By Joe Floyd
This piece originally appeared in VentureBeat.
Consumer-to-consumer (“C2C”) marketplace startups are enjoying a Renaissance, as exemplified by Airbnb and others. Sites like these that facilitate transactions between people have disrupted older offline business-to-business marketplaces by taking advantage of ubiquitous mobile access, and delivering a better experience.
This recent C2C marketplace success is spurring a new crop of similar business-focused ventures, which I believe have tremendous potential to leverage the unique synergies of combining the marketplace model with the software as a service (“SaaS”) platform.
By serving as the access portal to the marketplace, the system of record and most importantly, the paywall that drives predictable revenue, SaaS can revolutionize the marketplace model to offer modern advantages the failed B2B marketplaces of the early 2000s never had. These include revenue predictability, favorable unit economics and a barrier to disintermediation.
Here are the three key advantages of SaaS:
Larger market size and revenue predictability
In the late 1990s, Zoho Corp. emerged as an online marketplace for hotel supplies that raised $63 million. Targeting the massive hotel industry ($120 billion in revenue in 2012 according to IBIS), Zoho operated on a transaction model whereby the company received a small percentage of each transaction. This transaction model severely limited revenue potential and made commissions unpredictable.
Zoho ultimately shut down when key buyers, including investors such as Harrah’, purchased only a small fraction of products from the heavily commoditized hotel supply chain. As a result, Zoho earned small commissions on low margin business with little predictability.
Today, business marketplaces can use SaaS platforms to increase market size and improve revenue predictability by selling subscriptions to access and manage the marketplace. For example, LiquidSpace enables individuals to reserve meeting rooms, conference or office space at commercial venues such as hotels. As a transaction marketplace alone, the market size is similar to Zoho’s which aimed to apply a small commission to a large target market and win by capturing volume. However, in addition to monetizing transactions, LiquidSpace also sells their platform directly to hotels (50,000+ potential), universities (100,000+ potential) and enterprises (potentially in the millions) as a service to manage their own meeting spaces internally.
These internal networks greatly increase the market size opportunity as well as revenue predictability with a monthly subscription service instead of a transactional model. Further, adding subscription customers with internal networks of captive guests, students, and employees greatly increases the number of individuals with access to the public marketplace since it is all one platform.
Better Unit Economics
Every successful startup faces competition and, eventually, margin pressure. This is particularly true for transactional marketplaces. For example, oDesk, Elance and 99Designs are all sizable marketplaces that connect jobs with freelance workers. But, the success of these marketplaces drove up the cost of keywords used to acquire traffic and drove down the price of jobs (and therefore net margin to the marketplace provider).
On the other hand, using a SaaS-based subscription model, business marketplaces can improve unit economics in three ways:
- Subscriptions lower customer churn, which improves customer lifetime value.
- Subscription breakage improves gross margin.
- Constant customer acquisition costs combined with increased customer lifetime value drives sales and marketing efficiency.
For example, Scripted connects businesses to freelance journalists through its online marketplace. Since Scripted sells access as a SaaS subscription, businesses sign annual contracts (which lowers churn) with Scripted supplying a minimum quantity of written content. If the customer does not utilize the full quantity of service, subscription breakage occurs – Scripted still earns the full revenue but does not incur the cost of providing the unused service (which expands margins). In combination, these two forces increase customer lifetime value, allowing Scripted to increase sales and marketing spend to scale growth more aggressively.
A Barrier to Disintermediation
The threat of disintermediation should be top of mind for any good middleman. Marketplaces serve as insurance to both supply and demand and provide the necessary security to complete transactions in an uncertain environment. However, once a network connects two parties, nothing prevents them from circumventing the platform and dealing directly.
For example, MetalSite, one of a few vertical specific marketplaces in the early 2000s, connected commodities buyers and sellers via auctions. But, MetalSite and many other vertical B2B marketplaces failed because they were taken out of the loop after the first transaction as suppliers began bidding lower prices directly to buyers, without paying commissions to MetalSite.
On the other hand, OpenTable, a restaurant reservation marketplace, has become the de facto system of record for many customers. As a result, customers are locked in to using the platform, which ensures OpenTable captures each transaction and receives its commission. Additionally, restaurants are much less likely to replace OpenTable with a competitor because it keeps the system of record as opposed to simply being a source of reservations.
