Why SaaS companies fail?

I am a passionate believer in SaaS, cloud, virtualization and any other delivery method that can help foster adoption of new applications in a much more cost-efficient ways. However, since my company first launched a SaaS e-learning solution many years ago (to give you a clue we called it ASP back then), I’ve seen many SaaS companies fail. I’ll try to summarize the reasons why they failed and if you are like me and tend to see the glass half full, you can use this guide to make sure your SaaS startup succeeds.

1. Using buzz words: I’ve seen startups claiming to be cloud solutions and after reviewing their business models they were not leveraging the cloud at all. Not every business model lends itself to be “as a service”. The most successful ones are those that can exist only because of the cloud.
2. Product vs. Service: many founders focus too much time thinking about the product and how to add new features without realizing customers are generally buying a service. Every touch point you have with your client is more important than a feature they probably don’t even need.
3. Metrics: SaaS companies should be metric driven organizations. I can understand if projections are not met, but I won’t understand if you can’t figure out what metric should be adjusted or targeted. Recurring revenues, churn, customer acquisition costs and customer lifetime value should be clearly understood, measured and targeted.
4. Analytics: with installed applications vendors had little first hand information about usage. Now, with a SaaS deployment, you can get detailed information you should use to improve your solution. You can see where people are spending most of their time, what features are being used, where the data-transfer bottlenecks occur and more. You need to monitor this activity and use it to align your solution with what the market needs.
5. Architecture: it sounds obvious, but I still see many startups implementing single-tenant solutions, eliminating one of the coolest features of SaaS: continuous updates. If you are maintaining multiple platforms then you won’t be able to make them converge ever. The more customized features you develop for individual customers the more you drift away from true SaaS.
6. Go-to-market: not everyone should be your customer, at least when getting started. I can tell from my own experience it is very different selling to large Fortune 100 customers from selling to SMBs. There’s even a big difference between small businesses and medium businesses. You need to be explicit and clearly plan your go-to-market strategy to make it as efficient as possible. Remember this is a numbers game, and volume is key.
7. Cash: large amounts of cash are required to build the dominant SaaS player in any industry. It took $126m for NetSuite to go public, $61m for Salesforce, $45m for SuccessFactors and $32m for Mint to get acquired by Intuit for $170m. If you understand the metrics of your business you will be able to estimate how much cash you are going to need. I would take that amount and double it… Remember it’s really bad to run out of cash!
8. Wrong partners: I’ve seen good business models and talented teams being dragged down by early partnering. Without a clear understanding of SaaS partners such as channel partners or VCs will try to manage a traditional product cycle, which is very different from what SaaS companies should be delivering. Make sure you partner with the right people or plan to spend a lot of time, energy and money educating them.

We are just starting to see the new era of SaaS business models. With a more educated enterprise consumer, large players such as Amazon and Microsoft making huge bets on the Cloud, and new devices such as the iPad the new ecosystem will evolve and new winners will emerge. Exciting times ahead!

You have your desktop and your laptop; what are you waiting to get your WEBTOP?

You probably didn’t know that you might already have it! At the AlwaysOn On Demand conference in Palo Alto, David Thomas, Executive Vice President with TechAmerica, talked about this interesting idea. Thomas, who claimed to be the “father” of the term SaaS, made an interesting analysis of the evolution of computing devices.

When Thomas talked about the “webtop” he was making reference to devices such as the iPad, the iPhone, the Nexus One and any other device designed to leverage cloud applications. This new category of devices creates a huge opportunity for a new wave of innovation. Some players such as Salesforce.com have already leveraged what they call “cloud2” with their chatter solution, and many startups are emerging with products designed exclusively for this new environment.

Some of the primitives for each category were listed by Thomas:

A recent report published by Morgan Stanley predicts that mobile users will surpass desktop internet users by 2013, so again, a new window is being opened for startups to innovate and deliver solutions both in the consumer and enterprise spaces specifically designed to leverage the innovative ecosystem the webtop is generating. We already have the winners for the destkop and laptop decades; now we need to see who wins in the new webtop days.

