By Brian Jacobs, General Partner, Emergence Capital Partners
Last night, we honored some of our portfolio companies at the Emergence Capital Annual CEO Forum, an afternoon and dinner with all of our portfolio company CEOs. Here is the text of my toast to Rene Lacerte, founder and CEO of Bill.com:
“Every year, we celebrate with our CEOs at the end of the year. We want to thank you for your tireless efforts and we want to recognize some of you who achieved significant milestones during the year.
At Emergence Capital, our mission is to build industry leading SaaS companies, and if we are doing our job – and we think we are – then by coming to this dinner you are almost guaranteed to meet famous software entrepreneurs who have disrupted billion dollar markets.
If you have been coming for a few years, you may have sat next to Lars Dalgaard, or Aaron Levie. If it’s your first time, then you may be sitting next to the next Peter Gassner or David Sacks. If fact if you are here, you much more likely to become a famous software entrepreneur or a billionaire, then almost any audience I can think of.
In addition to our Company of the Year Award, we also give something called the Emergence Award. The Emergence Award is not for the big successful sale or IPO, but a company that is working its tail off, executing, making their customers happy, often without much public recognition.
We give this award, because we know that success does not come from a sudden stroke of genius. It comes from years of hard work, planning, evangelizing, fundraising and countless tough decisions. Even for the companies that go public, there are 8 or 10 years of grueling hard work.
The Emergence Award is not about who has become famous, but who will be famous in the next 2-3 years. This year we want to recognize Bill.com and its founder and CEO, Rene Lacerte.
I met Rene through his wife, Joyce, a friend of mine from MIT. I watched him develop his management skills by watching him raise his kids.
When we first invested in Rene, he convinced us that small business owners are always thinking about cash – when will we get paid by the large customer, when is that bill due – but there was no tool to really understand the ebbs and flows of cash. He also convinced us that those small companies paying each other are really a network- a trusted network of financial payments and trusted business partners. If we earned the trust of these customers, they could lead us to thousands of additional customers, just like them.
Today, Bill.com has over 12,000 customers, growing over 100% in the past year. The company has a reputation for insanely happy customers.
Bill.com is transferring customer payments at a $12 billion annual rate. The network of payers and payees now exceeds 200,000 small businesses. Many of these companies experience the service for free, relying on Bill.com to get payments from our paying customers. These are our future customers.
In the past year, we began to feel that the momentum had shifted. Instead of pushing customers to try the product, the market is pulling Bill.com. Two of the five largest banks have agreed to offer the service to their small business customers. The company recently announced a $38 million financing, led by Scale Ventures, heavily oversubscribed, with several of the leading banks participating.
These successes didn’t happen overnight. The team had to get the product right. They had to develop processes to ensure that our customers are protected from fraud. They had to learn how to explain it to small businessmen and women.
We faced some dark days, and we stand here today because Rene’s leadership was critical to survival. During the fall of 2008, when Sequoia shut down the venture capital market, Rene proposed the steepest cuts of any in the entire Emergence portfolio to extend his runway.
During this time, he lost his father and supported his wife while she suffered from the loss of both her parents. Rene was like a strong oak tree. He carried a heavy weight, but he never wavered.
There are many positive things I can say about Rene. He is a creative business thinker, a gifted product executive, he hires an A team. People who know him immediately think of his integrity, his authenticity and his love of life and his family.
But the thing that really sets him apart is that he genuinely listens and seeks the opinions of others. I have found that this single characteristic to be most correlated with success for entrepreneurs. Rene has great ideas, but he doesn’t assume that they are all right. He is constantly talking about them with other people and gathering their ideas too. It also makes for a positive relationship with your VCs.
Bill.com still has a lot of work to do, but we are proud to be investors and partners in your success.
Thank you, Rene, and congratulations.”
