Saturday, January 23, 2016

The Stack Fallacy™: Why Big Companies Keep Failing

Stack Fallacy has caused so many companies to attempt to capture new markets and fail spectacularly. When you see a database company thinking apps are easy, or a VM company thinking big data is easy — they are suffering from Stack Fallacy.

Stack Fallacy is the mistaken belief that it is trivial to build the layer above yours. 

Mathematicians often believe we can describe the entire natural world in mathematical terms. Hence, all of Physics is just applied math. And so on and so forth.

Stack Fallacy — “Just an App”
In the business world, we have a similar illusion. Database companies believe that SaaS apps are ‘just a database app’ — this gives them false confidence that they can easily build, compete and win in this new market. As history has shown, Amazon is dominating the cloud IaaS market even as the technology vendors that build ingredient, lower layer technologies struggle to compete — VMware is nowhere close to winning against AWS even though all of AWS runs on virtual machine technology, a core competency of VMware; Oracle has been unable to beat Salesforce in CRM SaaS despite the fact that Oracle perceives Salesforce to be just a hosted database app. It even runs on their database!
by Ananth Sharma, FlickR (Creative Commons)
Apple continues to successfully integrate vertically down — building chips, programming languages, etc. but again has found it very hard to go up the stack and build those simple apps — things like photo sharing apps and maps.

History is full of such examples. IBM thought nothing much of the software layer that ran their PC hardware layer and happily allowed Microsoft to own the OS market.

In ’90s, Larry Ellison saw SAP make gargantuan sums of money selling process automation software (ERP) — to him, ERP was nothing more than a bunch of tables & workflows — so he spent 100s of millions of dollars trying to own that market with mixed results. Eventually, Oracle bought its way into apps market by acquiring Peoplesoft & Siebel.

Why do we keep falling for the Stack Fallacy?

The Stack Fallacy is a result of human nature — we (over) value what we know. In real terms, imagine you work for a large database company — and the CEO asks — can we compete with Intel or SAP? Very few people will imagine that they can build a computer chip just because they can build relational database software but because of our familiarity with building blocks of the layer up — it is easy to believe you can build the ERP app. After all, we know tables & workflows. 

Often the bottleneck for success is not knowledge of the tools but lack of understanding of the customer needs.

Database engineers know almost nothing about what supply chain software customers want or need. They can hire for that but its not a core competency.

In a surprising way, its far easier to innovate down the stack than up the stack. 

The reason for this is that you are yourself a natural customer of the lower layers. Apple knew what it wanted from an ideal future microprocessor. It did not have the skills necessary to build it but the customer needs were well understood. Technical skills can be bought/acquired where as its very hard to just buy a deep understanding of market needs.

Its therefore no surprise that Apple had an easier time building semiconductor chips than building Apple Maps.

Google, Facebook, WhatsApp

Google is a great example here. It owned our email graph, it owned our interest data (search) and yet found it very difficult to succeed in what looks like a “trivial to build” app — social networks. 
In fact, this is the perfect irony of Stack Fallacy. You can build things higher up the stack. Its just that its often not clear what to build.

Product management is the art of knowing what to build.

The Stack Fallacyprovides insights into why companies keep failing at the obvious things — things so close to their reach that they can surely build. The answer may be: the what is 100x more important than the how.

Monday, December 21, 2015

When do SaaS Startups get M&A Offers?

There are many points along the SaaS startup journey where its ripe for M&A from acquirer perspective:
Is their a right time to be eaten?
  • Product Market Fit (<$5M in ARR): Your startup is in a new or adjacent area for us (the acquirer) and you have proven product market fit. At this point, we can visualize you growing into a $100 to $200M business but you are young enough that we can swallow your tech, rebuild it as needed and go to market. This can be very lucrative for founders even if VCs won't like it as the total $ returned can be small. RelateIQ or Assistly/Desk acquistions are a great example here.
  • Pre IPO ($30 to $150M in ARR): At this stage, you have taken out both product & market risk - we would buy you so you can be an entire new Business Unit for the company. Typically there is minimal rewrite - there may be integrations built to core. These became hard to pull of in 2011-14 because of the very high multiples private companies had but may again be happening soon as public markets are ruthlessly compressing multiples at IPO. If SAP were to buy Docusign right now in 2015 end, it would be a great example.
  • Post IPO: This is common and well understood. Oracle bought Responsys, Salesforce bought ExactTarget. Easier to negotiate these transactions as the market price is easy to verify. Hard to do in real world because SaaS businesses are hard to integrate without a lot of rewritingThis is why Aneel Bhusri and others have stated - in SaaS you have to build to be truly a winner. 
  • Team Sale: This is a failed startup having a hard time raising money typically after angel round but can be any stage. You sell for whatever you can make. This is one area where top tier VCs are often good - they have connections and can make a soft landing lucrative. Some have argued Diane Greene's startup acquired by Google fits this pattern.

Thursday, May 21, 2015

How do I find a co-Founder?

Find your POV and you will soon attract the right potential cofounders. (POV stands for point of view.)

Unless you have been organically working with and talking to potential cofounders who want to work with you because you like each other etc, the main reason someone will work with you is because of shared interests. 

The POV can be in the form of:
  • Problem statement: e.g, you think the cab market is broken. You think mobile apps can help solve this. You will now attract people who like the space and have some ideas - you will have something to talk about. You get to know each other by solving the problem together.
  • Target Market: You think Obamacare is going to change healthcare. Now you have something to filter each other by. Ideas will come up. 
  • Technical Architecture: You believe that Hadoop is just plain dumb for real time analytics and the right way to do big data analytics is by using X. Now you can sit down and discuss Hadoop and X. You can then find some problems to solve with X. 

