If your enterprise software brings revenue it is worth a lot more than if it just cuts costs – the revenue model shift from Subscriptions to Transactions June 4, 2014Posted by bernardlunn in Corporate Strategy, Enterprise Sales, SAAS, start-ups, Strategy Workshop.
Tags: b2b2c, crossing the chasm, revenue sharing partnerships
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Historically, the objective of enterprise software was to make employees more efficient by automating tasks. The software industry moved from cutting G&A costs to making people at the front line more efficient through software such as CRM, Marketing Automation, Business Process Management and Collaboration.
In all cases, the business model was licensing. The licensing model moved from perpetual to periodic (monthly or annual). Seen in this context, SAAS is just an evolution of the old licensing model (plus bundling the hardware into the price). Consumerization of software is a natural response to the risk/reward shift of periodic pricing in SAAS. When vendors got all the money upfront, they could afford an expensive sales process. SAAS shifted the risk to the vendor who got investors to fund the cash flow gap. Investors were happy funding that cash flow gap because periodic SAAS revenue is more predictable and therefore more valuable. To reduce the cost of sale and therefore minimize dilution, entrepreneurs created consumerized services and Freemium.
That about brings us up to date.
So, what’s next?
What’s next is usually an evolution when it comes to enterprise. There may be a disruptive 10x technology shift driving the change, but big companies tend not to make big disruptive shifts. There are exceptions of course, the most famous being Intel’s shift into semiconductors under Andy Grove. That is such a compelling story (told in Only The Paranoid Survive) and so many enterprise executives reference it in glowing terms that we can easily believe that it is the norm. It is not the norm; it is “more honored in the breach then the observance”. Enterprises have built-in inertia, because senior managers are incentivized to optimize short-term profits.
The next iteration will continue the risk/reward shift that was started by SAAS. This will change the revenue model from licensing to % of transaction/revenue (in any shift we see hybrids of old and new so many ventures will mix subscriptions with transaction revenue). I am observing a few innovators who are combining digital consumer marketing techniques with selling a partnership model to enterprise. This is where the puck is going. These ventures get their revenue from a % of the transaction/revenue. This is obviously highly scalable. These ventures take on more risk and have to generate more value before they get paid, but if they can get there they have great scalability and moat.
The idea is simple. You create a consumer service and get enough users that you prove the proposition. Then you scale by partnering with enterprises. One way to look at this is as a technique for crossing the chasm. You can easily find early adopters online. (I say easily, it is of course not easy, but the techniques for doing so are well understood and documented). However, scaling beyond that is hard. Only a tiny % of ventures, blessed with great virality and addictiveness, cross the consumer chasm. As always exceptions (such as Facebook) prove the rule while blinding us to the rule with their brilliance. Many other ventures will cross the chasm by partnering with enterprises. One reason that enterprises are so big is that mainstream consumers trust these large enterprises.
If you prove the proposition directly with consumers you have created a lot of value. You can exit at that point. You can sell to a company that can cross the chasm to the mainstream consumer. Or you can partner with the enterprises that have access to those mainstream consumers in a shared revenue model and scale to become a large enterprise. You will typically be making one or more of these propositions:
- Get more revenue from their existing customers. You are accessing their customer base and they are using your service to get extra revenue from those customers.
- Bring them new customers. This is where the big $$$ prize lies. If these new customers represent the early adopters, the enterprise will be worried that eventually their mainstream customers will “see the light” and want to switch to your model. If they see that they will buy you for a big premium or partner on terms that are more advantageous to you; in this situation you have real clout.
You can create these partnerships on a white label or co-branding basis. Obviously you get higher margins if you get co-branding. There is a spectrum of co-branding. The more traction you have with consumers, the more clout you will have in those co-branding negotiations. Once again, Intel was the thought-leader, with their Intel inside campaign. These negotiations are fundamentally about “how big is my logo vs your logo?” Screen real estate is precious, so this matters. If you have 1 million consumers and the enterprise has 1 billion consumers you have reasonable clout if your 1 million represent early adopters and they can see their 1 billion moving to your model at some point. If you have only 1 thousand consumers, you will be limited to offering a white label service.
Back in the days of the Dot Com Boom/Bust era we saw the concept of B2B2C. Like many concepts from that era, it is easy to ridicule this one, because it did not happen then. That may simply be related to the % of people online. Now that more than 50% of the global population have mobile phones, the concept of tiny ventures getting millions of consumers directly is no longer a pipedream. However it is not wise to ignore the power of the incumbent enterprises. Rather one should get enough traction with consumers to have some clout when negotiating revenue sharing partnerships with those enterprises.