By Gordon Ritter, Founder and General Partner, Emergence Capital Partners
The benefits of an industry cloud strategy are clear. But are there certain industries that are more cloud friendly? To answer this question, we set about scoring industries using a framework that ranks each industry based on eight factors that speed up cloud adoption and two factors that slow things down.
The Top Cloud Friendly Industries
Which industries rise to the top? Based on our analysis, two industries stand out as the most cloud-friendly: healthcare and education. Healthcare has the most traction, with focused and fast-growing cloud companies in many facets of this massive and concentrated industry. Veeva Systems [Veev] (an Emergence portfolio company) recently had a successful IPO, and companies such as Doximity, CareCloud and PracticeFusion are getting traction. Athena Health has been successful for years. The cloud helps these companies stay current in a strongly regulatory industry. Within education, universities and school districts have shown a willingness to try cloud solutions, particularly those that are designed for non-desk workers and leverage big data. We have seen a range of companies make inroads, including Coursera, Edmodo and Schoology, as well as two from Emergence’s portfolio — Top Hat and Civitas Learning.
The next tier down includes industries such as retail, utilities, transportation, real estate, construction and insurance, each of which score high on several dimensions. The retail sector looks promising due to its mobile workforce, visual elements, and big data value, and we anticipate major shifts in the software used to drive that industry over the coming years. While these sectors face more hurdles relating to fragmentation and cyclicality, companies such as Real Page (real estate), Textura and PlanGrid (construction), Drivewyze (transportation, Emergence portfolio company) and GuideWire (insurance) show the potential for cloud solutions in these industries.
Finally, a few industries such as banking and government will likely be among the slowest to move to cloud technology. While these industries have great potential given their massive IT spending, it may take a number of years to overcome the privacy concerns and high migration costs. We are starting to see some early progress with companies such as Addepar and nCino; however, many sub-sectors in the financial services industry may not benefit from the revenue expansion and cost savings offered by the cloud for some time.
What makes an industry cloud-friendly?
Below are eight factors that increase the potential for industry cloud success, as well as two factors that will slow things down. To arrive at these factors, we reviewed material for public industry cloud companies such as Veeva [VEEV], Textura [TXTR], Dealer Track [TRAK], Real Page [RP], Athena Health [ATHN], and Fleetmatics [FLTX]. In addition, we based on our analysis on the growth metrics we have seen through meetings with hundreds of private industry cloud companies.
Eight Factors that Impact Industry Cloud Adoption Speed
- Dynamic Regulatory Environment: Software deployment through the cloud dramatically reduces the complexity of delivering updates and revisions. In the world of on-premise software, new regulations often mean company-wide software upgrades on every desktop and laptop – a burdensome process for the IT professionals. Industry cloud platforms enable rapid and “auditable” deployment of new features or functionality that are required to comply with regulatory changes.
- Dissatisfaction with Incumbents: Unhappy executives grumbling about their existing software and systems can be good news. Users of incumbent software may have grown accustomed to changing their workflow process to accommodate a one-size-fits-all system, but once customers get a taste of a vertical solution designed specifically for them, they realize the lack of value in a horizontal offering.
- High Industry Concentration: Industry cloud solutions enable more efficient sales and marketing processes, particularly in highly concentrated industries in which fewer than 50 companies represent over 80% of revenue. By concentrating sales energy on a limited set of companies, customer acquisition costs (CAC) can be especially attractive. In addition, industry concentration helps with word of mouth recommendations, further improving sales and marketing efficiency.
- Mobile Work Force: Emergence Capital has seen an increasing number of promising industry-specific, mobile-first cloud solutions, and many of these are focused in verticals with high percentages of non-desk workers. For the first time, workers in real estate, construction, retail, education, healthcare, and transportation have cloud applications that can be used on their smartphones and tablets, or even Google Glass.
