VentureBeat » business to business

Why SaaS is the secret to success in the business marketplace

Joseph Floyd — Thu, 14 Feb 2013 22:38:21 +0000

This is a guest post by investor Joseph Floyd

Consumer-to-consumer (“C2C”) marketplace startups are enjoying a Renaissance, as exemplified by Airbnb and others. Sites like these that facilitate transactions between people have disrupted older offline business-to-business marketplaces by taking advantage of ubiquitous mobile access, and delivering a better experience.

This recent C2C marketplace success is spurring a new crop of similar business-focused ventures, which I believe have tremendous potential to leverage the unique synergies of combining the marketplace model with the software as a service (“SaaS”) platform.

By serving as the access portal to the marketplace, the system of record and most importantly, the paywall that drives predictable revenue, SaaS can revolutionize the marketplace model to offer modern advantages the failed B2B marketplaces of the early 2000s never had. These include revenue predictability, favorable unit economics and a barrier to disintermediation.

Here are the three key advantages of SaaS:

Larger market size and revenue predictability

In the late 1990s, Zoho Corp. emerged as an online marketplace for hotel supplies that raised $63 million. Targeting the massive hotel industry ($120 billion in revenue in 2012 according to IBIS), Zoho operated on a transaction model whereby the company received a small percentage of each transaction. This transaction model severely limited revenue potential and made commissions unpredictable.

Zoho ultimately shut down when key buyers, including investors such as Harrah’, purchased only a small fraction of products from the heavily commoditized hotel supply chain. As a result, Zoho earned small commissions on low margin business with little predictability.

Today, business marketplaces can use SaaS platforms to increase market size and improve revenue predictability by selling subscriptions to access and manage the marketplace. For example, LiquidSpace enables individuals to reserve meeting rooms, conference or office space at commercial venues such as hotels. As a transaction marketplace alone, the market size is similar to Zoho’s which aimed to apply a small commission to a large target market and win by capturing volume. However, in addition to monetizing transactions, LiquidSpace also sells their platform directly to hotels (50,000+ potential), universities (100,000+ potential) and enterprises (potentially in the millions) as a service to manage their own meeting spaces internally.

These internal networks greatly increase the market size opportunity as well as revenue predictability with a monthly subscription service instead of a transactional model. Further, adding subscription customers with internal networks of captive guests, students, and employees greatly increases the number of individuals with access to the public marketplace since it is all one platform.

Better Unit Economics

Every successful startup faces competition and, eventually, margin pressure. This is particularly true for transactional marketplaces. For example, oDesk, Elance and 99Designs are all sizable marketplaces that connect jobs with freelance workers. But, the success of these marketplaces drove up the cost of keywords used to acquire traffic and drove down the price of jobs (and therefore net margin to the marketplace provider).

On the other hand, using a SaaS-based subscription model, business marketplaces can improve unit economics in three ways:

Subscriptions lower customer churn, which improves customer lifetime value.
Subscription breakage improves gross margin.
Constant customer acquisition costs combined with increased customer lifetime value drives sales and marketing efficiency.

For example, Scripted connects businesses to freelance journalists through its online marketplace. Since Scripted sells access as a SaaS subscription, businesses sign annual contracts (which lowers churn) with Scripted supplying a minimum quantity of written content. If the customer does not utilize the full quantity of service, subscription breakage occurs – Scripted still earns the full revenue but does not incur the cost of providing the unused service (which expands margins). In combination, these two forces increase customer lifetime value, allowing Scripted to increase sales and marketing spend to scale growth more aggressively.

A Barrier to Disintermediation

The threat of disintermediation should be top of mind for any good middleman. Marketplaces serve as insurance to both supply and demand and provide the necessary security to complete transactions in an uncertain environment. However, once a network connects two parties, nothing prevents them from circumventing the platform and dealing directly.

For example, MetalSite, one of a few vertical specific marketplaces in the early 2000s, connected commodities buyers and sellers via auctions. But, MetalSite and many other vertical B2B marketplaces failed because they were taken out of the loop after the first transaction as suppliers began bidding lower prices directly to buyers, without paying commissions to MetalSite.

On the other hand, OpenTable, a restaurant reservation marketplace, has become the de facto system of record for many customers. As a result, customers are locked in to using the platform, which ensures OpenTable captures each transaction and receives its commission. Additionally, restaurants are much less likely to replace OpenTable with a competitor because it keeps the system of record as opposed to simply being a source of reservations.

Final Thoughts

The initial wave of business-focused marketplaces crashed in the dotcom bust because they focused on transactional pricing, competed with incumbents on price and failed to build relationships with their marketplace participants. We are in the early innings of a new wave of business-focused marketplaces that are likely to succeed, thanks to SaaS, which can serve as the system of record, and generate predictable revenue.

Joseph Floyd joined Emergence Capital Partners as a Senior Associate with more than seven years of technology advisory and investing experience. Prior to joining Emergence, Joe was a Senior Associate in American Capital’s technology group where he focused on investing in fast growing internet and software companies.

While at American Capital, Joe was involved with the team’s investments in HomeAway (Nasdaq: AWAY) and PeopleMedia (acquired by IAC). Joe was also an Associate at McKinsey & Co. in their corporate finance practice.

