and driving kills 10,000 Americans every year. We have to stop this!

You need to develop impactful statements of your own to compel those around you to join you in your mission. It takes a little work, but if you nail this, then you have something that really works.

Step 3: Position your Company/Product as the Only way to Stop the Status Quo from Continuing to Wreak Havoc.

Here you list the features and benefits of your product or service and show how they solve the problems you outlined in Step 1. Again to use the Uber example:

You will be able to hail a ride by pressing a button on your phone without the need for a dispatcher or by mindlessly waiving at speeding cars.. The app will tell exactly where the cars are and how soon they can pick you up. It will help the driver navigate efficiently to you and then your destination. It will have an integrated payment system that will do away with the need for cash and tipping. And it will have a patented demand based pricing system that will allow for the free market to match supply and demand, especially in peak periods. And so and son on.

Can you do that with your product or service. You need to be able to concretely show that your company can/will solve the problems you outlined in Step 1.

Step 4: Show that You have a concrete plan

Saying you have an idea or an early version product will be good enough for some employees, but many others will want to here the concrete steps that must be taken to get to the end game. You don’t need all the answers, but you need to not come off as a dreamer company that is short on specifics. Also have a plan to fight when the status quo belatedly fights back or when another new emerging startup launches a similar service.

Step 5: Tell Them that it will be Hard and that You Need their Help.

Don’t forget this last step. Every executive, founder knows they can’t do it alone. But we too often come off as people who think they know all the answers or have all the plans. Be prepared for closing with a story and a plea for help. “It will be hard, there is much we do not yet know and hurdles that we know we must overcome, I need help and the right people on our team. We need your unique skill sets, and your perseverance to carry us through. We cannot let the status quo perpetuate itself and we need to ensure  a new and better way wins the day.”

It seems easy . Five simple steps. But I think we need to spend more time on building and telling the compelling story of why the companies we run should exist. And if we spend time to develop the story, then maybe, just maybe we can get by with only three flavors of water in the employee kitchen.

If you want to read about a concrete Enterprise SaaS of one of my stories click through to my blog and read an additional supplement to this post. How I creating our story in the Gmail versus Exchange cloud battle.

2007 Flashback: Gmail vs. Exchange

Why Gmail for Business should exist?

In February 2007, a group of associates and I launched a head on assault on the status quo of email. We planned to offer a cloud based alternative to Microsoft Exchange, Lotus notes and Novell’s Groupwise. At the time, 95% of all email was on premise solution and Microsoft had about 70% share. Here was our story that I developed put within the framework I wrote about in another blogpost.

Step 1: Identify the Problems of the Paradigm that you are trying to disrupt.

Existing email systems are a nightmare for end users and heinously complex and expensive for IT.

  1. Email box sizes are much, much to small for today’s information age. The average is about 500MB. That is way too small for a world where email volume is increasing by 25% annually. Most users spend an inordinate amount of time cleaning up their email box, deleting and archiving so that their email box can fit new email. If you don’t spend a lot of time managing your impossibly small inbox, then existing systems stop delivering new email to you! Its crazy, why are we forcing users to live in this environment?
  1. Existing Client server emails require you to download email to your PC. Users are spending tons of time waiting for email to download. And if you are a road warrior and have a bad connection or can’t get through the corporate VPN then there is no email for you. How crazy is this. Do we really need the email to live on our laptops? Wouldn’t it be more efficient to store it on a server? And wouldn’t it be more secure?
  1. Users spend an hour a day foldering and sorting email. This is a galactic time killer for every information worker. Do we really want to treat high volume electronic communication like it is piece of paper from the 1950s. Back then, we saved each piece of paper into a separate folder and stored it in filing cabinet. In age where we can easily search and find things on a data source called the internet, can’t we develop some email search technology that would allow us to find email without having to spend an hour a day foldering email. You know what is worse than spending an hour a day foldering email? Spending an hour a day foldering email and then still not being able to find it because you can’t remember what folder it is in!!! I mean really, its 2007, this is just such bullsh*t!
  1. Existing email systems are way too expensive and consume large amounts of scarce IT resources.

On premise systems require hardware, system software and application software to be procured provisioned and maintained. In addition to that expensive virus scanning and spam filtering software and hardware must be added to each email server. Most email systems are deemed mission critical and require high levels of redundancy to ensure data integrity and high levels of availability and performance. So take the normal email hardware and software configuration and multiply it by 2 or 3. Furthermore the nature of most workforces is increasingly distributed, so the It configuration must be deployed in a complex distributed fashion. Lastly, the Microsoft applications require frequent patching to ensure security and reliability. Every second Tuesday a large number of patches are distributed to Microsoft customers. The number of patches is so large and frequent, that the industry has come to know every second Tuesday as “Patch Tuesday”. I mean it is so cumbersome they have a name for the day that you just maintain the system!!!

