I believe that when the day is done we’re all going to rediscover that unicorns don’t exist. As a result of the value of all these companies inevitably is going to be questioned and most likely going to decline because we inevitably will live in a market where rational decision making will overcome the irrational speculation that is suggested over the past year or two.
So with many questions still unanswered in our minds on those topics, and as we wait to see if the Salesforce rumours, are exactly that, just rumours, we invited Jeff Kaplan the Managing Director of THINKstrategies, to the SaaS revolution show podcast for his expert opinion.
THINKstrategies is a strategic consulting firm focused entirely on the business implications of the transition of the technology industry from a product-centric to services-driven solution model, including Software-as-a-Service (SaaS), Cloud Computing and Managed Services, and how organizations can leverage these trends to capitalize on Big Data and the Internet of Things (IoT).
You can listen to the podcast here but for those readers out there, here’s Jeff’s topical thoughts:
HI Jeff, you’ve been managing director of THINKstrategies since 2001, But not only that, you’re also founder of the Cloud Computing Showplace, which is a vendor-independent online directory of cloud solutions, and also host of the Cloud Innovators Summit. So you’re pretty busy then?
I sure am. You know, it’s been interesting because we founded THINKstrategies back in 2001 because we were firmly convinced that despite the failure of the first generation of application service providers and utility computing that the world would, at some point, come around to this idea that our products would have to change into services. Lo and behold the success of Salesforce.com in the SaaS world and Amazon Web Services in the infrastructure world has led us to this brave new world of the cloud.
So I guess you heard or read the rumors this week about potential Salesforce acquisition?
Yeah, I have. I was very interested in those rumors because they’ve come a few years later than I thought they would have. I published a blog post back in 2007 suggesting that Oracle should have bought Salesforce back then because, if you know anything about Salesforce, you and that it’s populated with a lot of Oracle people starting with Marc Benioff. Back then, it would have been a lot easier and a lot less expensive to acquire them than it would be today.
Absolutely. The money they’re talking about! $47 billion?
That’s right. It’s a rare group of companies who can stand in line thinking they might be able to acquire Salesforce and, more importantly, do something positive with them. I’ve been through my own series of acquisitions in the past and unfortunately people have written books about how most acquisitions fail. I’m afraid that there’ll be very few folks who can successful acquire Salesforce financially so much as from a cultural and momentum and goodwill point of view.
So you mentioned Oracle. Microsoft have also been touted. I think I’ve seen IBM, maybe HP, maybe SAP. Who’s your bet?
Well, if there’s going to be in fact a friendly acquisition, and at the time I wrote my first blog post I thought it would be a hostile acquisition by Oracle. I think of all of those folks, a friendly acquisition, although it may seem impossible to believe, would in fact be with Oracle if that in turn meant that Marc Benioff would assume the role of president of the company and take over from Larry Ellison when Larry decides to in fact truly retire. The reason being because the two cultures are so much alike in that the senior staff of the two companies know each other so well. I’m not predicting that’s going to happen but I think that would make the most sense.
It is interesting to note that there is a friendlier relationship between Microsoft and Salesforce today, but I think that that combination would be a difficult one to make a success of. And as I said before, I think all of these speculation leads me to believe that if it were to happen it would be a sad day for the industry because I do think that we would not see Salesforce ever be what it is today if it were a part of some other company. Inevitably we would see people leaving the company, momentum lost, goodwill lost, and the dream of what Salesforce represents today would be lost as well.
Is SaaS moving back into old ways of solution selling? Are we going to be seeing more steak and sushi dinners or deals done on the golf course in the future in the SaaS industry?
I think there’s some salespeople who would love to get back to the free lunch. There’s no question about that.
And in truth again referring back to our friends in Salesforce, if you look at when we had most important senior leadership changes over there over the past couple of years, it was Marc Benioff bringing over his friend, Keith Block, to become president of Salesforce. Again, another Oracle alum. What he was doing was giving Keith the responsibility of maturing, if you would, the sales team and the go to market strategies for the company to address the raising of the bar, if you will, when it comes to enterprise application sales in the SaaS marketplace.
And again, I wrote a blog post on this topic a few years back because I saw it already beginning to happen because of the recruitment tactics of both Salesforce and, at time, success factors when they were still an independent company and companies like Workday as well, all of whom have been acquiring sales talent from the established software or enterprise software companies because the nature of those enterprise SaaS applications is not only becoming more robust but has to be integrated into more complex environments. That it does take a different kind of sales skill, it does take a different kind of implementation process, and it does take a much more mature working relationship, if you will, between the SaaS provider and the enterprise customer. So the more things change, the more they eventually remain the same.