The initial wave of business-focused marketplaces crashed in the dotcom bust because they focused on transactional pricing, competed with incumbents on price and failed to build relationships with their marketplace participants. We are in the early innings of a new wave of business-focused marketplaces that are likely to succeed, thanks to SaaS, which can serve as the system of record, and generate predictable revenue.
By Kevin Spain
Looking back at 2012, one thing is abundantly clear: all things SaaS were firing on all cylinders last year. Based upon what we saw in 2012 – and what we’re seeing already in 2013 – the momentum around SaaS company creation shows no sign of slowing.
From seasoned enterprise executives, to entrepreneurs with consumer backgrounds, everyone seems to be thinking about SaaS these days. The reasons for this increase in activity are numerous, but in part come down to market fundamentals, including:
- Public SaaS companies are killing it. The performance of publicly-traded SaaS companies far exceeded that of the NASDAQ and S&P 500 indices in 2012, proving just how important the SaaS industry is in the technology sector today. In fact, according to William Blair, the performance of public SaaS stocks through Q3 of 2012 was nearly double the performance of the NASDAQ and bested the performance of the S&P by nearly 3x.
- SaaS exits are on the rise in a big way. Over $1.3 billion was raised in SaaS IPOs in 2012 per a William Blair analysis. SaaS M&A activity has also risen to sky-high levels, led by deals such as Oracle’s acquisition of Taleo for $1.9 billion, IBM’s acquisition of Kenexa for $1.4 billion, and Microsoft’s acquisition of Yammer for $1.2 billion. For SaaS businesses, the exit landscape has never been better.
- The venture pendulum is swinging back to the enterprise. Because of the robust exit environment and the fact that VC interest in consumer technology has waned a bit, William Blair found that there is intensive interest in SaaS businesses among venture investors. Over $3 billion in venture capital was invested in SaaS companies through the first nine months of 2012 year versus $1.7 billion in the first nine months of 2011. For the first time in many years, B2B is again top of mind for many in the venture community.
With the excitement among entrepreneurs at an all-time high when it comes to SaaS, the logical question is “What’s next?” As we gaze into our crystal ball, it reveals a number of noteworthy trends on the horizon for 2013, including:
- This will be the year of the enterprise mobile app. Most investors are hardly thinking about mobile apps in the enterprise. There has been a fair amount of investment activity in the area around mobile device management, but there few mobile-focused business apps have been funded. We see the industry perched on the cusp of a revolution in business applications that are built specifically for mobile devices and take advantage of the unique features they provide. Built-in location awareness, on-board cameras, the relatively low cost and durability of mobile devices is opening new doors for use in a wider range of industries and applications to dramatically streamline operations. For example, Doximity pioneered the first HIPAA secure mobile-based professional networking platform for physicians that improves the speed and quality of patient care. DoubleDutch’s mobile-first CRM app makes managing the sales process easy, effective and even fun. Roambi lets you turn boring business data into insightful, interactive graphics on any iOS device. The next few years promise to be the era of the business application, and we starting to see many more entrepreneurs approach us with mobile-first business app concepts.
- Verticals are hot. We’ve seen a number of SaaS up-starts find tremendous success with vertically-focused solutions, including Veeva in life sciences, Top Hat Monocle in higher-education, and Xtime for CRM in the automotive service industry. Further, we’ve seen first hand how a vertically-focused strategy can enable a company to build a business with high market share in a very capital efficient way. While health care and education seem to get all the attention when it comes to verticals, there are plenty of other opportunity outside these hot spots. My partner Gordon wrote a great post on this topic. I expect we’ll see many more entrepreneurs pursue vertical strategies in 2013.
- Defensibility is more important than ever. With all of the investment activity in SaaS these days, there are many more companies being created in each application segment. As a result, we may begin to see more price-based competition in certain application markets. In order to avoid becoming commoditized, the best SaaS entrepreneurs are thinking about how to build a moat around their solution. Whether it’s finding a way to create a network effect (like LinkedIn) or using the data on customers’ usage of your product to deliver more value than the competition (like our portfolio company Lithium), the pressure will increasingly be on entrepreneurs to build a defensible advantage into their SaaS offerings .
We’re extremely excited about what 2013 holds for the SaaS industry – and are looking forward to working with our existing portfolio this year, as well as many new entrepreneurs, to help build the next generation of SaaS leaders.
by Santi Subotovsky
Where can you find some of the hottest CEOs all in one place? Each year, Emergence Capital Partners’ CEO Forum brings together the CEOs of some of the most successful B2B companies to share their experiences and expertise, learn from one another and talk about exactly how they’ve successfully made B2B, SaaS and enterprise sexy once again.