Step 2. Develop Concrete Impact Statements on the Consequences of the Status Quos

The problems described in Step 1 have the following impact on organizations

  1. Legacy email systems designed for volume email environment of years gone by have a huge negative impact on information worker productivity. It is estimated that information workers spend 30 minutes per day doing unnecessary email hygiene primarily in unnecessary foldering and email/attachment deletion or archiving. Eliminating that 30 minutes would lead to a 6.25 increase in productivity! No other simple system change can have such a big impact on information working productivity.
  2. It is estimated that 20% of the data in a company is structured data and 80% of that data in unstructured data. The majority of that unstructured data is in email or in attachments and files sent though email. And yet we force employees to constantly delete, archive or use an arcane foldering system to manage the largest amount of information in your company. If you cannot easily locate our unstructured information, then your decisions, processes are underperforming through lack of complete data. In today’s competitive world you can’t operate without comprehensive data at your fingertips.
  3. The average company of spending $500 per year per user on email boxes that are 500MB. Expansion of those email boxes is prohibitively expensive. So users are in the worst possible situation: High costs for a service that is not and cannot meet their needs.

Step 3: Position your Company/Product as the only way to stop the Status Quo from continuing to Wreak Havoc

Gmail for business is uniquely capable of solving the problems of legacy email solutions:

  1. Gmail offers 25GB of storage for every users. That is 50 times larger than your average corporate email boxes. Users will never have to delete an email ever again. Not only will they not have to spend time deleting email, folders and attachments, but they will have access to all their email at all times.
  2. Gmail has integrated Google Search technology built into the product. No need to create and maintain cumbersome foldering systems. Simply type in a key word and Gmail will find what you are looking for, just like Google on the internet.
  3. Gmail is a completely cloud based service that requires no hardware, system software or application software. It comes with integrated virus and spam filtering technology, so you can get rid of your expensive in house system. Google does all the work on the system so you can redeploy IT personnel to other projects.
  4. Gmail is $50 per user per year. This is 1/10 the expense that you are paying for your tiny email boxes today!!!

Step 4: Show you have a concrete plan

Here is our plan : ( just a sample)

 

  1. Develop some still unfinished enterprise features that could slow adoption in larger accounts.
  2. Be able to quickly deploy these new systems in complex It environments.
  3. Develop a scalable way to train and handle change management
  4. Compete with MSFT who has dominate share, customer install base leverage and financial contracting advantages due to ties with other MSFT products.
  5. Convince the market that the cloud is safe, secure environment for corporate data.

Step 5: Tell them that it will be hard and that you need their help.

The closing pitch went something like this:

This is an important mission that we are on. Email systems touch every employee in a company. It is the primary way companies use to communicate in today’s era. And yet we are using systems architected for the late 1990s. Users are furious with the current state of this important application. Companies are overspending on outdated technology that is inherently insecure and heinously complex. We are the only company that has the product and resources to compete with Microsoft. They have no incentive or ability to significantly improve the status quo. Without our efforts, companies will continue to overspend on systems that drive users crazy by enforcing email storage limits and systems that are a decade old. But we need more help. We especially need help from people like you to help us make this new paradigm a reality. There are still unknown technical and integration hurdles to overcome. Microsoft will not take our entry to the market lying down. Expect them to counterattack very hard, to ridicule our new method and spread fear uncertainty and doubt that the future is a scary place. I could sure use your help over the coming years to maker our vision a reality. If we can pull it off, then I think you and I can both look back on this with significant pride because it is an accomplishment that will have big impact on an application that touches every single employee.

Defending the (Enterprise) Unicorn

The unicorn is under attack. Not a day goes by now where the tech press is not publishing a “Who will be the first dead unicorn” story. Every tech conference contains lots of fireside chats where we opine about the overfunding of late stage companies. We also seem to now be drawing parallels between what we are seeing in 2015 and what we saw in 2000-2001.

 

unicorn

So while everyone is freaking out. I would like to write a defense for some of these unicorns and more specifically for the Enterprise unicorns. But first some caveats. I am not saying that all Enterprise unicorns are all huge winners and I am not saying that some of the Enterprise unicorns are not potentially overvalued. I am also not saying Enterprise tech companies are not immune to dying or being sold for scrap. Indeed, while Webvan and Pets.com were B2C companies and became the poster children for Web 1.0 bubble, There was plenty of Enterprise tech carnage to go around. Remember these names: Ariba, CommerceOne, Epiphany, i2? I don’t need to go on, it is too painful.

