Software as a Service

Services and consulting companies become “Software as a Service”

I wrote about how the cloud migration represents a large opportunity for Systems Integrators such as Accenture and Infosys, among others. Many customers are moving their existing applications to the cloud and using SI’s to enable that migration. This is largely being driven by lowering the cost of infrastructure for their existing applications.

The other big opportunity that I am starting to see for systems integration companies is the development and introduction of internal employee facing applications, which so far has been only been developed by pure play SaaS companies.

All applications built by a company fall into two categories – those that are used by employees and those that are used by customers / partners / suppliers etc.

The customer facing applications that are “business critical” and revenue producing are the ones that companies are starting to build themselves. The ones that are internal, employee used are the ones they are buying from SaaS vendors.

Why? Three main reasons:

  1. If they were to build applications in-house they need to hire people, and hiring developers for any company right now is very tough. That might change if a lot of coding schools end up producing more developers, but you can never be too rich, too thin or have too many good developers.
  2. Many of the internal application purchases are increasingly being bought directly by the business team instead of asking IT to procure. Thanks to cloud and SaaS, it no longer takes 3-6-12 months to buy, install, customize and deploy a solution, so business teams with the need (HR, Sales, Marketing, etc.) are directly buying software (usually that’s being done by someone who needs it, not by the head of the business unit) that’s needed by employees to be productive.
  3. Thanks to the lower cost and subscription pricing models it is cheaper to buy than to build. Many companies are also realizing that internal applications are no longer “the competitive edge” that they thought it was in the 80’s, and 90’s.

So, where is the opportunity?

Although many businesses are buying these applications via a SaaS model, SI’s are usually the first to know about the need as they scan the market for potential partnerships and vendors.

They also have a clear idea of business needs for these internal applications. I am surprised more system integrators are not offering products and services they have built for one customer “as a service” to others.

Currently if a customer needs an internal application – they put them into 3 buckets – a) those for individual use, b) those that are departmental and c) those that are to be used by an entire organization or across multiple organizations.

The ones that are for individual use (e.g: SEO optimization software) are usually purchased by the person with peer reviews and feedback.

The apps that are departmental (e.g. Collaboration software) involved one early adopter who gets 2-3 folks in the team to use them together and that spreads virally among others.

Software as a Service

Software as a Service

Finally the ones that are enterprise-wide, or multi-department or department-wide in usage (e.g. HR software, Email, etc.) are the only ones that go through the RFP and purchase process. These also have many customization requirements and fall into two categories themselves – 1) those that are standard off the shelf and 2) those that are custom and specific to a company / industry, etc.

The off the shelf products can be purchased from SaaS vendors, but I think the opportunity for the systems integrations to turn their businesses from consulting and services to Software as a Services is in the custom applications – being developed as a subscription style offering instead of consulting and billable hours.

New market analysis: The “database” market #napkinStage

The database market is about $45 Billion with Oracle, Microsoft and IBM dominating the paid enterprise market in revenue, MySQL, PostGres and NOSQL databases such as Mongo and Cassandra leading on the opensource side, and distributed databases such as Hadoop doing well in pockets for specialized applications.

Global Database Market 2015

Global Database Market 2015

The large companies that need high end features still rely on very expensive databases such as Oracle, Terradata, IBM’s DB/2 and SAP’s in memory HANA. Microsoft SQL Server is more prevalent as a departmental solution.

As the type of applications has changed dramatically, the biggest driving factor among new app developers has been the reduced friction to get started, costs and ease of use (easy to learn, easy to maintain and scale).

Which is why databases such as PostGres are starting to do very well as is Amazon’s (Relational Database, RDS). Most applications that are simple to start with tend to use basic features that databases offer, so many developers start to choose PostGres or another OpenSource database. With Oracle’s purchase of MySQL, there has been a big shift away from that software to PostGres.

Database ranking over time

Database ranking over time

As applications start to mature, gain more traction and grow, developers are starting to explore column stores, NO SQL databases and other options as well.