- Value in Data: In many industries, the ability to access and analyze tremendous amounts of data (“big data”) is highly valuable. Retailers rely on big data to make sourcing, staffing and pricing decisions and financial services firms integrate sophisticated data models into nearly everything they do. Cloud architectures are uniquely good at sifting through large datasets. Additionally, cloud companies can capture new proprietary data streams by adding software features that capture new end user data and behavior. In the insurance industry, Progressive’s Snapshot service is an example of not just mining existing data but creating new data points.
- SaaS Platform Alignment: Many of the early industry cloud leaders have built their solutions on existing horizontal cloud platforms such as Salesforce.com and Amazon’s AWS. The ability to leverage platforms can dramatically speed time to market and enable a young company to focus on what is specific to the industry, rather than building the underlying infrastructure.
- Industries with Little to No Cyclicality: Industries that tend to be immune from financial cycles are better candidates for cloud solutions for two primary reasons: First, seasonal or annual forms of cyclicality make it difficult to build recurring revenue businesses, the hallmark of most SaaS businesses. Second, moving to a cloud solution often requires some initial IT investment, and this can be hard to make if an industry is in a “down cycle.”
- Visually Dependent: Industries such as real estate, manufacturing, construction and retail rely heavily on visual representations, making industry cloud platforms the best solutions to integrate visual images. In addition, visually dependent industries can leverage the powerful cameras on mobile devices. Images can be updated from one location and pushed out to all parties, often via tablets that are well suited to showcase visual images. For example, in the construction industry, PlanGrid is transforming collaboration around blueprints.
Two Factors that Slow Industry Cloud Adoption Speed
- Privacy Concerns: One of the core tenets of SaaS infrastructure is that data is hosted “off-site” in the cloud. In industries such as banking, consumers and regulators are concerned about the potential for security breaches with this data structure. In fact, financial services companies have some of the largest IT budgets of any industry because they tend to build and run most of their systems in house. While leading SaaS companies take extensive precautions to institute the highest level of data privacy, it may take many years to build enough comfort with these platforms.
- Migration Costs: Shifting to a cloud model requires a software transition that can be complicated and expensive. In industries such as transportation or manufacturing, software changes can lead to errors, lost revenue and customer dissatisfaction. High switching costs will reduce the appetite to make the change to an industry cloud solution, even if the next generation software might ultimately be better. This is particularly the case if cloud solutions start with back-office solutions that tend to focus more on cost reduction rather than revenue enhancement.
Based on our analysis, we see potential for substantial new industry cloud leaders to continue to emerge over the next few years, particularly in the more cloud-friendly industries such as healthcare, education, retail and transportation. Industry cloud companies have been performing well in the public markets, and investors appreciate the capital efficiency that comes from being able to focus on customers in one industry. Gone are the days when industry verticals could be dismissed as niche plays. Today, they are the future of the cloud.
*This post originally appeared in TechCrunch on October 26, 2013.
By Kevin Spain
The article was originally published on GigaOM (5/11/13)
Over the last few months, I’ve had several conversations about mobile business applications that remind me of early discussions and debates around SaaS a decade ago. When Emergence first invested in Salesforce.com in 2003, we heard all kinds of reasons why Software-as-a-Service wouldn’t work. Yet, cloud-based computing enabled a fundamental shift in software design, go-to-market strategies, and cost structure. Today SaaS companies are quickly coming to dominate the business application market.
I feel like we are on the cusp of a similarly fundamental shift in business software. Once again, the change is about rethinking business applications, but this time it is with a mobile lens. When talking with companies that don’t have a specific mobile strategy, I keep hearing about how mobile is just a feature of cloud-based applications. Yet when we meet with entrepreneurs who are building “mobile-first” business apps, we can see a completely different way of thinking: Leveraging the unique capabilities of mobile devices is at the core of every decision they make.
