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How Software Can Be Resilient to Recession

Are we heading into Recession?  The “Big R” talk of early this year quickly subsided, economic growth returned, the markets appeared to vindicate the optimists.  US Presidential Candidate John McCain repeatedly said the economy was fundamentally strong… until just days ago, when he quickly switched to declaring a crisis.  The Wall Street Journal says we’re in the Worst Crisis Since ’30s, With No End Yet in Sight.

I don’t claim to be an expert economist, so whether the Big R is looming is not my call – but if you believe we’re in a strong economy, I have a bridge to sell you.  Let’s just focus this discussion on how Software businesses can survive in a financial crisis, which is undeniably here.

Not all will survive, and it’s probably healthy they won’t.  Tim O’Reilly, Father-of-all-things-Web-2.0, asked the question at the Web 2.0 Expo last week:

Global warming. The U.S. losing its edge in science and technology. A growing income gap. “And what are the best and the brightest working on?” O’Reilly asked, displaying a slide of the popular Facebook application SuperPoke, which invites you to, among other things, “throw sheep” at your friends.

“Do you see a problem here?” he posed, showing another slide of the popular iPhone app “iBeer,” which simulates chugging a pint. “You have to ask yourself, are we working on the right things?”

The poster-child of the Web 2.0 boom may very well become the symbol of what went wrong:

  • useless
  • consumer-only
  • ad-driven

Actually, the problem is not what they do, but how seriously they were taken.  Will Price, a very smart VC said long ago:

It may well be that Slide raising $55m from mutual fund companies at $500m+ pre-money will be the “what were we thinking” moment of the current cycle.

I’m glad they did not go public, at least not a lot of people will get hurt holding the bag.   But enough of what’s wrong, here’s what works:

  • go where the money is, and that’s businesses (“Enterprise” vs. consumer, even if it means small business)
  • deliver value – useful functionality that improves business
  • charge for it – companies actually prefer to pay for reliable, good service.

The last point brings up the price issue.  Credit will dry up. Whether we’ll officially declare Recession or not, the fear of the Big R is enough for corporate budget cuts, the disappearance of any CAPEX spending. Even worse, an entire sector almost disappeared as IT buyers.  Did you know that Lehman Brothers spent over $300M on IT in just the last quarter, right before declaring bankruptcy?   How do you sell in this environment?

The after-bubble nuclear period of “no IT spending at all” found me at a startup in 2001-2003. We did not exactly hit it big, but did not go under, either, and that’s because our model allowed us to get in the door way below the threshold that would have required higher authorization. Not classic SaaS, rather SES (Software Enabled Service), we were essentially data providers and often got into an “enterprise” account at $3k for the first month … eventually ramping up to annual $60-$100K.   Anyone familiar with Enterprise Sales knows the term Economic Buyer:  typically getting involved later at the sales cycle, approving or nuking the deal.  Well, we saw no Economic Buyer: being under the threshold, we sold to the User directly.

Of course my little business is not the only proof: Salesforce.com & WebEx thrived during the last recession. The secret is the business model: pay-as-you-go.  SaaS offers lower risk to enter, no initial cash layout, the subscription fees come out of OPEX vs. CAPEX, and is often approved by the User, not the mysterious Economic Buyer.  The barrier of entry is much lower: once you’re in, it’s up to you to grow.

In fact I suspect the looming downturn will accelerate the structural changes in the software industry: SaaS players will thrive,  traditional on-premise vendors will shrink, many will disappear.

That leaves a final point to discuss: financial solvency.  For startups, it will be increasingly hard to find investors.  For larger businesses the lack of late-stage investment, the credit crunch may be a serious impediment to expansion.   Discover the beauty of bootstrapping – you actually get to do what you believe is right for your business, not what your Board tells you.  Do less, take small steps.  Frugality is key to survival.  Small is beautiful will get a new meaning.