The selection of a database used to be driven by high end security, performance and how extensible they were, it is increasingly being driven by convenience, ease of use and price.

So, where’s the opportunity.

From the 1980’s to the 2005 time frame, you could make money being a DBA or database administrator and earn upwards of $150K to $250K, managing the complex systems on top of which internal applications such as ERP, HR and CRM systems were built.

There was a large market for database tools as well, to help these DBA’s.

With the advent of the cloud, and move to developers managing, deploying and maintaining apps, the choice of database has been relegated to “what works, what’s cheap and what is easy to use”.

Most developers are starting to make the choice of technology stack – Node.JS, Angular.JS, Meteor.JS, Ruby on Rails, etc. and use the default database that is supported by the stack they choose.

Database ranking

Database ranking

So the market for database tools and DBA’s is going away to a large extent. Except for maintaining those legacy applications.

The opportunities are in providing optimization, tuning and application level services instead of the database management capabilities in the short term.

If you are a developer, I’d love to talk to you about your choice of database and stack to understand this market better. Tweet to me and we can setup a time.

IT Org Chart

“Peak IT”: Or how most new startups may NEVER have an “IT department” in their future

Yesterday I had the chance to talk to 2 startups. One has been around for 2 years and has raised $2 Million in seed funding and is in the B2B SaaS (Marketing) space. The other is older, has raised a series B and has over 47 people in their company.

Neither of them have a single person in “IT”. They both have over 40+ applications they use and everyone of their employees is using notebooks, phones, etc., but they dont have a central IT team.

I asked the CEO’s at what point do they see themselves getting an IT team and the answer from both of them was “Why do we need an IT team”?

That reminded me of Nichoas Carr’s piece, 12 years ago, in which he claims IT does not matter. He was subjected to a lot of ridicule many year’s ago, but he’s proving to be right.

I started to read about what all IT does actually in any company. You can break it down into 5 main priorities.

IT Org Chart

IT Org Chart

  1. Support the business with computing – notebooks, devices, etc. Turns out most new startups, (which will grow into larger ones later), have mostly a BYOD policy or let their employees choose their own machines, which focuses on the support, maintenance and upgrade of the machines to the employee. So, that’s mostly not needed.
  2. Provide the business teams with internal applications (Build, Buy or Outsource)- Email, Collaboration, HR systems, ERP, etc. Most new companies are buying SaaS products and are letting the business teams (HR, Sales, Engineering, etc.) make their own decisions on which applications to buy.
  3. Build, buy or outsource external customer / partner facing applications – These are also being moved from IT to the business teams. They directly engage with partners, agencies or buy off the shelf SaaS applications, bypassing IT to directly buy to their requirements. In fact over the last 10 years, according to Gartner, 50% of IT spend on applications is being managed directly by the business teams, bypassing IT. That’s in the large companies. In the small companies, it is 100%.
  4. Supporting, managing and assisting internal users via a help desk on problems they have with IT systems. Most users are bringing their own devices and building their own applications, so the help desk is largely eliminated.
  5. Operationally support the applications built with DBA’s, system administrators, operations managers, etc. With the rise of DevOps and the cloud, all of these external facing, customer applications, which are developed internally are being deployed, managed and supported by the developers who built the applications in the first place.

The only remaining portions are vendor management (if there are many suppliers to IT) or outsource partner management, which is starting to get managed by the business teams.

While, many of these startups are saying they dont have an IT team, what’s really going on is that many of the functional elements that IT did before are being given back to the business teams.

The two entrepreneurs who I spoke with foresee a day when they might need a person to help them with integrating their different “apps” which the teams bought, but that’s much later, and a highly specialized role.

Maybe in 20 years only 10% of large companies will have an IT org, and that’s when they have multiple locations, need to make sure all the offices have connectivity to their VPN and need an intranet (which can also #SaaS), but that’s going to be rare.

Cup of Ambition

The size of your ambition determines the value of your outcome

When you are building a technology startup, one of the first choices you make even before you get started is the size of your ambition. Most entrepreneurs dont think about it, so it tends to be an unstated but large impact choice.