Thought leadership selling for enterprise software creates a qualitative feedback loop that can get marketing & product management on the same page. May 5, 2014Posted by bernardlunn in Blogging, Enterprise Sales, Enterprise Web 2.0, SAAS, start-ups.
Tags: sales, sales management, thought leadeship selling
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There are two core jobs in enterprise software; you either code it or you sell it. All the other jobs, vital as they are, facilitate those two core tasks. In the great companies there is a culture that synthesizes the best of the coding world and the best of the sales world. In those companies both techies and hustlers respect each other and know that they depend on each other like mountain climbers roped together.
Sadly that kind of mutual respect culture is all too rare. For the first generation of enterprise software, the sales guys ruled and they often abused that privilege. It is therefore no surprise that in the next generation, characterized by SaaS and consumerization, many technical founders sought to write the sales guys out of the script.
In the consumer world, there is no selling (door to door salesmen are only in history books), there is marketing and that is tightly integrated with the product (lots of AB testing to find out what gets consumers to hit the buy button).
Marketing has become a science. The creative folks and their hustlers that we watch with such amusement on MadMen have been banished to the history books along with door to door salesmen. We now have a perfect quantitative feedback loop of Analytics feeding into Marketing Automation feeding back into product feeding back into Analytics….
That would be OK if selling to the enterprise one user at a time – the consumerization story – was all that was needed. It is a venture lifestage issue. You get early traction, the foot in the door, one user at a time using Freemium. To grow your share of budget you need at some stage to engage with the people who manage these enterprises (or sell to an acquirer who can do this but that is a very limited pool of acquirers).
So what you need is a qualitative feedback loop integrated with this quantitative feedback loop. You need to hear what people are thinking and feeling about your product, what would entice them to buy more. When you find this out you need to quickly integrate this into your product and your marketing; this has to be an agile feedback loop. For this you need humans who can understand the nuances of the enterprise you are selling to, the geography and the trend line dynamics in the niche you are focused on. They also need to be credible inside your company so that the voice of the customer is heard.
Thought leadership selling is a forgotten art. I think of it simply as industry expert bloggers who sell or salesmen who blog credibly about the industry. This Forbes article outlines it well, the key quote is here:
“Take Salesforce.com as an example. This was an organization that took cloud-based software-as-a-service for customer relationships into the mainstream marketplace. There are several elements to its success, namely a strong product, but it also has an army of thought leaders who specialize in app development, sales lead development, sales management, etc. that helps customers do their jobs better. Salesforce’s model, driven by product success and thought leaders, has led to a familiarity with “the cloud” and a willingness to accept it in a corporate environment. These achievements not only helped the cloud computing industry with adoption rates, but helped make Salesforce a leader in the cloud-based CRM space.”
I think of this simply as industry expert bloggers who sell or salesmen who blog credibly about the industry. It is no longer OK for customers to read interesting blogs on your site and then meet sales people who cannot continue the conversation because they follow the old fashioned scripted model of selling. This is particularly true when crossing the chasm through the bowling alley of niche markets. Of course in the early days, the founders do this and in very late days you can hire teams of sales people who follow a more scripted approach, but you need thought leadership selling to make the tough transition from the early days of founder led selling to mature enterprise sales processes.
This is post # 4 in a serialized book called Enterprise Sales for the Digital Age. You can get value from each post in isolation, but if you really need to understand enterprise sales, it is worth reading the whole series. You can buy an improved version, neatly printed and bound, for $6 from Amazon.
When you get through that door, your job is testing your theory. You created a theory about why this specific customer should be a good prospect. That is what I described in the last post, the proactive lead generation process. You now want to find out if that theory works in practice. You are trying to find out if your product is a fit to your customer’s need. Your prospective customer is also trying to figure this out. This is a cooperative process between buyer and seller; neither of you wants to waste time if the fit is not good.
Product fit to market is the key step in the entrepreneurial journey. Product fit to customer is the key step in the sales journey. It may sound strange to think of a single customer like a market, but enterprise means really, really large customers. Selling to an enterprise as big as Google, Citibank or Pfizer is as much of an opportunity as selling to tens or even hundreds of small firms.
Your goal is to become an enterprise-wide approved vendor. That is a ticket to 8 figures (tens of millions of $) per enterprise per year. Clearly, that takes time and is done in steps but, if you are in the enterprise game, that is your mission.
Once you have your foot in the door, you have to prove that your product is the right fit for that customer’s need. This is the complex, lengthy middle game where your CAC (Customer Acquisition Cost) metrics can get so damaged that investors conclude that you have “a great product, but a lousy business”.