So with those caveats, let me lay out 5 reasons why there is no overarching crisis in Enterprise Tech valuations.

1. Enterprise Tech valuations are high, but not as high as B2C tech companies.

The really big private company valuations – the so called decacorns- are Consumer plays. Uber, Xoami, Snapchat, Pinterest, AirbNB, Flipkart all have valuations over $10B. The only pure Enterprise company in the $10B plus club in Palantir. And that is a very special and secretive company. Dropbox is a 50/50 play and valued at $10B.

2. Even if B2B Tech companies are overvalued, a Web 1.0 meltdown won’t happen.

This is is the most interesting thing about the unicorn attack phenomenon. I believe that unlike 2001, Enterprise tech companies are real businesses with great recurring revenue and many happy referenceable customers. In 2001, companies bought a lot of “exchange and procurement “ software from CommerceOne, but few if any every got live and the chance for repeat customers and new customers from references dried up real quick.

If Enterprise unicorns are slightly overvalued, it will not really disrupt their business. The investors, founders and employees will all make a little less money. Even the late stage investors appear to be protected by so called ratchet clauses. So in the end. if valuations are toohigh, I don’t think we have a fundamental problem.

The only risk here is that companies might be raising too much money at high valuations and not moving towards businesses with strong gross margins, acceptable customer acquisition costs and high customer retention rates. But the Enterprise SaaS model is getting well proven and I think highly valued Enterprise tech management teams understand this and are not making the types of mistakes that we saw in the first meltdown.

3. Enterprise Tech SaaS business models are inherently strong and will stand the test of time.

Enterprise SaaS is a great business model.  Contracts are typically annual commitments and renewal rates tend to be quite high. Modern Enterprise SaaS is easier to implement, time to value is quick and enterprise customers are not fickle as consumers. Ie – they don’t change their technology stacks very often. The bottom line is SaaS companies have predictable repeating revenue which makes a great business.

Secondly, gross margins tend to be good. The business is pretty simple. You charge customers  for usage. Your cost to deliver that service tends to be predictable and has high economies of scale. Most Enterprise Saas is multi tenant, so you make the software once, run it in a single or few instances. So at worst , costs scale with revenue, but more likely marginal costs drop as you add customers. That is very good!  Also, they don’t run our their data centers anymore, they run on Amazon or Azure or Salesforce. We don’t have big upfront expenses to get our business going, because we just rent compute and storage.

Customer acquisition costs can be high, but nowhere near the high costs in consumer tech ( see Fanduel or Draftkings). There are now well established models to acquire customers without blowing your bankroll and with proper investment in customer success teams, you can keep and expand customers for a decade. That makes for great margins.

Not only is this model, way better than the on premise model software model, it is much simpler that the B2C tech models that exist. Don’t get me wrong, I would love to have a advertising model like Google or Facebook, but Consumer Tech business models do not offer the type of predictable revenue and solid margins that Enterprise Tech does.

4.The trend to replace on premise software and hardware is irreversible and we are still early in the cycle in most categories

Enterprise Tech Unicorns are largely SaaS plays replacing or extending functionality provided by  on premise software vendors. The on premise software model is hopelessly broken  In those models, customers pay for a perpetual licenses and then pay about 20% per year in “maintenance fees”. Customers are also heavily incented to pre-buy software and even buy ‘all you eat” licenses. This led to a ton of shelfware, where many,many licenses go unused. The on premise software model was also famous for long expensive implementations, where time to value was measured in decades. The old model was famously inflexible. Even if you got the software implemented in was incredibly difficult to upgrade due to the massive complexity of a traditional on premise software/hardware stack. Lastly, the on premise software model is an incredibly insecure environment where tracking and applying multiple patches to many layers of the software stack lead most companies to have long periods of time where known vulnerabilities remain unpatched.

Enterprise SaaS solves almost all the problems caused by on premise software and with the possible exception of CRM software, most categories are early in adoption/replacement cycle.

5. Almost all traditional Large Enterprise players are not well positioned to compete with Enterprise SaaS.

The new Enterprise unicorns largely compete to replace solutions from Old tech – IBM, HP, Oracle, SAP, Cisco and Microsoft. With one notable exception, these companies are not well positioned to compete in SaaS organically. They have typical innovator’s dilemma problems and their size and age makes them less than nimble competitors. They also typically have little large data center, cloud experience and have difficulty attracted the employees with the skill set to compete in the new world.