If you get inspired by another entrepreneur, such as Sachin Bansal of Flipkart or Drew Houston of Dropbox, then you are likely to think in terms of a large market-changing company. If you find inspiration instead, in a wrong that needs to be righted then you are more likely to build a purpose-driven company. Finally if you think in terms of targeting a large market and are interested in being a meaningful player, then you going to end up doing that but only smaller.

What I have found from my experience is that entrepreneurs that start with the intent of solving a small problem, but in a large market have a much higher chance of creating a large company. Which is very counter intuitive.

This is dramatically different than what most investors have been looking for and what most entrepreneurs to be true as well.

“Focus on becoming big”, we are told. “Go big or go home”, is another term bandied around.

What I have noticed is also that having a large ambition but wearing that on your sleeve up front tends to distract most entrepreneurs.

The single biggest indicator of increasing ambition, unsurprisingly is confidence from achievement.

Which means, the small goals you set for your self and overachieve, the more size of your ambition becomes.

It becomes a self perpetuating virtuous cycle of delivering on your smaller milestones and gaining confidence from them.

Ambition

Ambition

So what are the other items that determine the size of your ambition?

The obvious one is market. Larger the market, the more ambitious you become.

The next one seems to be time together with your team. The more your team has worked together, got some wins together and more the battles you have fought, the bigger your ambition gets.

One proxy indicator seems to be amount of money raised, but that’s usually not a signal for anything other than the artificial pressure on the founders to return the money that investors have poured into the company.

So, if you are ever in doubt about how big you should become, I’d say aim higher. Much, much higher, but execute towards a smaller goal faster to let your ambition grow.

Credit: Paul Martino, Bullpen Capital

Does raising institutional money at the seed stage help or hurt?

In 2009-2010, during the peak of the eCommerce bubble in India, there were very few seed stage options for raising funds for startups. You could either get money from angel investor or look to raise money from large VC’s, hoping they would put money at the seed stage so they can be part of the later round.

During that period, larger firms in India, such as Sequoia Capital and few others did many (over 15-20) deals in a year. The typical check sizes were about $500K in India (about 2 CR that that time).

The main reason why entrepreneurs were looking to raise money from institutional investors,  besides needing the cash and finding not many other options was the belief that “if they were in early, they would be an automatic in the next round”.

Of the over 40 deals  that were done by institutional investors in 2008-2010 in the early stage (largely in eCommerce), only 4 are still around. Of the companies that took money from institutional investments in their seed round, only 5 secured investment from the VC in their post seed round.

This weekend I had a chance to read the ET survey on Why startups are raising seed stage capital from VC firms.

The average % of the company that entrepreneurs gave up is about 15% and the amount they raised from VC investors at the seed stage is about $500K.

There are many good reasons to raise money from traditional Venture investors, but assuming they will definitely invest in the later round, is quite possibly wrong based on previous history.

If you are looking to raise money and you have an interested later-stage VC investor willing to put money in your company, by all means you should take it.

Assuming they will invest later is a big leap of faith.

There are, like most things in the startup world pros and cons to this approach.

The pros include the “name brand” value of the VC firm on your cap table early on, the ability to tap into the expertise of the VC investors and also access to their network and connections.

The downsides are the signalling effect if they refuse to invest in the follow on round, the likelihood of them investing in other competing startups in the same space in later round (since they understand the market) and finally the smaller pool of investors available for you (since many VC’s wont invest if a lead VC investor passes on the follow on) in the next round.

While I dont think there are many options in India for entrepreneurs, the best bet I would still recommend is to get the right investors at the right stage of your company. At the early stage, angel and seed stage firms make sense, and later on using their help to get VC’s is a good approach.

Credit: Paul Martino, Bullpen Capital

Credit: Paul Martino, Bullpen Capital

Paul Martino of Bullpen capital puts this week in the chart above.