Mistakes entrepreneurs make when pitching their companies

A lot has been written about how to present to VCs. Last week I attended the Under the Radar conference here in Mountain View and was able to listen to 19 presentations. The format was simple: entrepreneurs were given 6 minutes to pitch, judges (VCs and industry experts) asked questions, and then the judges and the audience voted “American Idol” style.

It was interesting to see how once the first judge set the tone for the Q&A session (either positive or negative) the rest just adopted the same stance following the lines of the first judge. It was also quite remarkable to see how not necessarily the companies with the best solutions came up at the top. The presentation style made a huge difference and these are some of the most common mistakes they made:

1. Leaving the team for the end: most companies talked about the team at the end of the presentation while running out of time. Presenting the team at the beginning makes the judges and audience understand and validate the rest of the presentation, showing why the team is competent to solve a problem in the industry.
2. Talking about the technology and not about the solution: many of the speakers spent more than enough time talking about the technology without identifying the problem they were trying to solve. You can have a great technology (such as e-ink) but if you don’t have a market willing to pay for the solution (such as readers buying Kindles) then you don’t have a viable company.
3. Ignoring the competition with statements such as “nobody is doing it”: when entrepreneurs say they don’t have any competitors then VCs think they haven’t done enough due diligence or they have a completely revolutionary solution that is going to change the world. Most of the time, unfortunately, the first explanation is correct.
4. Assuming that if they build it people will come: many companies ignored talking about the go-to-market strategies, making VCs nervous about the “unforeseen” sales and marketing costs. Identifying a set of early adopters and a set of key driving features are great ways of staging growth and validating the concept before scaling up, and that should definitely be part of every company presentation.
5. Being unable to identify 3 “dream customers”: entrepreneurs failed to name 3 ideal customers. If the solution is compelling and proper due diligence was done with potential customers then this question should trigger an immediate reaction and allow entrepreneurs to name, without even thinking, at least 3 “dream customers”. If they are unable to do so, that is a big red light…

When you have 6 minutes to make your case you need to think and plan accordingly. Even if you have 30 minutes or an hour, the first minutes are key as most people make their decisions early on. Plan, practice and test before getting to the audience that matters. Remember there are “rarely” second chances for a first impression…

Is online learning coming back?

When I started my e-learning company back in 1999 everyone was talking about how all training was going to be online by 2010. It hasn’t happened at all, and even worse, flagship companies such as Saba, with a market cap of $142M and SumTotal, which was taken private by Vista Equity Partners in 2009 for about $160M didn’t perform as expected.

On the other side, companies such as BlackBoard, with a market cap of $1.45B and SkillSoft, with a market cap of $1.05B did much better. There hasn’t been a lot of innovation after this first generation of e-learning startups. However e-learning as an industry seems to be making a comeback with companies such as 2Tor, founded by Princeton Review’s John Katzman, getting a lot of attention after raising a $10M series A in June 2009 and $20M series B recently led by Highland to go after elite programs at elite schools.

The US market for self paced e-learning reached $16.7B in 2009, and is expected to grown to $23.8B by 2014 according to AmbientInsight. What does that mean? That the market opportunity is huge! The market is begging to be disrupted and shaken.

Even though most of the spending is done by corporations, the healthcare, higher education and PreK-12 segments are growing faster. What makes it even more interesting is that new devices such as the iPad create interesting opportunities to develop solutions for these growing segments. Imagine if someone could leverage the iPad, Twitter, Facebook, Zynga and other highly interactive and addictive solutions to go after the training market?

UPS had a lot of press lately about the use of video games to train the younger generations of truck drivers. Gaming is hot and portable devices are much better in handling multimedia applications. The ecosystem is ready for a second wave of innovative e-learning companies and I expect to see a lot of action there!

Will Apple’s history repeat itself and make Android the winner?

There has been a lot of buzz these past few days about Apple’s battle against the world. Apple picked 2 influential companies directly, Google and Adobe, and many smaller ones indirectly.