While the Emergence CEO Forum is always a must-attend event, this year, it was truly something special. Not only did we welcome new members to the Emergence family, but we heard from some of the most innovative leaders of our time exactly how they’re revolutionizing the B2B digital services landscape.
It was a rare opportunity to get inside the minds of these visionaries and hear their perspective on the issues, strategies and opportunities they face. With blockbuster speakers like Jim Corbett, Geoffrey Moore and David Sacks, the agenda for the event read like a who’s who in the B2B enterprise technology start up space.
Even though most of the value is generated by the behind closed door conversations that take place among the CEOs, we wanted to share some of what Geoffrey Moore presented to our CEOs.
The Perfect Storm is Actually a Tornado!
We hear a lot about how market forces, business opportunities and stellar teams often converge at just the right moment to create a “perfect storm” for success. But have you ever considered that the “perfect storm” should look more like a tornado?
Geoffrey Moore has made the understanding and effective exploitation of disruptive technologies the core of his life’s work. A best-selling author, his books Crossing the Chasm, Inside the Tornado, The Gorilla Game, Living on the Fault Line and Dealing with Darwin are required reading at leading business schools.
During his talk, Geoffrey captivated the CEO Forum audience with his assertion that entrepreneurs must harness the tornado effect to reinvent enterprise IT. Sharing his thoughts on the waves of disruption and the keys to digital engagement, Geoffrey masterfully wove every-day examples into the discussion of his macro theories and trends, making it easy for the audience to relate.
According to Geoffrey, these waves of disruption are watershed eras in the evolution of the way we work today: from the 1980s revolution in Digital Office Work with personal IT to the 1990s Digital Value Chains in Enterprise IT, the age of personal Digital Consumption in the 2000s and back to the enterprise IT focus of Digital Engagement in the 2010s.
Needless to say, the audience was thrilled to hear his prediction that the pendulum is swinging back to enterprise IT and it’s once again time for us to shine.
When Crossing the Chasm became a best seller, it made us think about our own technologies. The challenge for us then as early innovators was to transform into industry visionaries and finally to become the pragmatists and conservatives who would build a big business. Today, crossing the chasm is not enough for this new breed of lean startups. Inside the tornado is where magic happens. But, exactly what’s happening inside that tornado? And what enables these companies to turn a mild breeze into an unstoppable tornado?
The model Geoffrey described is simple, yet insightfully brilliant and extremely applicable. In order to generate a tornado, like the one created by Yammer, 4 key drivers must be present:
- Acquisition: This is probably the most critical area of focus. Bringing in new customers or users generates an initial critical mass that makes everything else possible.
- Engagement: Once you have customers/users flowing into the system, you must ensure they are fully engaged and realizing value from your solution in order to build a strong, sustainable business.
- Monetization: Once you’ve generated substantial value for your customers/users, the next step is to devise a way to extract money from those interactions. If you’re unable to monetize, your tornado might quickly run out of steam.
- Enlistment: The final driver is enlistment or advocacy—the synergistic moment when you’ve successfully generated enough value for your customers that they become willing advocates for your brand, raving about your solution and inviting their friends and peers. The ability to monetize and enjoy the viral benefits of customer advocacy is truly golden!
To drive home his theories, Geoffrey shared four examples of companies that have had trouble aligning these drivers to generate a tornado, citing Kiva’s high cost of acquisition, LinkedIn’s engagement issues, Facebook’s clear monetization challenges and Yahoo!’s low enlistment levels.
Now that we have the formula, how should it be applied to our own startups? That’s where the “slowest gear” questions become salient:
- What is your slowest gear today?
- How do you plan to speed it up?
- If you succeed, what gear will then be slowest?
- How far away is your viral tornado?
- If you had more capital, what would you do differently?
As you can see, the model is simple, useful and extremely applicable to high velocity B2B companies. While it seems most suitable for freemium companies, the conversations following Geoffrey’s presentation proved its relevance for almost any company looking to generate its own unstoppable tornado.
So, now that you know what it takes, the question is, “What will YOU do to create a tornado?” As we approach the new year, the market remains primed for the next big thing that will continue to transform the way we do business. Will it be your next-generation concept? Or will yours get swept away by the perfect storm of another big idea? Now is the time to harness the winds of change, create your own perfect storm and chart a new course for the future of enterprise business technology.