Given that seed is now a perpetual and continuous process until your series A, I would recommend you raise constantly and raise often.

sales hacker

The SalesHacker Meetup at Seattle

Yesterday, I had the chance to meet 12 entrepreneurs at the Impact Hub in Seattle, who attended the Sales Hacker Workshop.

Sales Hacker Conference

Sales Hacker Conference

Max Altschuler of Sales Hacker reached out to me last month to be a part of the panel to a set of developer and technical folks who were at the early stages of getting their sales efforts started at their startup.

Richard Harris, who runs Harris consulting was the instructor and I had a 30 minute session on 3 topics – a) What the new “sales funnel” looks like and why is it different b) Should you outsource your sales efforts at a startup and c) What should I do after I hire my first salesperson at our startup?

I have mentioned before that more sales people at startups are becoming marketers, consultants and enablers than closer’s.

I get a lot of questions from entrepreneurs on how to develop their sales team. Many of the entrepreneurs I work with are engineers and think about sales as they would another engineering process. The framework to think about building a team requires 5 important questions to answer before you come up with your sales.

I am personally happy that folks like Max, Richard and Balaji in India, are raising the level of sales discussion with the entrepreneur community, mostly so that we can help B2B entrepreneurs find, grow and enhance their teams.

I was surprised that there were only 10-12 folks in the audience, since the list of people who can benefit from this is a lot more in Seattle.

I am wondering what it would take to get more folks who are entrepreneurs to attend sales training and enablement sessions instead of only spending time on technical briefings. Thoughts?

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Open Stack

The #OpenStack Seattle community and progress of Cloud technology

I had the opportunity to be a part of the #OpenStack Seattle conference yesterday in the morning. I was invited by Sriram who runs the local chapter. If you dont know much about OpenStack, it is an open source initiative to help companies run their own private and public clouds. There is an awesome getting started reference card that Sriram has put together for you to read as well.

OpenStack has been around since 2010, but only now has started to pick up steam. Over $1.5 Billion worth of market value has been created around the software. It helps you manage compute, networking and storage resources, provision them, optimize and also help you scale the cloud solution you decided to manage.

There were about 150 folks at the meetup, a third of them having implemented OpenStack in production, another third considering it and the remaining who were too bored to raise their hands.

Open Stack

Open Stack

The thing that I found interesting is still the resistance in larger companies to open source software. This was named as the #1 barrier to adoption among most of the folks I spoke with. This is a real problem that exists after so many years of open source in the enterprise. Many people whose jobs depend on applications and services being available and performing well still want to be able to have a company or another organization support them through the process.

The perception among many of the folks who are in traditional technology organizations (who run internal systems) is that open source is largely unpredictable, mostly renegade and insufficiently production ready.

There are 2 observations I had from the various presentations yesterday morning.

First, developers are becoming more powerful in the IT organization compared to the Operations teams, which were pretty powerful 10 years ago.

Previously you had to ensure that the application that you built was on an environment that the Operations team (DBA’s system administrators and network administrators) supported. Most operations teams had standard policies around the database used, the languages and environments supported, so most applications were fairly similar.

If you were building an app that had intense media or voice / video usage, you had to build so much into the app to work around the limitations of the environment used.

Not any more.

The #1 issue that I heard from many of the operations folks is that developers are starting up instances on the public cloud, using a set of “right technologies” for the app – based on their familiarity, hosting and supporting the app themselves until the innovation phase of the app is done and then “throwing it over the wall” for the operations teams to support them.

Second, the “stack choice” – which database to use, which language, framework, caching system, platforms (IoS, Android, etc.) to support is also a lot more complicated for developers.

This is a serious problem for developers. If you are developing a data science, or big data application, you are likely to use R or Python.

If you are however building a simple internal CRM app, then you might choose to build it with Javascript and a Node.JS or Backbone.JS framework.

Add the concepts of containers, virtual machines (which are phasing out), microservices, API based systems, and many more choices, you are suddenly spending a lot of time figuring out which “stack” to use.

Most developers are just talking to their friends at companies which have done similar apps and “copying and pasting” their stacks.

This will be a very interesting space to watch in the next few years.