A contrarian bet on SaaS
David Peterson

For the past decade, conventional startup wisdom has been to focus. Find a narrow problem, solve it and you’ll be rewarded. And for the past decade, that’s been pretty good advice. The world is full of excellent point-solution SaaS products, many of which unseated inferior modules in old-school enterprise software suites.

But things have gotten a bit out of control. I was chatting with a good friend of mine the other day who is starting as the VP Sales at a fast-growing startup. The number of products he intends to purchase is mind-boggling. Outreach, Calendly, ChiliPiper, Gong, ZoomInfo, Clearbit. Some sort of lead scoring tool he hasn’t decided on yet.

The monetary cost to this is steep (he’ll be spending at least $350/month per rep, not including Salesforce!). But there’s an organizational cost as well. He’ll need to hire a RevOps person to tie everything together, as well as get time from engineering to ensure every tool has the right data flowing in and out.

If you’re a customer, this is hugely painful. And if you’re an entrepreneur, you’re left competing for budget against countless other tools no matter what angle you take. It’s not 2010 anymore.

With that in mind, I recently happened upon this excellent talk by Rippling founder, Parker Conrad, on the virtues of building “Compound Startups” (a.k.a. companies with a multi-product portfolio rather than a point solution). In the talk, Conrad explains why the “focused” approach to building a software business may be outdated, and makes a case for the strategic advantages to building a compound startup like Rippling.

I found the talk to be quite thought-provoking, and immediately started to think about how I would go about identifying a good opportunity for a compound startup.

Here’s what I came up with:

First, you need an “over-tooled” business process that you can wholly own. You’re looking for the customer pain my VP Sales friend is facing. A single business process that requires too many tools that are too expensive and cause too much overhead.

Second, you need a foundational data layer. Look at Microsoft, Salesforce and ServiceNow, the three largest enterprise software companies in the world depending on the day. They are each the single source of truth for a different type of critical business data:

• Employee data (Microsoft Active Directory)

• Prospect and customer data (Salesforce)

• Customer and employee requests (ServiceNow)

This data layer is key to their success. They can build their products on top of that foundation, and seamlessly share relevant data across the product portfolio. Their solutions may not be strictly better from a user experience perspective, but that’s not the dimension by which they’re competing. They win by reducing complexity for their customers. Their customers don’t need to think about how to get their customer data, or employee data, or support data, into this new system. It’s already there.

And by offering many different product SKUs, they can take advantage of bundled pricing, meaning they can price differentially and extract value more efficiently. Said another way, they can maximize the price of the bundle, but undercut the price of each SKU, enabling them to compete ferociously and still come out ahead. Just look at how Microsoft Teams has been able to compete with Slack.

That’s not to say this approach is easy. If anything, it’s much harder. But if you can pull it off, there’s a much bigger reward, as well.

After more than a decade, the point-solution SaaS playbook has become so standardized, and the revenues, margins and churn so predictable, that VCs invest as if the risk has been all but eliminated. I can’t help but wonder, then, if this is the moment when everything changes.

So, while I can’t tell you what the next great compound startup idea will be, I’m officially on the lookout for it. If you think you’ve found it, I’d love to discuss it with you!

David

EVENTS

Mar 23 / The Importance of Culture and Values As You Scale a Business
Oren Kaniel, Co-Founder & CEO, AppsFlyer

Apr 11 / How to Employ Category Design as a VC
David Peterson, Partner at Angular & Al Ramadan, CEO of PlayBigger

FROM THE BLOG

Enterprise & Deep Tech VC in Europe & Israel 2021
A data-driven look at a record-setting year.

Shifting Left, Shifting Right
Are we on the cusp of a new era of empowered non-engineers?

The Problem with Engineering-led Growth for Early Stage Startups
What kind of growth team you need to hire depends on the stage of your company.

What Childhood Can Teach Us About Entrepreneurship
Childhood as a solution to the early stage entrepreneurship explore–exploit dilemma.