In summary, Software businesses that combine good old business sense: frugality, spending wisely, delivering value to businesses and getting paid for it, with a new business model, SaaS are likely winners in the downturn.  The rest are playing musical chairs. (Oh, and the bridge is still available)

(This post originally appeared on CloudAve.  Keep informed by grabbing our feed here.)

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Can the Software Sector be Resilient to Recession?

I was very lucky in the early 90’s being in an industry that was not only shielded from recession, in fact it was thriving.  Corporate America was taught to fight their way out of the slump by Business Process Reengineering, and what better way to execute it than by implementing new integrated business information systems.  The slump for the rest of the country was a major boom for SAP, and the entire ERP industry born in their footsteps.

Today we’re amidst another technology change, one that may just ensure relatively smooth sailing through a recession for the Software sector – at least those who are on the right side of the change.smile_wink  The belts will be tightened, says the New York Times, but technology will still grow, just at a slower rate:

Overall growth in technology spending may fall from 7 percent last year to 4 percent or less this year, according to estimates by IDC, a research firm.

But that won’t be nice 4% growth for the entire industry; I strongly believe pioneers of Software as a Service (SaaS) will be amongst coming out of a slow-down as winners, leaving others in the dust. 

TechCrunch is optimistic for the entire Web 2.0 business:

All of those Enterprise 2.0 startups out there, or even Amazon trying to sell Web-based computing infrastructure, are actually at an advantage. Customers are more likely to try cheap cloud computing when they can no longer afford the alternatives.

ZDNet’s Dan Farber disagrees:

Most of the Web/Enterprise 2.0 startups can’t get a hearing with CIOs and tech buyers at corporations. While consumer applications are influencing corporate applications and coming in through the back door, Enterprise 2.0 apps (blogs, wikis, predictions markets, social networking, mashups, collaborative cloud-based apps and technologies such as RSS and tags) are just beginning to reach the radar of larger corporations, and they are not considered mission critical, which is where the money is funneled first

I think they are both right – and wrong.  I don’t agree that the entire Web 2.0 sector is immune to a down-turn: the advertising market will shrink,  the “lets-grow-insanely-who-needs-a-business-model” types will suffer. As Software VC Will Price says:

It may well be that Slide raising $55m from mutual fund companies at $500m+ pre-money will be the “what were we thinking” moment of the current cycle.

I also agree with Will, that a movie we’ve all seen will be playing again:

The last downturn saw the valley swing violently away from consumers to the enterprise – bastions of value, hard ROI, tangible value propositions, enterprise pain points and budgets, etc became the mainstay of investment decisions and the consumer, I kid you not, was literally a bad word…
The valley became all enterprise, all the time.

It will not be all, and not only Enterprise, but Business Software, whether for the Enterprise or small businesses will come back with a classic, “old-fashioned” business model of actually charging for value (product or service) delivered.  Of course there is still the dilemma of selling business software – much better if you don’t have to, it is getting bought instead. smile_shades  Yes, Dan is right, “Web/Enterprise 2.0 startups can’t get a hearing with CIOs and tech buyers at corporations” and their  apps are not considered mission critical, but the whole point is that a lot of these Enterprise 2.0 tools are not sold at the CIO level.

The after-bubble nuclear period of “no IT spending at all” found me at a startup. We did not exactly hit it big, but did not go under, either, and that’s because our model allowed us to get in the door way below the threshold that would have required higher authorization. Not classic SaaS, rather SES (Software Enabled Service), we were essentially data providers and often got into an “enterprise” account at $3k for the first month … ramping up to $60-$100K annually.   Anyone familiar with Enterprise Sales knows the term Economic Buyer:  typically getting involved later at the sales cycle, approving or nuking the deal.  Well, we saw no Economic Buyer: being under the threshold, we sold to the User directly.

As Zoho CEO Sridhar Vembu adds to the discussion:

It is useful to remember that both Salesforce & WebEx thrived during the last recession – in fact they were relatively unknown during the last boom. Cost was a major part of the reason they thrived in the bust.

