post

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.)

Reblog this post [with Zemanta]
post

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.

post

24SevenOffice Acquisition Rumors

24SevenOffice, the European SaaS provider of an integrated, All-In-One system for small businesses may be in acquisition talks with a major US vendor. The news went almost unnoticed, partly because it leaked just before Christmas, partly because the company is largely unknown outside a few European countries – not for long if a deal comes through.

I covered 24SevenOffice, a very promising SaaS provider for the SMB (SME) market several times. Their system is modular but integrated with a breath of functionality I simply haven’t seen elsewhere: Accounting, CRM (Contacts, Lead Mgt, SFA), ERP (Supply Chain, Orders, Products, Inventory), Communication, Group Scheduling, HR, Project Management, Publishing, Intranet. Essentially a NetSuite+Communication and Collaboration.

About the only thing I did not like was the lack of availability for US customers – this might change soon. The news release and blog post mentions three names: Salesforce.com, WebEx and Google, but adds a somewhat cloudy remark: “the companies here are only examples of what the rumors have outlined.” It does not explicitly confirm one of these specific companies as the potential buyer. I should also add that while I had in the past been in touch with Management, at this time I have no information whatsoever from the company, so the ideas below are purely my speculation.

Salesforce.com as suitor: A well-integrated All-In-One product would come handy to Salesforce.com which could dramatically expand their customer base this way. However, they’ve gone a long way in the other direction, trying to become a platform and extending their reach via the ecosystem built around the AppExchange. Acquiring 24SevenOffice would be a huge about-face for Marc Benioff, and essentially would mean admitting that archrival Zach Nelson of NetSuite was right all this time about the superiority of the integrated All-In-One approach.

WebEx: Their original market, the web conferencing space is being commoditized, they clearly are looking for more lucrative markets, as evidenced by the recently launched WebEx Connect (their “AppExchange”). I haven’t heard about much activity since the announcement – certainly owning a product like 24SevenOffice (btw., it really should be called 24SevenBusiness) would allow WebEx a powerful entry into the SMB applications market.

Google: No way, you might say. Google and business process / transaction oriented software are lightyears apart – at least today.

Yet unlikely as it sounds the deal would make perfect sense. Google clearly aspires to be a significant player in the enterprise space, and the SMB market is a good stepping stone, in fact more than that, a lucrative market in itself. Bits and pieces in Google’s growing arsenal: Apps for Your Domain, JotSpot, Docs and Sheets …recently there was some speculation that Google might jump into another acquisition (Thinkfree? Zoho?) to be able to offer a more tightly integrated Office. Well, why stop at “Office”, why not go for a complete business solution, offering both the business/transactional system as well as an online office, complemented by a wiki? Such an offering combined with Google’s robust infrastructure could very well be the killer package for the SMB space catapulting Google to the position of dominant small business system provider. Who’d benefit from such a deal? Google, millions of small businesses, and of course 24SevenOffice.

I admit I would feel somewhat sorry for 24SevenOfice though, as I clearly think they could have a shot of becoming a billion-dollar business on their own – the next NetSuite. Either way, if they make it to the US market this year, they’ll likely see explosive growth. When they are a well -known brand, remember, you discovered them here.thumbs_up