Taking Shots at a SaaS King? Better be ready for the Frank Underwood

 CEO of Salesforce, Marc Benioff, and Frank Underwood discussing ways to deal with RelateIQ Sometime in the early part of the previous decade, Salesforce went all Frank Underwood...

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 CEO of Salesforce, Marc Benioff, and Frank Underwood discussing ways to deal with RelateIQ

Sometime in the early part of the previous decade, Salesforce went all Frank Underwood on its direct competitor, Siebel, and took the CRM market before Siebel even really knew they were in competition. It was quick and it was decisive, because it was not just a competition on product functionality and innovation, but instead Salesforce was introducing a fundamentally new delivery model and cost structure with software-as-a-service. This caused an avalanche that ultimately led to the death of the once mighty Siebel, a company that Deloitte previously recognized as the Fastest Growing Company in US History.(a)

Similar narratives have played themselves out in SaaS vs. On-Prem battles over the last decade including Workday vs. Peoplesoft, Zendesk vs. RightNow, ServiceNow vs. BMC, AppDynamics*/New Relic vs. IBM (Tivoli)/CA (Wiley).(b)

But as soon as you seize the throne, you’ve got to worry about people coming for you. Some challenges are nuisances and some are real shots at the top.

In House of Cards, Frank Underwood taught viewers that every kitten grows up to be a cat. They seem so harmless at first—small, quiet, lapping up their saucer of milk. But once their claws get long enough, they draw blood. Sometimes from the hand that feeds them. For those of us climbing to the top of the food chain, there can be no mercy. There is but one rule: hunt or be hunted.

With the founding and subsequent success of RelateIQ*, Salesforce experienced the first real shot at its core business in the decade since it had established itself as the CRM king. Unlike Salesforce’s ascension to the top, RelateIQ couldn’t compete on delivery model or pricing – like Salesforce, it too was priced on a per-user basis and delivered via SaaS. RelateIQ also couldn’t compete on the robustness of the platform – Salesforce had continued to iterate over the years and built a feature-rich, robust product.

So how did RelateIQ compete? It started out by going after younger, forward-thinking technology companies – its venture-backed peers – with a light-weight, mobile-centric product. RelateIQ was able to capitalize on very specific workflows that had evolved since Salesforce was first architected – most notably using the inbox as a means of gathering customer data for internal collaboration and prioritization. The product was well received by VC-backed companies as they valued these workflows over Salesforce’s more robust, albeit cumbersome, solution.

This likely did little to register on Salesforce’s radar initially, but these customers grew into ones that Salesforce cared about and RelateIQ’s revenue grew right along with them. RelateIQ also began to diversify its client base away from just venture-backed companies and moved further up-market towards Salesforce’s sweet spot. Quickly, the kitten became a cat. Without the same mobile functionality and email/contact-related workflows, Salesforce was put on the defensive and back-pedaled until ultimately opting for a Godfather offer of $390M to acquire RelateIQ.(c) Hunt or be hunted.

This is the first realized outcome, but it’s definitely not the last in the battle of upstarts vs. incumbent SaaS companies. In fact, a battle is unfolding (or starting to) in a number of the largest SaaS markets:

  • Procurement: Coupa* vs. Ariba
  • Expense: Expensify vs. Concur
  • HR: Namely vs. SuccessFactors
  • Recruitment: Greenhouse vs. Taleo
  • User Analytics: Mixpanel vs. Omniture*

SaaS vs. Upstart

Note: The most recent valuations for the upstart companies (outside of Mixpanel) are not public so I have instead included the amount of money that has been reported each raised.

So what can be learned from these other battles? How should you attack if you’re going to take shots at an entrenched SaaS company? Here are four key takeaways:

  1. Make sure there is a fundamental weakness in the workflow/product.

This should be obvious, but if you’re just going to throw some lipstick on a pig, you’ve got no chance. You should be able to crisply articulate exactly what has changed from a workflow standpoint that has made the incumbent out of date.