And in truth, this has something to do with the changing profitability of the SaaS marketplace. There are some companies like Salesforce who have always put their metal or the foot to the pedal to try to win, share, and sacrifice profits in the process. But part of the problem is also that the Cost of Sales in the enterprise SaaS marketplace is inevitably going up not only because of the complexity but because of the competition. That is going to put some more pressure on profit margins going forward, which again by the way makes the track in buying a big company like Salesforce that much more complicated in today’s marketplace.
How important is it for a SaaS company to be profitable especially if you look at Salesforce? Despite their huge valuation and being at the forefront of the biggest SaaS companies in the industry and their billion dollars quarters they’re still not profitable as far as we know.
Well profitability is important in the sense that the ability to be profitable is essential. What I mean by that is I’m reminded of the founder of SuccessFactors, Lars Dalgaard, who made the statement at an investor conference that he could turn up the switch on his business any time he wanted to operate profitably. But he chose to reinvest his money in growth in customer acquisition in order to build his market share.
But in fact there was a period of time where he was trying to demonstrate profitability in the company which inevitably led to his acquisition by SAP and, in fact, changed the operating rules for a period of time to make that happen.
Salesforce.com could do the same thing if they wanted to. It is a profitable business, although the cost of delivering services is something that most software companies in the past didn’t have to contend with. But the way in which SaaS works can be in fact very profitable. But in today’s highly competitive marketplace most companies are going to reinvest those profits into sales and marketing and the growth of their infrastructure and service delivery capabilities and that is why you see companies like Salesforce in fact running at a deficit as opposed to a profit.
It’s been speculated a lot this year that we actually may lose a few unicorns, or actually the words were we’ll see the death of a few unicorns this year, by commentators in the industry and VCs such as Bill Gurley. Do you think this is something that we’re going to see in 2015 and are we in a SaaS bubble?
I think there’s no question that the valuations have gone a bit out of hand and the most recent indication that there is a lot of apprehension about those valuations just came the other day with LinkedIn admitting that that it wasn’t going to hit the numbers and meet the expectations of Wall Street and watching its shares as a result of decline. Twitter had a similar experience. And there are those publicly traded companies about whether it’s for the investment community who has also put a significant amount of capital into startups who, as you mentioned, are referred to as today’s unicorns.
I believe that when the day is done we’re all going to rediscover that unicorns don’t exist as a result of the value of all these companies inevitably is going to be questioned and most likely going to decline because we inevitably will live in a market where rational decision making will overcome the irrational speculation that is suggested over the past year or two.
Can you speculate on which Unicorns we might lose this year?
Well, there is tremendous opportunities still in this marketplace. To a certain extent, the greatest opportunities I see are on the periphery of the mass market brands that everybody pays attention to. So when I think about where the exciting opportunities lie are in many ways they dwarf the businesses we’re seeing the valuations being given to. It’s in the industrial world that’s being transformed by the internet of things.
And even in the SaaS world there’s some companies who are emerging in various vertical markets taking the same principles of Salesforce and Workday and ServiceNow and other horizontal enterprise application companies and applying those principles to specific industries and helping to transform those industries in a way that I think long-term is going to have a greater impact on how business is done in anything we’ve seen before.
We’ve mentioned a lot of big names in our conversion today within the SaaS industry. Now, if you were going to start a SaaS startup what would it be and why?
Well, it would be focused on specific industries. Every industry has its business processes that need to be digitised so to speak. So think about the paper, checks, and other kinds of processes that still exist in banking and how those should be turned into digital forms with new payment systems that are being transformed on a daily basis.
Think about the interactions we have in the insurance industry with insurance brokers still meeting with us with yellow pads of paper trying to record information and transmit that information up a supply chain of underwriters.
All of these things in every industry have the opportunity to not only be digitised but I refer to as SaaSified. And we’re seeing players pop up in each of those industries. In fact, if you look at my Cloud Computing Showplace, we have over 2500 companies now listed across 90 different categories including every imaginable industry. Companies like Tireware a SaaS for tire distributors or iPipeline in the insurance world and Vlocity also in the insurance business. These are companies that are all doing interesting things to help, again, not only digitise but modernise the way we see these industries work.
And I imagine you’ll call the company SaaSified.com?
You know what? That’s a great idea. I’m going to…
Jeff Kaplan was interviewed by Alex Theuma @alextheuma