Indeed. Software as a Service and the typically associated pay-as-you-go model allows businesses – enterprise and SMB – to use software without the typical upfront investment the traditional model would require, therefore SaaS providers have a good chance of withering a Recession.  Another noteworthy idea in Sridhar’s response is that they really don’t have to have a “massive win”, a total move from the desktop to the cloud: a “marginal” business  is good enough.

Of course this “marginal business” is not as attractive to many startup entrepreneurs as fast forwarding to the IPO, preferably over $1.5B. In fact it’s really boring… building a business gradually; no IPO thrill; serving millions of customers, helping them actually conduct business.  Oh, and making millions of dollars of real revenue in the process – not bad, if you ask me.  And it’s quite bubble-proof. smile_wink

Related posts: Vinnie Mirchandani –  Why it will be very different this time, Fred Wilson- This Time Will Be Different.

Update (1/28): Forrester Research predicts gains for Enterprise Web 2.0 apps in 2008.   Also read: Between the Lines, ReadWriteWeb.

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Dream Job for a Software Marketing VP @ Atlassian

Atlassian, a fast-growing, successful enterprise software company is looking for a VP of Marketing. I don’t normally broadcast job searches here, but am breaking that rule now for I believe this is a truly exceptional opportunity with a truly exceptional company. (Disclaimer: I have no business affiliation with Atlassian, but admit to being positively biased, as the company exemplifies a lot that I stand for.)

They are best known for two products: Jira, the issue tracking & software project management application was their first hit, putting the company on the fast growth track and establishing a loyal fan-base in the IT community.  Their existing reputation in the IT community certainly helped the second product, Confluence, the enterprise wiki gain traction: it is now equally popular in the IT and business community.  Wikis in general  have become more commonly known in the past two years; once a tiny market niche, today a growing field where new entrants pop up left and right, claiming to be best in this and that….  But numbers talk, and the verdict is clear: Confluence is the undisputed enterprise wiki market leader. 
Atlassian is not sitting on their laurels: in the past year they diversified, acquiring several companies and launching new products on their own.  Frankly, I lost track, but I believe  their portfolio currently includes 8 products, all part of an “IT toolkit”, with the exception of Confluence, which is seeing fast adoption amongst business users, too.  

The customer list is impressive: IBM, HP, SAP, Citigroup, Boeing, BMW, Shell, McDonalds, Pfizer … just about all the Fortune 1000, as well as non-profits, Universities, Government Agencies, totaling over 9000 customers worldwide. (The chart is a bit misleading: Atlassian’s fiscal year starts in June, and the FY08 bar shows the current figure only, excluding projections.)

How did they achieve this?  They must have an excellent sales force.  Wrong! Atlassian has no sales force at all.  They don’t sell: customers simply buy their products on their own.   I often talk about  the pull-model that’s replacing the traditional, expensive enterprise sales process (6-9 months, high touch, flights, meetings, wine-and-dining, entertaining, in the end often nuked by politicssmile_baringteeth) – but that’s typically in the context of Software as a Service, and in the SMB (small business) market.  Atlassian’s products are mostly on-premise (although they now have a hosted version of Confluence) and their primary market is the large Enterprise.  Yet they pulled off what amounts to a small miracle:  essentially took the download.com, tucows style model we all know as consumers, and ported it to the enterprise space. 

Of course having customers try-and-buy through the Internet is not as simple as firing your Sales team ( or not hiring one).  It’s not a matter of a decision: it’ s a consistently applied philosophy, that you have to implement in every aspect of your business.  The key components are:

  • lightweight software
    • well-defined function set, meets specific user need, small user groups can get started
    • ease of use (both easy to learn and easy to use)
    • well documented, well supported
  • transparency
    • features (what you’re getting, no surprises)
    • issues (Atlassian’s bug tracker is open to the public)
    • pricing (simple, upfront pricing, no fill-out-contact-form-wait-for-sales-to-call-back BS)
  • low price (“expensable, not approvable” – to quote a former competitor)

The “pull-model” means customers will need to find you- which is why Marketing is a critical function.  With Sales gone, Marketing becomes sales (actually, Atlassian’s CEO proudly says everyone is in Sales, especially Support).  So if you are a marketing superstar,  or know one, want to be part of a successful team, work for celebrities , you owe it to yourself to apply.