EUROPE & ISRAEL FUNDING NEWS

UK/SME ERP. Forterro has been acquired for $1.1B by the Partners Group for its enterprise resource planning software and services business focused on SMEs.
Israel/Construction Tech. Veev raised $400M for its tech-enabled homebuilder service.
Israel/HR SaaS. Connecteam closed $120M for its all-in-one app providing HR tools, communications services, and daily operations management for deskless workers.
Bulgaria/Financial. Payhawk raised $100M becoming Bulgaria’s first unicorn for its platform allowing companies to manage corporate credit cards and expenses.
UK/Electronics. Paragraf closed $60M for its graphene-based magnetic sensors.
Serbia/Crypto DevOps. Tenderly raised $40M for its Ethereum Developer Platform that offers real-time monitoring, alerting, debugging, and simulating of Smart Contracts.
Israel/Security. CardinalOps raised $17.5M for its SIEM platform for vulnerability assessment.
Israel/Food Data. Tastewise raised $17M for its AI-powered platform to help food brands bring products to market based on consumer data.

WORTH READING

ENTERPRISE/TECH NEWS

Cybersecurity surge. There’s been a recent surge in interest in cybersecurity, as a response to the cyberwarfare surrounding the war in Ukraine. Many governments and companies are rapidly beefing up their cyberdefense. Lior Simon, a partner in the Cyberstarts fund, believes the cyber risk is very real. “The risk of an all-out cyberwar is entirely possible. The fear exists and is growing,” he says. “Those who need to worry are mainly companies who operate at the sensitive nexus of business and government, like airlines and banks.”

Enterprise tech market performance. Despite several public enterprise tech companies recently delivering strong quarters, many of their stocks still took a beating. For example, Snowflake reported 101% revenue growth YoY, beating analyst expectations, yet the stock was still down as much as 30% after announcing earnings. Why are investors punishing enterprise tech stocks when they meet their targets? Because that’s no longer enough. “Investors are demanding faster-than-anticipated growth numbers to support prior valuations, and merely meeting expectations is a recipe for share-price collapse. Good growth is what the market now expects. If a company wants to hold on to some of the premium that software companies garnered last year, it will have to do more than merely grow quickly. It needs to forecast numbers better than the numbers investors have penciled in. Or else their valuation is at risk of more than a mere haircut.”

Post-IPO slump. Crunchbase reviewed IPOs from the past year, with the conclusion that post-IPO performance has largely been poor. Many of these newly public companies are now worth less than their previous private valuations — some are even worth less than the capital they raised… “For venture funds looking to return a nice multiple on investment, these don’t look like winning deals, except perhaps for the very earliest investors. Unless, of course, shares happen to go back up.”

HOW TO STARTUP

Funding announcements in decline. The number of startup funding announcements have dramatically fallen since the Ukraine conflict started — especially in Europe. “Since the beginning of the invasion, average daily disclosed startup funding has fallen by over 70 percent in EU countries.” It remains to be seen how a prolonged conflict will affect VCs’ capital deployment — and companies’ desires to announce their rounds publicly.

Navigating the Seed round. With the sizable amounts of capital currently in the Seed landscape, Work-Bench’s Jonathan Lier stresses the importance of selecting the right VC for Seed rounds — and gives tips on how to do so.

HOW TO VENTURE

Founder liquidity. Many tech companies are now opting to remain private longer before their IPO than companies in the past. In fact, the median time to IPO for tech companies has increased from five to 12.5 years over the last 20 years. As the time to exit has increased, as has founders’ demand for secondaries. “Over the past decade, the private company secondary market has grown by 300%, from a few billion a year, to more than $30 billion in 2020.”

PORTFOLIO NEWS

Budibase’s CEO, Michael Shanks, will lead a webinar on open source low-code on March 9th. Register here to join.

Levity’s ML Tech Lead, Shashank Agarwal, was featured in Forbes where he shared his insights and predictions on jobs and tasks which will be automated within the decade.

Sisense’s CEO, Amir Orad, covered their ongoing approach to supporting their 150 employees in Kiev during the Russia-Ukraine conflict. Sisense has taken several steps including: renting shelters in western Ukraine and offering workers a temporary relocation to Israel or the US, organizing busses to take their workers from Kiev to western Ukraine, advancing salaries, and shifting important and urgent tasks to teams based elsewhere.