I must say, Microsoft is the exception here. Their Bing and former Hotmail consumer products gave them some great cloud DNA and they have done a decent job with Office365, Azure and Dynamics. So don’t count them out.

But other than Microsoft, Old Tech is not likely to outcompete Enterprise unicorns. And in fact, their large cash hoard and slow growth rates make them ideal acquirers of Enterprise Unicorns. ( See Eloqua, Taleo, Responsys, SuccesFactors). Stock buybacks can’t buy you top line growth, so stay tuned for a more robust M&A market.

So there you have it. Enterprise Unicorns are in good shape at a macro level. Quit fretting, If you want to worry, go worry that Snapchat’s $16B valuation in a company without a reliable revenue model. Leave the Enterprise Unicorns alone. They will be just fine.

I hope Aaron Levie is wrong, but I am worried he is right!

Enterprise End Users deserve both Security/Compliance and Beautiful Simple to use Apps.

aaron-levie-drew-houston

For those of it who missed it Drew Houston of Dropbox and Aaron Levie of Box got into a little war of words this past week. Competition is good for the market and I admire both these companies, but some of things Aaron Levie said worried me a little.

Here is what he said.

“I don’t think it( meaning Dropbox) will work at scale in the enterprise.  There are a lot more security, compliance and legal measures that need to be ironed out.”

We then went on to suggest that Google Apps is not enterprise ready

“Google Apps has millions of small businesses, but Microsoft is what is becoming the standard in the Fortune 500 and larger enterprises. That’s just because the DNA of the companies are just very different.”

Here is the problem I have with these statements. Aaron is suggesting that there are two kinds of enterprise companies with two different kinds of DNA. He is suggesting that companies like Microsoft and Box understand the enterprise security, compliance and legal issues and then there are consumer or user focused companies like Google and Dropbox who do not.

There is certainly ample evidence that this divide has existing for some time. Enterprise applications have long erred on the side of security/compliance. Up until recently applications were procured by the CIO’s office and enterprise software companies treated the needs of IT ahead of users. Users have hated Enterprise applications for a long time. If you have ever used SAP,  or Siebiel, you know what I am talking about. If you have ever walked up to the counter of an airline to change your flight and watched the person make about 500 keystrokes  to get you an option, you know how bad enterprise software has been. That SAP or reservation system is secure and compliant, but users hate it.

There is also evidence that application companies that focus on end users have been dismissive of enterprise needs. Up until recently, Apple was the poster child for this unfortunate approach. Steve Jobs did not like designing products for CIOs or corporate middlemen. Users loved Macs, but Microsoft won this segment handily. End user focused companies have had difficulty valuing enterprise requirements. Their engineering teams don’t like working on the boring plumbing issues that large enterprises need. They want to focus on design and end user features, but they don’t want to hear about developing an API to interface with multiple Single Sign On solutions.

Aaron Levie was saying that Box and Microsoft get the Enterprise, while Google and Dropbox do not. He is saying that the features that users love about Google and Dropbox cannot be used by enterprise.

BUT, I personally hope that enterprise end users won’t have to face this false choice between – compliant, secure apps OR user oriented apps. The users of Fortune 500 companies should get both a beautiful user experience and a secure/compliant environment.

When Aaron says companies have a certain DNA, he seems to be implying that these companies cannot change and that Enterprise users will forever be faced with a choice between applications that security and compliance professionals love and applications that end users love.  We simply can’t allow that to happen. We are in the process of a huge application shift that is seeing enterprises trade in their old on premise apps for cloud/mobile apps. We should aspire to the consumer grade usability standards as we make this shift. If we don’t, we will have failed our enterprise end users.

I think we have made some progress in this area. Traditional enterprise companies are improving their design teams. Take a look at Microsoft’s mobile Outlook app. It is arguably the best mobile email client. Great design. And despite what Aaron says Google and Dropbox have made great strides in building scalable enterprise IT feature sets. When I was at Google, we bought Postini for $625M to add granular policy control and archiving feature sets that IT needed. Facebook and LinkedIn have recently launched programs that enable enterprise users to utilize their technology for corporate use. Look for them to add these enterprise IT features. And even Apple has seen the light. The iPhone has added enterprise features and Apple created a partnership with IBM to help them with Enterprise requirements

So, I call on all cloud based B2B tech companies to ponder this question and achieve excellence in both areas.