In short, act like a sole founder that has a mission - solving a problem, attacking a market, disrupting a company, leveraging a new technology - and you will find like minded cofounders, investors and others who are ready to sign up for the cause.

Before your startup is a company, its a cause. Identify the cause. Build a movement.

Monday, May 18, 2015

Death of Native Apps on PC: Trillion Dollar Transfer from Microsoft to Apple

The web browser is dead or at least dying. After its peak of popularity in early 2000's when we spent our time on the internet and that primarily meant the web browser, we are now living in the age of the apps.
The web browser was never invented to run apps — it was meant to render the web of HTML pages interspersed with images and other multimedia. It worked so well for the web that we hacked it to serve our apps.

Why did the Apps in the Browser Succeed?

If you go back in time, to the late 90's and early 00's, the operating system of choice at work was Microsoft Windows. Windows was not a very well designed OS when it comes to security and stability. Installing one app could open the possibility for security holes and for one app to hurt the performance of other apps- remember the corrupt registry problem?

CIO kills the Native Apps — Microsoft helps

The CIOs who run our computers at most workplaces responded to the various challenges by essentially locking down our computers. We could not install any apps as end users because we were not given the permission to do so by the CIO. This facility — the ability to remotely control and manage our computers — was a key selling point for the Windows platform.
Essentially, the apps we could access on our computers were the ones built by the likes of Microsoft (Excel, Word, Outlook, Powerpoint), a few large software companies like Oracle & SAP, and 3–5 apps the CIO built. That was the computer. You as a user had NO CHOICE.
In theory, you could install other apps by following the company processes — go buy app, get CIO to approve the purchase, get CIO to test the app, and then isntall it. It was just too difficult.

Unlocking the locked PC

If you were an employee at a company and wanted to use a new piece of software it was nearly impossible to get access to it on your PC laptop. This, by the way, was equally true for Mac or Unix systems which were locked down.

Nature Abhors an App Vacuum

However, we still had a lot of tasks that were not yet automated like customer relationship management (CRM) for which we as end users wanted to try out new software and were often willing to pay for it, albeit in small dollar amounts. Similarly, the users could imagine better versions of tools they were using or being forced to use at work.
The software vendors were suffering too. They had to go through the CIO to sell every new app to the end user or a department. What if we could bypass this CIO?

SaaS is the Market Response to the PC Lockdown

At the same time, as our PCs were getting locked down on the apps side, we could visit all kinds of magical places on the internet and do things like buy books online. As Marc Benioff said — what if we could use enterprise software the way we buy books on Amazon?
You could sign up online and using just your web browser access new functionality. The rest as they say is history.
The browser apps were NOT better than the native apps in terms of core funcationlity — even today a natively installed Excel or Numbers app beats the best online spreadsheet.
It took Steve Jobs and opening of the app store for us to realize that you can actually get best of both the worlds — cloud backends and a fully native, rich app running on your device fully exploiting its resources — rather than a boiled down version of the app forced to fit into the browser.

Today, the Apple app store and the Android app store have millions of apps with millions of developers making billions of dollars while there is no such equivalent for the PC.
Microsoft’s biggest failure of the last decade may not have been missing the cloud and the mobile revolutions but giving away probably the biggest advantage it had — developers building killer apps for your ecosystem. Microsoft seems to have finally acknowledged, and under Satya Nadella’s leadership is fighting back with innovations like apps that sit inside a VM container to isolate them and make them safe to install.
Today, the browser based cloud apps on the desktop completely bypass Microsoft’s Windows stack by running on the browser and most of the mobile apps run on either Apple iOS or Google Android. A daylight trillion dollar heist.

Monday, March 09, 2015

The Missing  Watch Billionaires: The Platform Test?

Every new platform enables a new breed of entrepreneurs to change the world and become billionaires in the process. 
The iPhone (and the smartphones that followed) produced the Uber billionaires, the WhatsApp billionaires, the Snapchat billionaires and so forth.
If Apple watch is to be successful, it must not just sell a lot of watches - it must enable developers to dream up entirely new forms of applications that enrich our lives and solve problems that we didn’t even particularly know we had. Think Uber - there were no Wall Street Journal editorials on the challenges of hailing cabs. Ditto for hotel rooms and AirBnB. 

The amazing thing about great platforms is that even the builders of the platform don't know what amazing new apps will become reality. When we were building the Salesforce platform, we were always amazed by the ingenuity of our developers and startups who built things we thought were impossible. The ecosystem humbles you and makes you successful.
What could the watch enable?
An Apple Watch could enable founders and dreamers to rethink some apps - and succeed with this new form factor where most others have failed in the past.
Here are some candidates:
  • Kill the Password: The watch is the ultimate personal second or third factor in Authentication. Passwords are a bane for our financial and communications security.
  • Make us Healthy: While I loved my Fitbit, and even Philips DirectLife (now discontinued), I kept forgetting them and losing them. Entrepreneurs who use the watch to deliver the right nudges to us - to take a walk, to eat healthier, to snooze better, to sit straighter - can help us live better and longer. 
  • Train a Dragon: Well, you may not actually train a dragon but the watch sensors could be used as an input device to play games. Just as an iPhone can be tilted, the Apple watch can enable new gestures to be used as input.
  • Money: The obvious use case of using Apple Watch to make payments which Apple has already thought through - you can reimagine all kinds of processes from how you order at a restaurant to how you get notified when food is ready.
In a few years, we will look back and if Apple Watch was more than a blip it would have changed our lives in meaningful ways - enabling and enriching a new set of entrepreneurs who add new verbs to our lives. I cant’ wait to find out what comes after Ubering?!