At Emergence, we have put together a first cut at defining the emerging mobile business app landscape based on conversations with over 100 early stage companies. Here’s a look at our findings:
Vertical apps: field-based, on the go
Vertical apps are defined by their singular focus on industries that have a substantial cohort of non-desk workers. Real Estate is a great example. The industry has been notoriously slow to adopt new technology, but in the last two years there has been an explosion in mobile-first technology solutions. For example, Cartavi’s mobile solution for real estate transactions gives agents, buyers, sellers, and related parties (mortgage banks, title companies, etc.) the ability to store, access, update and share transaction documents in the cloud.
On the construction side of real estate, PlanGrid is eliminating reams of paper-based blueprints and change orders with a rich mobile app built specifically for the iPad. Given the field-based nature of the work and its traditional reliance on paper-based solutions, it makes sense that real estate is one of the most crowded boxes on the Emergence mobile business app landscape.
Healthcare and education are other verticals that are particularly well-suited to mobile business solutions. In these sectors, most mobile business apps are enabling entirely new forms of communication, rather than replacing paper-based solutions. Doximity offers a professional networking solution for physicians that hasn’t existed before (Disclosure: The author’s firm, Emergence Capital Partners, is an investor in Doximity). More than 160,000 doctors have joined the network and over 75 percent of their engagement is through mobile devices.
Other vertical categories including restaurants, transportation and hospitality have begun to attract attention, and we predict that we will soon see more apps in the manufacturing, retail and agribusiness verticals, given the “always on their feet” nature of the workers in these sectors.
Horizontal apps: innovating on existing services
Looking at horizontal apps, most start-ups emerge in three sub-sectors: productivity; mobile marketplaces; and sales, marketing and services. A defining characteristic of the companies in the productivity space is their focus on leveraging the native integration of email, desk and calendar in mobile devices. For example, Tylr Mobile has recently launched a new mobile app for salespeople called Workinbox that directly connects salesforce.com data with email. Another young company, Cloudmagic, has developed mobile search capability that allows users to find names, documents, or other files stored in any of your cloud-based applications (e.g. email, calendars, Box, Evernote).
In the mobile marketspace sector, many business apps share a heavy reliance of location-based services. There are several promising car service companies such as Uber, Flywheel, Hailo, and Taxi Magic that enable drivers to find passengers through a marketspace leveraging GPS data. Another interesting company, Quri, has developed a mobile platform that uses both GPS data and mobile cameras to crowdsource in-store intelligence for consumer brands.
Within the sales, marketing & service, ServiceMax, has developed a mobile solution that helps companies manage the entire field service process including scheduling, parts and contracts (Disclosure: The author’s firm, Emergence Capital Partners, is an investor in ServiceMax). The company sells into over 20 verticals, and its bookings increased over 150 percent relative to last year. As we think about the other horizontal sub-sectors, some companies that stand-out have found innovative ways to use mobile cameras (Expensify, Flint), alerts (PagerDuty), and even the headset jack (Square).
Unsolved challenges remain
At Emergence, we feel optimistic about the tremendous growth in mobile business applications that we have seen over the last 12 months. However, like all nascent categories, there are many unsolved challenges. Distribution issues come up during every conversation we have with entrepreneurs. All mobile business app entrepreneurs want to figure out how to leverage mobile app stores more effectively, but most struggle to do so.
In addition, founders are working through the question of whether to native-build mobile business apps or to use a browser-based approach. To date, I have found that native apps tend to provide a better user experience. Further, business users often like access to their applications even when they don’t have connectivity – which makes native apps a better choice today. However, developing and maintaining native apps across multiple platforms is challenging and costly. I am hopeful that the evolution of HTML5 will help entrepreneurs achieve the benefits of both.
As we look ahead, we know the mobile business app landscape will continue to evolve. We realize that we have likely missed some great companies, so please let us know if we missed you. Or if you are thinking about other ways to categorize the companies, it would be great to share ideas.
Kevin Spain is a General Partner at Emergence Capital Partners, a Silicon Valley venture capital firm focused on Enterprise SaaS. He sits on the board of several companies, including Doximity, Viglink, and Welltok.