If you have end user design DNA. then you need to acquire the enterprise skills. You need to learn about Directory integrations, Single Sign On Systems and Mobile Device Management solutions.  You need to learn about Granular Policy Control and Archiving capabilities. And you need to learn about compliance rules of different countries and industries and help your customers meet those compliance requirements. You can’t just rely on your outstanding design and tell the CIO/CSO/CCO that their requirements are secondary.

If you have a lot of enterprise DNA, you must get out from selling and servicing the IT department predominantly. Ultimately your customers are your end users, not the CIO.  Do not rely on the CIO or compliance office to select your apps and then foist them on end users. Hire some designers, especially mobile designers and value and prioritize end user simplicity and beautiful design.
Come on people. Its 2015! I am getting same day delivery at my house. I press a button on my mobile phone and a driver shows up. We have robots, drones, wearable computers and pretty soon my car is going to drive itself. Please don’t tell me we can’t build beautiful enterprise apps that are secure and compliant!

United/Smisek’s Marketing Sucked!

United/Smisek’s Marketing can’t work in a Hyper Connected World

Authenticity is not an option anymore!

friendly skiessmisek1

I have flown Millions of miles on United Airlines. And I can’t say I shed a tear when I heard  Smisek was “stepping down”. I am pretty sure my fellow 1Kers and Global Services passengers were also leading a silent cheer last week.

To be fair, Smisek and all airline CEO’s have a brutally difficult job. It is a tough business and the legacy airlines have tremendous transformation to go on just about every facet of their business.

But I can’t cut Mr. Smisek any slack on the horrific marketing that was pumped out during his tenure. I was a very frequent customer of United (SFO Hub) and the marketing would drive me crazy. Why? Because it was just so phony! Or more politely, inauthentic!

In today’s social/mobile world every consumer is hyper connected. It is not like the old days, where customers and prospects could not engage with one another and advertising and marketing could just decide what positioning and marketing message they wanted. But It today’s world, your brand and marketing message better be “who you are”. You can stretch it a little and brand “who you want to be”, but you better be showing tangible effort that your company is trying to get there quickly.

Bottom Line: In today’s hyper connected world, authenticity is not an option, it is a requirement. Violate the law of authenticity and become an Internet meme!

United’s marketing violated the new laws of marketing authenticity and then didn’t just violate them a little, they were guilty of multiple felonies.

Let’s just discuss two examples

First, United tried to rebrand itself as the “friendly” airline with a return to the Friendly skies campaign from yesteryear.  I am sure this sounded good in the marketing meetings. Customer research surely showed that passengers wanted a friendly experience and United’s competitors were not trying to “own” that positioning or word….so let’s go for it. Unfortunately, it is not 1970, you can’t just broadcast a message on traditional media and pound the message into customers. Customers knew that United was “Not friendly”. A quick examination of the united Twitter feed would have shown that. If you surveyed a 100,000 United customers and did a word association test, I am certain that United would get zero “friendly” responses. In fact, I am pretty sure “hostile” would far outrank anything close to friendly. The company has a long history of labor issues with its unions and every united passenger knows that their flight crew, gate agent and call center person is very unhappy with their job. I make it a point to never complain to United flight crews because I know they are less happy than I am when seated in 34B on EWR to SFO. The advertising was not only ineffective, it was a negative to the brand. It made customers dislike the airline even more.

Second example. It’s a smaller one. But it drove me crazy. When you get on the plane and have to watch the Airline’s promo videos, they were simply the worst. They were wonderfully produced and very high quality, but once again they violated the authenticity rule. They always had very happy United employees talking about the “how they loved working at United”. Really? In millions of miles flown, why had I never met any of these employees. The granddaddy of all inauthenticity was the “London Symphony video”. In that video, Smisek in a great suit, perfectly coiffed hair and a great manicure explained how he had contracted with the London Symphony orchestra to record the United theme song. Talk about tone deaf. The company who is too cash strapped to pay its employees or treat its customers well, is spending money with the London Symphony on the theme song?????!!!!! Worse than that, they actually produced a TV spot showing an orchestra playing in a United plane. The social mobile consumer was quick to point out on the internet that it was highly unlikely that a cello could fit in any of the spaces United alots for seats. And the message of the ad was “every movement carefully planned, coordinated and synchronized” and compared United performance to a finely tuned orchestra! Really? It does not come any less authentic than that. I mean, have you ever see United board a plane? How about just getting the right amount/variety of crappy food on the plane?

New United CEO, Oscar Munoz has a huge task in front of him, I can’t imagine his “fix it list”. Improving the airline’s on time record and customer service will be hard. Fixing the marketing won’t. Just make it authentic!