Atlassian is not only about business – it’s about people.  I know, old cliche.. but here it works.  The unique culture this team maintained throughout their super-growth even now that they have 130 people is a large part of their success.

So what is this culture like?  Tough. When he doesn’t make his numbers, Atlassian President Jeffrey Walker is forced to make up for it as ticket-scalper on the street. smile_omg OK, joke apart, this photo was shot last August, when the entire San Francisco office went to see a Giants game together. (Incidentally, just a day before Jeffrey became cancer dude). This wasn’t a rare occasion, either: both the San Francisco and the Sydney teams have a lot of fun together:  Cutlassian, Mission: Atlassian, theme-filled staff events, abound throughout the year.   Their new office  building in Sydney is right next to a pub (hint: when will you guys realize you’d be better off buying the entire pub?beer)  I wonder when the San Francisco office will move into a winery…  Perhaps you get the picture by now: Working for Atlassian isn’t just a job  – it’s a lifestyle.  But don’t for a minute think it’s a bunch of rowdy kids having fun only:  they bring in $30 million a year.  And if you don’t perform, this is what awaits you.

So that’s the magic formula: combine business success with a fun, team-focused culture and you’ve got the makings of the ultimate job.  (Are you still reading, or have you alerted your Marketing superstar friend yet?)

Now, if this is the ultimate job, there’s one question unanswered: How come it hasn’t been filled yet?  I wanted to hear the answer straight from the horse’s mouse so to speak, so I asked Atlassian President Jeffrey Walker, who responded below:

We were inundated with resumes, and found a few excellent capable candidates. Unfortunately, one of the growing pains of companies like ours is we were not quite ready for the right candidate. Incorporating someone of the caliber we need takes preparation. Our search began prematurely. Lesson learned. After the founders and I took another few ‘long walks’, we came out aligned and ready. This time I fully expect to complete the search. Just need the right remarkable individual.

Well, I did not walk with Jeffrey and the Founders, but I certainly hope they will not change a lot:smile_wink.  I have a lot to say on the subject of hiring, but it’s not specific to Atlassian, so I’ll break it out to a separate post.  In the meantime, if you are that “remarkable individual”, what are you waiting for?

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Web 2.0 & Enterprise, Round 3: Enterprise Software for Small Businesses

(Updated)

This post is a continuation of Web 2.0 in the Enterprise – Round 2 in which I reflected on some thoughts brought up by Stephen Bryant in Five Reasons Web 2.0 and Enterprises Don’t Mix.

The Web 2.0 in the Enterprise TIE event I previously referred to was hectic, trying to cover way too many subjects in 90 minutes, with one common underlying assumption: Enterprise means large corporations. The theme of the night was how these Web 2.0 technologies and business/communication approaches will “seep in” to the large enterprise from the bottom up.
What is then Enterprise Software? Typically SAP, Oracle et al come to mind, and I can hear the roar “Enterprise Software is Dead” – well, is it?
If we define Enterprise Software as the traditional heavyweight, expensive, pay-huge-license-fees-upfront, then try-to-implement-forever model it is certainly challenged from two ends, by Open Source and the SaaS model. But there is another definition that is largely being overlooked:
Software that allows a company to conduct it’s everyday business, supporting most of the core, fairly standard business processes any company performs repeatedly.

With this definition, Enterprise Software has a whole new, largely unpenetrated market to enter: that of small businesses, referred to as the SMB or SME segment. Such enterprise functionality has traditionally been beyond reach for a typical small business, for two major reasons:

  • Cost (license, hardware, implementation, maintenance ..etc)
  • Lack of IT resources (integrating applications, designing processes, dealing with multiple vendors ..etc)

SaaS is the right answer for both, since it allows the SMB user to start using the functionality without an upfront investment, does not require implementation, upgrades, maintenance, worrying about backups and security ..etc.