The enterprise sale is notoriously long and expensive (high CAC), but there is far too much emphasis on sales cycles and sales processes. As a vendor you should be focused on the buy cycle and the buy process and how to gently nudge it in your direction. That is the only way to get your CAC to a level where your venture can scale its profits.
The buy process typically has four steps:
1. Senior management recognition that there is a problem to be solved. This recognition usually evolves slowly through conversations between multiple stakeholders. “Wait ’till you hear the screams” before you engage seriously; you must know that the pain is acute, that this is a heart transplant kind of problem, not a problem that an aspirin can solve. Start-ups have to get involved at this stage, even though on normal sales qualification criteria you should wait until there is a budget for an approved project. Incumbents can afford to wait, they will always get invited to bid. Start-ups cannot afford that luxury. You have to be involved now, not only to get on a list of vendors which is relatively simple. What you have to do now is influence the requirements. This is where great sales people can make a difference at this stage. Great sales people have a deep understanding of three things a) the customer pain point b) your technical advantage c) your incumbent competitor’s weakness. At the intersection of that venn diagram is the key to the sale. You have to find the “innovator with clout” (see earlier post on leads) who has the background to understand it when you say “the only way you can fix xxx (customer pain point) is with yyy (your technical advantage)”. The innovator with clout can then carry that message to stakeholders. If you manage to insert your technical advantage as a requirement and make sure that enough stakeholders are aware how important it is, then you will be able to block the counter attack from the incumbent when they wake up to the fact that you are a threat. Note that all this critical selling is done well before the customer would be recognized as a “prospect” or even “suspect” in most sales methodologies. The key to doing this well is to cast your net very wide and qualify ruthlessly, a subject that we cover in the next post on having the courage, patience and smarts to “wait until you hear the screams”. Think of this stage as planting seeds. It should not take too long, most seeds won’t make it but you certainly cannot hope to reap later if you don’t seed at this stage. Note also that this is the time when you can build senior management relationships; as soon as you at the next step, you will be managed by more junior managers whose job it is to manage vendors and “keep them in their place”; incumbents always win this game.
2. Somebody is given the job of defining a solution. This includes coming up with a list of potential vendors and a budget. This is where most “leads” come from and this is why experienced sales people are wary of these leads. Often the vendor list just needs a couple more names. Maybe they already have Incumbent Vendor A and Innovator Start-up B. They want to see what else is out there. They just need a list with say 3 or 5 vendors, because that’s what their buying process requires. You can jump in at this stage and win but the odds are against you. This is before a budget is allocated. It can take a long time for a budget to get allocated. That may never happen for many reasons – the problem just goes away, they find a non-technical way to solve it, an incumbent vendor may show a just good enough solution based on an incremental module or version upgrade. This is where rookie salesmen are buried. The person that the rookie is talking to may be sincere or may be just getting some “suckers to the table” to fill out a list and make the buying process look good. Even if the person who is tasked with contacting the vendors is sincere, he or she may simply not know that the deal has already been tied up by another vendor. It is possible to “come from behind” and win in these situations, but the odds are stacked against you; so be cautious of leads that come from this stage of the buyer’s process.
3. Vendor evaluation & selection. By this stage you are down to a short-list, typically with 2 to 3 vendors. This is when you have to prove what you have claimed. This is a three part process for the seller:
A. Demo to formally insert your secret sauce into the recipe. Informally you have done this far earlier, at the first step of the buy process as described above. This can be a generic demo, there is no cost to customize at this stage. The good news is that all the “buyer self education tools” such as Freemium make this less expensive. Using online demos, Freemium and free trials, customers can self-educate before sales and sales support have to put in time. The buyer is investing time. The seller has the option of investing resources to use a human to give the demo. This is a qualification decision. Technical founders and technically driven sales people mix a demo with a training course, feeling the need to show every feature. This is where you need a great sales person working with a great sales support person. Remember what your mission here and KISS. You have to create a enough stakeholders who tell their peers “I just saw xxx, we would be crazy to opt for a solution without xxx, its the only way we can fix yyy (pain-point)”.
B. State what you have. Now is when you describe that secret sauce. If you have done your work earlier, the requirement your competitors have to respond to will be precise and only you can meet those requirements; this is why the customer will take a risk on an unknown start-up. You have to do this in such way that the incumbents cannot easily “put a tick in the box” with a BS response. So don’t just say “real time approval process” but be as precise as “approval process in less than 1 second on data from three external sources”. This will typically be in a proposal. It maybe in response to an RFP. This may become an addendum to the contract, so it must be accurate. Technical or product management folks must do this, sales people have too much motivation to exaggerate and many sales people are brilliant at communicating face to face but terrible at written communication.