Joe earned an MBA from The Wharton School of the University of Pennsylvania.

Top image via violetkaipa // Shutterstock

Filed under: Business

Cloud storage startup Box readies for a 2014 IPO

Christina Farr — Thu, 17 Jan 2013 23:17:20 +0000

Sept. 9 - 10, 2013
San Francisco, CA

Early Bird Tickets on Sale

Energetic CEO Aaron Levie of Box today revealed that his company is prepping for an initial public offering in 2014.

In an interview with Bloomberg, Levie said a 2013 IPO would be a “long shot,” but he didn’t completely rule it out. The company had previously aimed to IPO in the coming months, and analysts predicted that it would be in a strong position to compete in the public markets.

2012 was a hell of a year for companies that target their products at businesses, rather than consumers. And as we reported, about 80 percent of companies that will IPO next year will be business-to-business (B2B). Likely contenders include SurveyMonkey, which raised $800 million today, Zendesk, and Hubspot.

With software-as-a-service (“SaaS”) vendors Workday and Splunk surging more than 80 percent since 2012 public-market debuts, expectations are high.

The company’s ample shareholders expect to see a return on their investment. Venture capitalists have poured a massive $284 million into Box, which began in 2005 as a college business project. The rapidly growing cloud storage provider competes with larger players like Dropbox and Microsoft.

In recent interviews with VentureBeat, Levie said that the role of the chief information officer is changing, and startups have an opportunity to compete with legacy vendors like Microsoft and Oracle. In recent years, the venture capital community has caught up. “In 2007 when we looked more into the enterprise, even Silicon Valley didn’t think we could win,” he said.

Levie revealed today that his company would be using its ample resources to hire staff and open offices in countries like Germany and Japan. He expects to add about half a dozen executives in senior management roles, including an international chief. According to Bloomberg, it expects to bolster its staff to 1,000 employees in the next year, up from about 670.

The Los Altos-based startup recently celebrated the opening of its London and San Francisco office.

Filed under: Big Data, Business, Cloud, Dev, Enterprise

5 ground rules for B2B startup success

Cameron Peron — Tue, 15 Jan 2013 22:44:23 +0000

The B2B startup domain has slowly emerged into one of the hottest and fastest growing areas attracting expert talent funding.

Barriers to entry have fallen with light touch interfacing and sticky product features through web and mobile apps, as well as APIs. Deal flow opportunities are tremendous: Think scoring 50 fold+ in revenue over long term contracts with large clients, as opposed to one-night-stands with consumer who can flake out at any given time.

Exciting times, to be sure — but investing time, capital, and resources to align the ideal go-to-market strategy can easily burn out the most ambitious and experienced.

For those that are just starting out, here are a few ground business, marketing, and personal rules for building the foundation of a highly scalable business-to-business startup:

1. Don’t compete, just win

Execution trumps ideas every time.

Once you get past your ‘friends and family’ circle of prospects, no one will care about or your offering unless you push. You’re going to need tons of positive and assertive take-no-prisoners-style energy, while still being likable and a fun person for the other side to talk to.

When you get tired or frustrated, always push for one more call. It will give you a boost to perform and deliver above average more consistently.

2. Forget about 100% reliance on inside sales

It’s for the rich and well experienced, not for you.

You don’t have enough time or money to buy $10Ks in media, convert, and measure and expect to be successful from day one. Invest your time building a pipeline of prospects - through your network and straight cold calling like crazy. Find the processes that work and the customers that find value in your offering and pay. Constantly adapt your site messaging and selling methodologies based on paying customer feedback.

You’ll still need to buy media, but keep the budget low and consider it strictly for branding to build awareness, not direct revenue.

3. Get attention fast

You can’t do it alone on the phone.

Reach out to media outlets that speak to your target market right off the bat — don’t wait for your product to be perfect. Instead, focus on bringing one to three killer beta customers that can vouch for your offering. Highly visible beta users or customers will always speak better than you can about your company and are instantly recognizable by your prospective customers.

4. Hustle big

Remember David and Goliath? It’s scary reaching out to people for the first time and selling… even scarier when approaching larger companies.

But the important thing is that a few heavyweight names in your category will validate your market and the strategy you’re implementing to engage them. More than likely, it will take just as much time to bring on board as a smaller prospect … so why shoot small?

Shoot big, welcome them as partners, and promote your relationship as much as possible.

5. Eat and train well

Workout in the morning – at least four work days a week. By working out, you’ll find some type of physically stimulated activity that you’ll get addicted to doing every morning. You’ll come to the office ready to kick ass and will have more energy to continuously perform all day — believe it.

It’s a long road that will be challenging and confusing, but it will pay off.

When in doubt – focus strictly on execution!

Cameron Peron is VP Marketing and Chief Customer Advocate at Newvem, a web-based cloud usage analytics service that enables CIOs, CTOs, IT managers, Developers and Operators to capture and improve the effectiveness of their public cloud operations and ensure their cloud infrastructure is in sync with business performance so they are financial efficient and contribute to a company’s profits. Follow him at @cameronperon.

photo credit: Stuck in Customs via photopin cc

Filed under: Business

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