History tells the story of a once integrated solution provider Apple vs. a use it everywhere Microsoft. Today Android is allowing it’s system to run on any hardware and will be running on non-Apple tablets. The adoption will generate an increasing base of users on Android which in turn will create incentives for application developers to focus on this open platform to generate revenues. That’s been the history so far…

Apple consumers might become a niche of early adopters fading away while the masses might find Android powered devices to be “good enough”. Besides, Apple is making things tough for application developers and is ultimately affecting its consumers today as, for example, they have trouble using flash based applications. Switching costs for Apple users to start using Android devices are still not that high so there is still an opportunity for the market to tilt towards Android and once the network effects kick in it will be a winner-takes-all play.

Steve Jobs has suffered the results of these dynamics before and is still playing the game all over again. Does he have something that powerful to prevent this natural effect or is he so obnoxious that he will bet his company and hope for the best? It will be fun and exciting to watch and see if new theory can be written!

How Twitter should think about addon companies

When I read Fred Wilson’s comment about how Twitter would start “filling the holes” and building features to compete against Twitter apps I couldn’t help thinking of Goya’s paiting depicting Saturn devouring his son. I still haven’t figured out what was Twitter’s intention by making that statement a couple of days before announcing the acquisition of iPhone app Tweetie. If the strategy was to frighten potential targets to negotiate valuation, then I need to say it was not fair play…
Twitter needs to think about how to better manage the ecosystem to build a healthy platform and generate returns. They need to keep the lion share of the business but shouldn’t try owning every possible revenue stream. They don’t need to develop every feature users like. They need to define which are the core revenue generating functionalities and own those pieces, while creating incentives for third parties to come up with “complements” that enhance user experience without getting in the way of the revenue generating core. What’s the problem? Twitter still doesn’t have a clear and proven revenue model so it is forced to “play it by ear”. It needs to do so, however, without killing the ecosystem as those experience enhancing apps are key to Twitter’s growth and innovation.
An interesting article by David Yoffie and Mary Kwak, “With Friends Like These; The Art of Managing Complementors” provides a useful framework to think about complements. One of the key question they ask is “When should you produce your own complements?”

Right now we can say Twitter should produce some complements and have third parties produce most of them, as they need a wide assortment and have high capacity to invest (relative to the amount of money it takes to launch these features). Yoffie and Kwak go on to says that in a business, as in a war, you need to know yourself, you need to know your enemy, and you also need to know your friend. I don’t expect to see a clear application of these 3 rules by Twitter in the near future as they still don’t know themselves so they probably don’t know who their key competitors are and who their friends need to be.
The roll out of the ad model will give Twitter an idea of where the money will come from and with that information they should start defining their revenue model stating who they are, who’s their enemy and who are friends. In the meantime, they should have this notion of complements in mind to avoid turning potential friends into enemies as they did with Wilson’s announcement.

VCs need to complement their farming strategies and start hunting again!

In the last couple of months I’ve been meeting lots of smart VC professionals, mostly in the Bay Area, and one of the common weaknesses I saw in big established firms as well as in medium sized “we-do-everything” shops is the lack of creativity to source good deals.
VC funds have been growing their assets under management while new tech startups have been decreasing their capital requirements. By looking at data on PWC’s MoneyTree and focusing on Early Stage investments this trend can be clearly observed.
If we look at these trends from 2004 to 2009 then we can see average new fund size increasing while average early stage deal investment decreases.

What does this mean for VCs? That they need to strengthen and expand their networks to identify hot startups and be able to add real value. It won’t be easy to deploy large amounts of capital and deliver the returns LPs are expecting. They need to seek new and younger entrepreneurs and build long term relations before their existing networks become obsolete and useless.
VCs need to start hunting again, reaching out and keeping their firms plugged into new emerging business categories. They need to expand and renew their sourcing and diligence practices to be able not only to compete but also to win the trust and respect of entrepreneurs. Some of them are already in this path, but others need to start thinking about this right away, before it is too late.