C. Prove that you have what you say you have. There are two ways to do this. One is the Proof Of Concept (POC). This is a customized demo that you leave with them for some time. It is usually free. It is like a free trial, but you put in the effort to customize your product to their needs. This costs money, so make sure the prospect is properly qualified before you invest this time. You must know budget, timescale, decision team, competitors before investing in a POC.
The other way to do this is via a Paid Pilot. This gets used for real and the buyer pays – unlike a POC. This is a real sale, but it is a small investment by the buyer. As the vendor, you look at this as the first Land in a Land & Expand strategy. Tactically you may choose a Paid Pilot instead of a POC or do POC and then Paid Pilot. The decision is complex and situation-dependent and is covered at the end of this series under FAQ.
The prove phase is where you can leverage technology to reduce CAC. Tools that make auto discovery of requirements and facilitate quick customization can help lower CAC.
4. Negotiation & close. This is the subject of a future post in this series.
The buying process can take a long time, a minimum of 6 months and often longer than 12. When you are deep in the middle game of chess, it gets horribly complex. It is the same when you are trying to prove product fit to an enterprise’s requirements, there are too many variables to manage. The next post gives you a way to focus and KISS.
Introducing Enterprise Sales for the Digital Age April 25, 2014Posted by bernardlunn in Deal-making, Enterprise Sales, SAAS, start-ups.
Tags: crm, enterprise sales
This is # 1 in a series of 12 blog posts. You can get value from each in isolation, but if you really need to understand enterprise sales, it is worth reading the whole series. You can buy an improved version, neatly printed and bound, for $6 from Amazon.
This series is written for technically-oriented founders of enterprise software ventures who need to hire & manage sales people and to hire & manage the people who manage those sales people. If you sell enterprise software for a living, you may also get value from thinking about how the game of sales has changed since you went on those early sales training courses; the Internet changes everything, including sales.
The techniques for enterprise sales were created in the years when companies like IBM and Oracle were rising to prominence. These techniques worked very well. They were encoded into books, CRM systems, training courses, methodologies and the daily work of countless sales executives and sales managers. If you wanted to close complex, big ticket enterprise sales you used these techniques.
Then something happened. That something is called the Digital Age, the convergence of mobile, social, real time and big data. This resulted in techniques such as SaaS, Freemium, Marketing Automation, Growth Hacking and Viral Marketing. It seems like it is time to throw out the old and bring in the new.
Not so fast.
Ignoring the new techniques of the Digital Age is not smart. Nor is it smart to use those techniques alone and ignore the wisdom of the past that created the enterprises that dominate our landscape today.
My aim with this book is to marry the best of the old with the best of the new. There are other people thinking about this, the entrepreneurs who are creating the Salestech ventures that I profiled in a series of posts on ReadWrite.
I have created this book as a series of blog posts, a serialized book in the tradition of Victorian novelists like Dickens who originally published each chapter in monthly magazines. (I did this before with the Startup 101 book that lives at ReadWrite). The content will always live here online thanks to WordPress. If you want the convenience of a PDF copy that you can print, please send me an email.
There are six reasons why many entrepreneurs need this guide now:
- There is a Renaissance in Enterprise Software. Or as the VCs would say, “this space is hot”. Or to put it another way, Google, Facebook and Twitter sucked the air out of the indirect/ad-driven model for debt-burdened consumers, so lets get direct revenue from where the cash hoards are overflowing in big companies.
- It is different this time. Consumerization, SAAS, Freemium, social networking – none of these were around when the early enterprise sales guys were learning their game. Big enterprises are facing existential crises related to the twin challenges of digitization and globalization. That’s good news, there are plenty of problems to solve with tech. The bad news is, don’t expect to get attention/budgets selling the “same old, same old”. The Big Old Vendors have got same old, same old sewn up. Don’t extract a sales team from those Big Old Vendors and expect them to meet today’s challenges with today’s tools for your startup.
- Most entrepreneur’s sales skills atrophied during enterprise software’s decade in a coma. I call the last decade a “coma” in enterprise technology, because there was very little innovation, just big old vendors selling the same old stuff to the same big old enterprises in the same old way. Most founders in the last decade were developers who did not want anything to do with sales; who wanted anything that looked like Glengarry Glenn Ross? Although it is different this time, there are still some old-fashioned sales skills that few entrepreneurs can ignore. Not quite everything is different. This series adapts the timeless verities of sales to the modern world.