Of course several Open Source packages are available completely free, which is a perfect solution for the cost problem, but I think most of these packages are by geeks for geeks; i.e. you really have to be quite IT-savy to implement, integrate, upgrade them, and as we stated most small businesses simply do not have that type of resource. Yes, that means the Silicon Valley tech-startups are not a true representation of the SMB world
Likewise, I don’t believe SOA, best-of-breed packages working together are an option for the SMB market, for the same reason. They will play an increasingly critical role in larger enterprises with a professional IT organization, but for a few more years SMB’s are far better off with integrated, All-In-One type On-Demand solutions.

Of the Web 2.0 companies Stephen mentions in Five Reasons Web 2.0 and Enterprises Don’t Mix two are offering Integrated On-Demand solutions:

  • NetSuite
    Stephen lists NetSuite along with Salesforce.com, and while they are in the same club, the significant difference is that Salesforce.com is only CRM, while NetSuite offers an integrated CRM+ERP package. They both are trying to become a “platform” via NetFlex and AppExchange, respectively. Both companies are definitely pushing upstream, going after the Enterprise market as in the first definition, i.e. large (or midsize) corporate customers.
  • 24SevenOffice
    Coming from Europe this company is lesser known. They focus on the SMB market and offer a modular but integrated system with a breath of functionality I simply haven’t seen elsewhere: Accounting, CRM (Contacts, Lead Mgt, SFA), ERP (Supply Chain, Orders, Products), Communication, Group Scheduling, HR, Project Management, Publishing, Intranet. Essentially a NetSuite+Communication, Collaboration. I’ve taken their test-drive (currently IE only) and liked it. I would debate how they structure their menu-system, as functions like Product, Inventory, SCM are all hidden under Financials.

Back to the economics: if SMB’s could not in the past afford Enterprise Software, the same held true for the Software Industry: they could not afford SMB’s, since there was just no way to make the numbers work. The cost of customer acquisition vs. the very low license fees made it an uneconomical model, whether via direct or channel sales.
Once again, technology comes to the rescue: the Internet, and largely Search Engine Marketing changes everything. Joe Kraus, Founder of JotSpot and previously Excite sums it up:
“ Ten years ago to reach the market, we had to do expensive distribution deals. We advertised on television and radio and print. We spent a crap-load of money. There’s an old adage in television advertising “I know half my money is wasted. Trouble is, I don’t know what half”. That was us. It’s an obvious statement to say that search engine marketing changes everything. But the real revolution is the ability to affordably reach small markets. You can know what works and what doesn’t. And, search not only allows niche marketing, it’s global popularity allows mass marketing as well (if you can buy enough keywords). “

Another benefit of SEM is that while traditional advertising can pick the right demographic groups, it cannot pick the right time, only a fraction of the target audience is in “change mode”, looking for a solution. That’s the beauty of Search Engine Marketing: obviously if you are searching, you have a problem and are looking for a solution, which is half a win from the vendor’s point of view.
Small Business Trends recently published a survey on “Selling to Small Businesses”, which supports the increasing importance of SEM: “A full 73% of vendors attract small business customers through search engine results”

Finally a quote from Ziff Davis again: “Products for the long tail and SMB market, where 72 million businesses spend $5k or less each year, are a much easier play” Wow, I don’t know where those numbers come from, but if I were a SMB-focused software vendor, I’d certainly like them … there’s a goldmine out there.

Update (2/22): Perfect timing for this report to come out just now: U.S. SMBs to Spend $2.2 Billion on Software in 2006, Says AMI-Partners

Update (4/17): Interprise Suite (recently debuted at Demo 2006) claims to be “The FIRST Accounting / ERP / CRM Solution to Bring the Power of the Internet to Small and Mid-sized Business“. While I take issue withe the claim to be “first”, considering the breadth of functionality it’s definitely an option to consider for SMB’s .

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