Real life example:

  • Incumbent: Omniture’s solution was purpose built for the then infant web and the company quickly established itself as the leading web analytics solution in the mid-2000s.
  • Upstart: Mixpanel has been architected with a focus on mobile analytics – with a core bread-and-butter in mobile applications. Omniture has made in-roads in mobile web analytics, but mobile apps represent a unique beast that require specific, extensive focus.

 

  1. Aim below the incumbent’s ideal customer.

This will typically mean the so-called “mid-market” (which is actually where most of the SaaS incumbents got their start originally). As the incumbents had success in a certain targeted area, they almost all moved up from there and went after larger customers. It’s just the circle of life in software – you start lower than you want to end up and build to get up-market. If you get the incumbent’s attention early by going after core customers, you’re more likely to get smacked.

Real life example:

  • Upstart: Unless your name rhymes with Dave Duffield, you’re not going to have the credibility to convince the largest enterprises to sign up with you until there are proof-points in the market. Namely has had great success targeting companies in the mid-market, which has allowed it to grow and build credibility before (inevitably) bumping into SuccessFactors.

 

  1. Disrupt on price.

One of the easiest ways to put an incumbent SaaS provider on the defensive is by shifting around the pricing model.

Real life example

  • Incumbent:  Ariba’s e-procurement pricing model focuses on charging a percentage of spend that goes through its platform. It makes sense and has been quite lucrative for the company – Ariba takes a percentage of the money flowing through and can directly tie this to company savings (with bulk pricing discounts). Ariba also has a Supplier Network which charges vendors to participate. Basically, if a vendor wants to sell something to an enterprise through the Ariba Network, they have to pay a toll to Ariba.
  • Upstart:  So what did Coupa do to this model? 1. They decided to price on a per-user basis (disruption in this case vs. simply the status quo) which actually nets out to lower cost for companies in a lot of cases 2. They made their Supplier Network free for people to join. Customers in particular love this second part because (although not a direct bill to them) they usually felt that vendors were ultimately going to pass the “toll cost” from Ariba back to them.

 

  1. It’s better to attack the acquired than the standalone.

Innovation of a standalone company will nearly always be better than that of an acquired one. Going after Salesforce, Workday, ServiceNow, NetSuite is just going to be fundamentally more difficult than going after Concur, Ariba, SuccessFactors, Taleo and Omniture. Either way you’re heading to battle, but not all wars are the same.

Real life example:

  • Incumbent: The story of Concur will always be one of the craziest of all time. There really should be a SaaS history book (let’s discuss this if someone actually wants to write it) and Concur would have at least a full chapter. But Concur is now a part of SAP, and being a part of a larger company has historically meant a slowing of innovation.
  • Upstart: The acquisition has opened runway in the market for Expensify as (inevitably) there will be responsibilities for Concur that go beyond just signing up new clients and retaining existing ones. At least a portion of Concur’s time will be focused on some form of deeper integration with SAP’s existing products or something else that would not have existed as a standalone entity. Opportunity – Expensify.

So there you go – hopefully this provides some framework for companies that are thinking about making a charge at the throne of an incumbent SaaS king. And even if you’re evangelizing a new market, if successful, you’ll inevitably bump into an incumbent that stands between you and an even larger market opportunity.

Because – like Frank said, the higher up the mountain the more treacherous the path.

This article was originally published on Logan VC Blog by Logan Bartlett a VC at Battery Ventures

Footnotes

(a) Bruce Cleveland of InterWest (and one of the founding members of Siebel’s senior team) wrote an article about the nuances of the death of Siebel. Good read on how the battle played itself out from his perspective. Lessons from the Death of a Tech Goliath.

(b) This is not to mention the successful delivery model pivots (on the public market no less) of Concur and Ariba – sometimes you need to do the 127 Hours and lose a limb to save yourself.

(c) Another compliance disclosure: this all took place prior to my joining Battery and I have 0 insider knowledge on how this actually played itself out.

* Represents a current or past Battery portfolio company. For a full list, please visit here

 

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