- Developer entrepreneurs need to be at least be Consciously Incompentent in Sales. Developer entrepreneurs are mostly Consciously Competent in development (good and always figuring out how to get better), but need just enough to be Consciously Incompentent in Sales (know what you don’t know so that you can hire well). That is why I keep each chapter to the length of a blog post; you don’t have time for a PHD dissertation on sales and our attention spans have become shorter thanks to the Internet. The aim of this series is to save you from being Unconsciously Incompent (the one fatal quadrant).
- Your product will not sell itself. Even if you opt for a sales-lite (try it online) model, you may need to sell to channel partners and you may need to sell the first few customers yourself (“do things that don’t scale”). Even if a consumerized Freemium model is your foot in the enterprise door, you may later need to meet the folks who control the big budgets in order to scale that.
- Despite all the great marketing technology, the bottom of the funnel needs attention. Despite the revolution in consumer marketing that we see from inbound marketing and the scientific processing of leads through Marketing Automation, the impact on B2B has been light and the impact on the enterprise end of B2B has been virtually non-existant. The attention today is on the bottom of that funnel where leads become sales – or don’t.
I am not the only person observing the increased focus on sales. This is from Businessweek:
“In the past few years the number of sales programs at colleges and universities in the U.S. has exploded, according to the “Sales Education Program Landscape Study” done by the Center for Sales Leadership, run out of DePaul University’s College of Commerce. In 2007, courses in sales were offered at 44 U.S. schools, a number that jumped to 101 schools in 2011. Now 32 schools offer a major, minor, or concentration in sales, up from nine just four years ago, the study found. Even MBA programs are starting to get into the game, with 15 now including sales courses as part of their graduate programs in 2011 and six offering an MBA with a sales concentration.”
The first four posts describe the key stages of the sales cycle. These posts follow the enterprise sales process, which is like a game of chess
Beginning: how you get leads, your opening moves.
Middle: proving product fit to that enterprise’s need
End: closing, getting signature and cash.
As a tech entrepreneur you may have to do some of this yourself. You will certainly have hire people to do this. It is useful to understand what the people who you are hiring will be doing.
The key management concept is CAC – Customer Acquisition Cost. You aim is not just to sell but to sell with a low enough CAC. If your CAC is too high, investors will conclude that “it may be a good product, but it is not a good business”.
We start at the beginning, like the opening moves in a chess game. How do you get leads? More importantly how do you do this cost effectively:
How do you get Enterprise leads that generate the right Customer Acquisition Cost (CAC)?
Then we focus on what you do once you have made contact and you are in the sales process.
Once you are through the door, focus on the buy process to reduce your Customer Acquisition Cost (CAC)
When you are deep in the middle game of chess, it gets horribly complex. It is the same when you are trying to prove product fit to an enterprise’s requirements, there are too many variables to manage. This post gives you a way to focus and KISS.
Deep in the complexity of the middle game, keep focus by imagining the press conference and concentrating on the “power of one”.
Finally, nothing happens until you negotiate and close. There are so many books, courses, seminars and theories about negotiation. Much of it “does not stick”, because in the heat of the moment you need to make instant decisions. One way for negotiation tips to stick in the mind is to relate them as stories, particularly stories where somebody screwed up really badly or did something clever to gain advantage in a difficult situation. These are the the subject of:
Negotiation Ninja Says: Tips on Closing from those with scars on their back
We then move onto management subjects. The first in the management series tackles the toughest question:
How to hire the A Team sales guys
The next post describes how to manage these rain-makers. How do you manage enough to meet company objectives without “crimping their style”:
How to manage a sales team in the era of bring your own everything
Is forecasting a science or a black art? It is certainly something that keeps CEOs of startups up at night, a lot of resource allocation (what a CEO does) depends on forecasting. Yet most forecasting systems are “garbage in, garbage out”. This post recommends a different way of thinking about forecasting.
Forecasting: Keep all stakeholders on the same page by rewarding accuracy
Before starting at the beginning of the sales process, the first post asks a clarifying strategic question:
Getting “the vision thing” right in Enterprise Software December 12, 2013Posted by bernardlunn in Corporate Strategy, Enterprise Sales, SAAS, start-ups.
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Lou Gerstner wrote one of the best business books of all time, an educational thriller about how he took an IBM that was on the ropes in 1992 (having failed to adapt to a PC centric world) and made it great again, which he called “Who says Elephants Can’t Dance?”
IBM was in total crisis in 1992. He was asked by a journalist what his vision was for IBM. His reply became famous and much misunderstood. He said something along the lines of “the last thing IBM needs right now is a vision”. A couple of years later he did unveil a classic bland corporate vision statement and then said what he really thought which was:
“So the most important strategic priority for IBM becomes, when you peel it to the core, to execute what it knows – and has known for years. Execution will lead IBM back to success.”
