In 2006, after 20+ years in a various product management and engineering roles, I transitioned into an investor role. When I made that transition, although I had run a large engineering team at Apple for many years, I elected to invest exclusively in software startups building products used by businesses and business users.
Since then, I have invested in and built a portfolio that includes infrastructure companies such as Aria Systems and Splice Machine as well as application software companies such as Amplero, C3IoT, Doximity, Marketo, Stellar Loyalty, Vlocity, and Workday. All use a SaaS business model.
My investments are often very early stage (e.g. Seed and Series A) and are either just at the concept stage (e.g. C3IoT, Doximity, Marketo, and Stellar Loyalty) or prior to a Minimally Viable Product (MVP) such as was the case with Amplero, Aria Systems, and Splice Machine.
This involves a lot of risk because these companies have significant hurdles to overcome — incomplete teams, lack of product/market fit and/or a repeatable go-to-market process. The trade-off for that risk is ownership. I can usually secure 20%+ ownership in these companies at this stage so that if they are successful they have the opportunity to be significant drivers in our fund.
This is the primary reason I tend to limit my investments to areas where I have significant domain expertise. I spent more than two decades building and marketing software for companies such as Apple, Oracle and Siebel Systems. Due to that experience, I feel I have a deep understanding of the business markets and a wide network of people I can rely upon to help staff these companies across engineering, marketing, sales, etc.
However, even with those years of expertise under my belt, nearly half of my investments have failed – for any number of reasons and usually within the first 3-5 years of my investment. This is better than the industry average of more than an 80% failure rate but daunting none the less. Fortunately, my successful investments have done well enough to significantly overcome any losses. But, the failures have led to some stomach-churning moments for me as my portfolio valuation has fluctuated with realized losses waiting to be countered with realized returns.
A Taxonomy for Start ups
The data will show you that, for the most part, I tend to invest in concepts and ideas more than startups that have already been created. As a result, I don’t have the luxury of being able to evaluate product usage data, capture customer feedback, review revenue or business metrics, or interview a complete management team. So, when I invest in a company at this stage you might wonder what I do to help mitigate my risk.
Here is a part of my approach.
In the first meeting with the team, I try to determine what category the company is either trying to enter or create and how big/disruptive that category might be. For a more in-depth overview of how to create a category, I highly recommend reading "Play Bigger" -- available here.
Next, I try to decide where the startup fits against the following taxonomy:
A “Feature” start up as one with initially a fairly lightweight capability that should eventually grow to be part of a larger product or product line offering. An example of a Feature start up might be one that is focused on improving an existing product with a simple add-on. A “Product” start up usually has a single product or a good idea for a single product. For me to believe a start up can become an independent “Company”, I look for it to articulate a credible strategy on how it will develop a suite of integrated products/product lines over time.
If the company is already a “Platform”, it is no longer a start up. It is a company that not only has its own product and product line offerings but also attracts other companies to develop offerings based upon its products. Consequently, I have not yet met with a Platform company seeking an early stage venture investment!
All business software companies should strive to become a Platform and do it as fast and as cost-effectively as possible. Platform companies are the ones that become market leaders, capture 76% of all the category profits, and garner a premium for their stock. They typically have valuations well above $1B. They can sustain economic down cycles because so many companies depend upon their technology to run their businesses.
Start ups that don’t set their sights on becoming a Platform and/or “only” make it to the Company stage, can still be a worthwhile investment/endeavor but typically they are acquired by larger incumbents to fill in product gaps. Few business software Companies are able to survive the long-term independently unless they become a Platform. Start ups that don’t make it past the Feature or Product stage – in the business software market – are usually acquired or shut down for modest or no return.
I use this simple taxonomy to help me think about and communicate with my partners the amount of capital the company may need, the type of go to market strategies it will use, and to define a pathway for how the start up might become a Platform company.
The (not so) Secret to Becoming a Platform
So, what is one thing all business software start ups need to eventually evolve into a Platform?
One word. Partners.
You can't go it alone.
I believe that all business software start ups should have a well-constructed approach to partnering from inception. By partners, I don’t mean a channel or team of resellers. I mean a strategy to partner with companies that have complementary offerings and are willing to go to market jointly.
By combining resources with partners – in areas such as demand generation and sales – you can substantially reduce your customer acquisition costs and significantly increase your brand awareness. And, as you grow toward becoming a Platform, you will have a created a well-developed ecosystem that is reliant upon your success for its own. This ecosystem will help you to thwart any emerging competitors.
I know a little about this topic because I was responsible for building the Siebel Systems partnering program. Over 4 years, we grew from our first partner (Andersen Consulting/Accenture) to more than 750 partners — consisting of systems integrators, hardware companies, software companies and others. These weren’t “resellers”. These partners jointly went to market with us via events, email campaigns, advertising, and sales calls – we worked together but we sold our products/solutions and they sold theirs. Over time, much of Siebel's partners' lead generation and revenue was dependent upon Siebel Systems.
By 2001, Siebel had more than 200 Alliance Managers in its Alliance organization who helped to drive nearly $1B in annual Siebel revenue and it won awards from Forbes and IDC for its innovative approach. As the head of the Alliance organization, I reported directly to the CEO due to the importance of this function in revenue generation.
Unfortunately, I find most start ups and even larger companies pay “lip service” to their partner programs. They hire a few people, put them under the Sales, Marketing, or Products organizations, and expect them to work with dozens/hundreds of companies. Then they wonder why their programs produce very little in terms of tangible results. If you want to learn what made the Siebel Alliance Program successful, there is a Harvard Business Schoool case study on it. I encourage you to download a copy as it provides a prescriptive, detailed overview of how we built and staffed the program.
- Identify where you are on the start up taxonomy: Feature, Product, or Company….if you are already a Platform, congratulations! You aren’t a start up and don’t need any advice offered here!
- If you don’t already have a strategy/roadmap/plan for how you will get from where you currently are to become a Platform, I encourage you and your team to create one — and make partners and the partnering process a key element of that strategy. You will substantially increase the likelihood of your success and use far less capital in the process.