Gerstner did have a vision – to make IBM a customer-centric business – but he recognized that realizing this vision was all about execution. Later in the book he revealed his growing understanding that execution was all about changing the culture.
At IBM’s scale he was right. It was 99% execution and 1% vision. For tiny startups struggling to get noticed in a crowded market, that balance is different. Execution is critical – it always is – but startups need crystal clarity on vision, mission, positioning and so on. Mind-share precedes market-share.
In many enterprise software startups, this is harder than it should be, because executives are like blind folks around an elephant. Each one feels a different part, but only one part, such as the side or the tusk. They then compare notes and learn that they are in complete disagreement.
The different parts of the enterprise software elephant are:
A. Technological Advantage aka “secret sauce”. Externally this is irrelevant. Your customers only care what you can do for them, not how you do it. You actually want to hide this externally and protect it with patents. However, internally you must know where your source of competitive advantage comes from.
B. Customer pain. You must know “what keeps them awake at night” and how you can use your technical secret sauce to solve these problems. The difficulty that horizontal platforms have is that the language used to describe this pain varies dramatically by market. The way that a CXO level person talks about the pain is totally different in a Bank, in a Pharma company, in Government, in FMCG etc.
C. Market Space Labels. This happens when some bright analyst does some pattern matching across vertical markets. They spot that the customer pain being described in such different ways in a Bank, in a Pharma company, in Government, in FMCG etc all have a common theme. They give it a name, a label for the market “space”. All the participants in the market realign to position into this new space and to get into the magic quadrant or other short list paradigm.
The problem for startups is very simple:
By the time the customer pain across verticals has been aggregated into a “space”, it is too late for a startup to become the dominant player in that space. The incumbents can offer “just good enough” features to be signed off by buyers who have already put them on the approved vendor list.
Startups have two ways to meet this challenge:
1. Name the space while you are creating it. It’s incredibly hard to do. In this post I describe how Tibco did this.
2. Just deliver and don’t label yourself. That is what Splunk does. You deliver value and let the market figure out what label to put on you.
Why Enterprise Software Sales is like Chess (with elements of Poker) November 4, 2013Posted by bernardlunn in Enterprise Sales, SAAS.
Tags: enterprise software, revenue, sales, sales management, software ventures
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Many cerebral developers have an image of sales as a game for smooth talking silver tongued devils who are not over-endowed with grey matter.
Coding is very hard intellectual work. So is enterprise selling. Enterprise sales is like a game of chess with opening moves, middle game and end-game:
– Opening moves in chess are fairly well-defined. You cannot win through brilliant opening moves, but you can lose quite quickly through some dumb moves. The same is true in enterprise sales. People over estimate the value of an introduction. It is not much more than Pawn to Queen four. You need to get through the door to sell, but its what you do when you are through the door that matters. Its not just the credibility of your introduction (first move) but also how you position your value proposition on first email, call and meeting that will determine how well you do when you get to the negotiation phase.
– Middle game is when the sales support guys make all the difference. The process of proving product fit to the specific enterprise requirements is long and complex with a track running from demos to gap analysis to proof of concept. Then the process of aligning stakeholders towards a specific proposal can take place. You cannot plan more than two moves ahead, the best players mix analysis with intuition (“sight of the board”) as well as some time-proven maxims (such as “control the center of the board”).
– End game is when the closers score. Some sales guys are no good in the opening moves (they expect the company to set them up with lots of qualified leads) and they are hands-off during the complex hard work of the middle game. This may annoy the hard-working folks in marketing and sales support, but they can get away with it because they are great closers. Watch out for these guys at your Gorilla competitors. A naive start up can align people around a perfect demo, gap analysis and proof of concept only to find the deal snatched away by salesman sammy at Bigco who trashed you with a well timed comment to the decision-maker over golf or cocktails.
The reason that winning at enterprise sales is so much fun is that it is cerebral but it is not only cerebral. You need good EQ as well as good IQ. Or, to put it another way it is a mix of chess and poker and as Bond says in Casino Royale “in poker you don’t just play the cards, you play the person sitting across from you”.
Disruptive Fintech: Bits Of Destruction Hit Wall Street. July 11, 2013Posted by bernardlunn in capital markets, SAAS.
Tags: capital markets, digitization, disruption, fintech, wall street
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Bits of Destruction is a phrase coined by Fred Wilson of Union Square Ventures to describe the disruption that incumbents face from digital ventures whose primary costs keep falling thanks to Moore’s Law.
Consumer finance has already seen successful ventures such as Mint. Will the same thing happen in the B2B markets for financial services aka the capital markets aka Wall Street?
At the 30,000 foot level, this seems inevitable. A financial transaction is simply matching buyers and sellers (or lenders and borrowers). The Internet is very good at that.
This “disruptive fintech” market is moving fast. Already $10 billion has been invested in disruptive fintech ventures.
Fintech (financial technology) used to mean selling financial technology to financial institutions, who used that software to provide financial services to companies and consumers: but that game is in its final innings and the winners have already been declared. The new game is providing financial services directly to companies and consumers via software-driven networks. This game is in its first innings and has decades of opportunity ahead; most of the winners have not been declared, most of them have not even started yet.
For decades, the big financial institutions ruled. They could invest in IT and their scale made them attractive vendors to the Global 2000 scale companies and they needed scale to reach consumers via physical branches. But then three things happened at the same time to disrupt this status quo:
1. The financial crisis made the big financial institutions “pull in their horns”, making them more cautious. Not only are all the usual organizational antibodies fighting to stop disruptive innovation. That is standard innovators dilemma. But the financial crisis means that even if a CEO musters the courage to fight those organizational antibodies, she will be constrained by their balance sheet, aggressive regulators and nervous investors. The absence of the big financial institutions opens a window of opportunity for other entrants.
2. It became dramatically easier to build financial technology. The combination of the cloud stack and open source software has taken a great big ax to the cost, timescale and risk of building financial technology. This is classic 10x disruption. What used to cost $10m and take 3 years now costs $1m and takes 3 months.
3. It is possible to reach customers directly online and through their smartphones. The low cost of building fintech is meaningless if the big financial institutions are still the only gateways to customers. You would then still need a lot of Rolex wearing, Beemer driving sales guys to sell to those Big Banks and that cost has not come down at all. But now that nearly 50% of the world’s 7 billion people have mobile phones that get smarter all the time, it is possible to reach consumers of financial services directly. And doing this digitally can be very cheap. Doing this well is still a mix of art and science that very few people understand, but that knowledge is propogating rapidly. The key point is that Big Banks are no longer the only way to reach consumers of financial services.
These disruptive Fintech companies all have software at their core, but they don’t look like what we think of as software companies. They don’t license software, they usually look to their market like a digital venture or a business service or a regulated financial institution.
Tags: competitive advantage, enterprise software, moat, SaaS, subscriptions, transaction revenue
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Yes, “software is eating the world” as Marc Andreessen puts it. But the software game is changing at a fundamental level. The opportunities are massive, but it is harder than it used to be to create sustainable value.
The big change is the revenue model for software; that is as fundamental as you can get. The revenue model used to be perpetual licensing. Then it moved to subscriptions aka SaaS. The next iteration is to transactions. The software enables a transaction to happen and the software owner takes a cut of the transaction as revenue. This fully aligns the interest of the software owner and the software user (as opposed to the licensing model where all the risk/reward passes to the user/licensee). This transaction revenue is variable but predictable; the metrics are similar to consumer web ventures.
Software licensing was a wonderfully simple game. Once you had built the software and sold it, all you needed to do was send a disk to the customer. The first time I saw this for real – I had sold the deal, signed the contract and asked “what do we have to do now?” and was told “just send them the disk”. This was a contract worth high six figures and the cost of the disk was a couple of bucks. During contract negotiations my boss told me that “the only thing we can warrant is that the software will have bugs”. My eyes were opened to the wonders of 100% gross margins. Customers eventually woke up and revolted against having all the risk passed to them; into this gap charged the SaaS pioneers.
During the SaaS wave of innovation, which started with Salesforce.com over a decade ago, the game got a bit more complicated. But only a bit. You now had to manage a data center or an outsourced infrastructure provider. Lots of vendors rushed in to make that pretty simple. Gross Margins went from 100% to around 85% to pay for the hosting infrastructure – still incredibly high compared to most businesses.
But SaaS is still a licensing game and that still passes most of the risk and all the upside to the customer. The SaaS vendor takes away the hardware capex cost and the technical implementation risk. But these are not costs and risks that keep the CXO folks awake at night.
To really build value in the enterprise software you need to build a moat to keep out the “ankle biters”. Then you need to put alligators in the moat. That may sound a tad cryptic, so let me explain.
“Ankle biters” is a term coined by Fred Wilson in this engaging talk to describe the startups that will invade any good niche with dramatically lower prices. The upstarts use open source and cloud infrastructure to copy the functionality of market leaders for a fraction of the cost and then use that lower cost to offer an alternative to the market leader at a dramatically lower price. A classic upstart game is to offer free license and charge only for maintenance. Say the market leader is charging $500k for a Perpetual License with 20% Annual Maintenance (ie $100k per year). The upstart simply charges $100k per year; whether they call this an Annual Subscription or Maintenance with a Free License is mostly optics.
It is very hard for the market leader to defend against this. Their cost structure and sales team incentives make it impossible to compete on price. The usual response is to greet the upstart with FUD and scorn, pointing out the functional gaps. This does not stop the upstarts; their customers happily trade a 10% loss of functionality for a 90% drop in price.
The only sustainable defense is to build a moat. Historically this has been through Patents but this is increasingly a weak defense (the reasons are too complex to cover in this post). The best moat is network effects, where each new user brings in more users or brings in data (or both). For example, you can easily recreate the functionality of Facebook, Twitter or LinkedIn but that does not give you a shot at beating those network effects champions.
Network effects is the best moat. In Consumer markets that is all you need. There is now plenty of advice, most of it free in blogs, telling you how to generate network effects. Despite all that advice, this is a totally Darwinian game, thousands of ventures attempt this and only a handful succeed.
Nobody has yet mastered the game of network effects in B2B. This game is just starting. Fortunes await those who succeed, as B2B has a direct revenue model; combining that direct revenue model with network effects is the magic quadrant of ventures.
What about the “alligators in the moat”? This is using service as a game changer. This matters in B2B where there is lots of functional complexity. To get people to commit to transactions you need to offer really high quality 24/7/365 support. That is of course not easy or cheap but once you build it you have a real competitive barrier.
Where Do Niche Enterprise Software Companies Go To Retire? October 10, 2012Posted by bernardlunn in capital markets, Enterprise Sales, Enterprise Web 2.0, SAAS.
Tags: george koukis, holding company, misys, private equity, rollup, temenos
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Many years ago I worked for Misys, after they acquired a company that I worked for. The founder, Kevin Lomax had simply taken the Hanson Trust model (for industrial companies) and applied it to software. Misys was a good exit option for the founding management team and Misys had a simple model that worked very well for a long time. The basic model worked as follows:
1. Buy a mature enterprise software company in a niche market. Mature meant lots of Maintenance Fees, which has good revenue visibility, almost SaaS like. I worked at Kapiti when Misys acquired the company. This was Misys’s first foray into banking software, their initial market was Insurance.
2. Buy other companies in the same niche, become the dominant vendor and get economies of scale. Fairly soon after buying Kapiti, Misys acquired ACT (a public company that had a couple of bad quarters and was available at a good price). ACT owned Kapiti’s two major competitors – Midas and Kindle. Overnight the instructions changed from “beat the crap out of those guys” to “compete, sort of, but do it nicely and for goodness sake don’t get into a price war”.
3. Then buy lots of young and more technically leading edge companies and sell that into the market that you already dominate.
So, what is wrong with this picture? Today, Misys is a shadow of its former glory. It was nearly bought by Temenos and now is a bit vulnerable after they walked away from the deal. In 1996, when Misys owned Midas, Kapiti, and Kindle (representing the number 1, 2 and 3 by market share), a tiny upstart run by a great entrepreneur called George Koukis decided that Misys was vulnerable and could be taken on! That was some crazy strategy, but he was right. His company was Temenos. The fire had gone from the belly of the Misys folks, but it burned fiercely at Temenos. (Watch George Koukis, a Greek, talk straight about the Greek Crisis, a refreshing entrepreneurial take on a tired old story).
The big question for all the holding companies that emulated Misys and all the Private Equity buyouts and roll-ups is how do you keep that fire in the belly? How do you go for growth when you already dominate your niche? The basic strategy is to move into adjacent niches. This requires a start-up/entrepreneurial mind-set, the kind of skills that the company had in its founding days and then lost.
Misys would have been fine had they not had a really driven entrepreneur like George Koukis coming after them. There was no disruptive technology or new market to worry about. Temenos had no tail winds to help them. The same is not true today. The legacy companies are being attacked by lots of Koukis like entrepreneurs and these entrepreneurs have the huge tail wind of working with native cloud technology. The old-software company’s retirement home is not as serene as it used to be.
Tags: enterprise software, ipo, salesforce.com, workday
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Where is the big enterprise software winner of the last decade? Where is the Oracle or SAP of the last decade? Or less ambitiously, where is the TIBCO, Cognos or Hyperion of the last decade? So far the only one to make it into the big leagues is Salesforce.com and it is unclear if they will actually make the breakout from their CRM niche to something bigger.
Workday has the ambition, funding, founder experience, breadth of offering to be this winner. This one will be interesting to watch, the SaaS Index is getting a new bellwether stock to join $CRM very soon.