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Anshublog: The Stack Fallacy

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Why We Invested in ProsperWorks CRM

admin · September 27, 2016 · Leave a Comment

With so many CRM products in the market, I was not looking for a new CRM startup. But when I met Jon Lee, the founder and CEO of ProsperWorks, two years ago I thought he was on to something big by solving the biggest, unsolved problem of CRM:

Sales people hate entering data

They do it because they are forced to do it or they don’t get paid.
Its not as if every CRM vendor does not know this — they all do. I have worked for 2 of the largest CRM players in the market and we all knew what the challenge was so we worked hard to make the CRM beautiful, and mobile, and social, and cloud.
But Jon had a different idea:

What if we could make the CRM disappear?

The Zero Input CRM

What if you started with the tool sales people already use the most and spend their lives in — email. And build the functionality right into the world’s fastest growing email product: GMail.
The ProsperWorks team launched the product and has gained amazing momentum. In our diligence, we compared the revenue and growth to some of the fastest growing SaaS startups in year 1 and year 2 of their lives — like Salesforce, Marketo and Zendesk — and found ProsperWorks was on to something epic.
Source: G2 Crowd User Reviews
We wanted to dig deeper into what was fueling this growth over and above a winning product that customers love — with 4.8/5 stars on G2Crowd. The key to their growth was focus.

Secret to Success: Focus

A startup must decide what it wants to do insanely better than the incumbents. Jon chose to focus on Google and making ProsperWorks the best CRM for Google Cloud customers.
ProsperWorks CRM
Every CRM company pays lip service to email integration. Just go to any of these leading CRM companies websites and review forums and you will see a litany of broken connectors and widgets that work half the time if at all.
By choosing to focus on Google Cloud, the team made a brave but strategic choice. ProsperWorks is one of six apps recommended by Google Cloud, and Google itself is a customer.

The Google Cloud Bet

As an investor, I am convinced Google Cloud — apps and platform — is growing fast and is on the cusp of an even bigger break out. The Google Apps for Work as its popularly known has been reported to be a multi-billion dollar business for Google, and growing fast.
At Storm Ventures, we believe Google Cloud under the new leadership of Diane Greene will continue to be an ecosystem where new leaders will emerge.
ProsperWorks has an amazing head start for companies that are betting on the Google apps and cloud ecosystem and with this infusion of $24M, I am excited to see what we can do in the next 10 years.

When Free is Not Really Free

admin · February 11, 2016 · 1 Comment

The Free Basics program which has become a topic of intense debate thanks to the tweetstorms by Marc Andreessen — is a stroke of genius. The program is called free, it sounds like free, and it is “free”.
Yet, it is not truly free — for it comes with many restrictions that limit the usefulness of the service, the freedom of people using it and lacks fairness of equal access to content and app providers.
While nobody in their right mind refuses “free”, as Marc pointed out in his tweets, the FCC of India (called TRAI) rightly decided against the Internet.org Free Basics program.
After all, what does free even mean?

Free:

1. adverb: not under the control or in the power of another; able to act or be done as one wishes.

2. adjective: without cost or payment.

The Free Basics program is the latter kind of free while we all want and demand the first kind too.

The Ma Bell Free Internet

Imagine a 1990’s program called “Ma Bell Internet for Poor and Parsimonious People” — a program that seeks to help millions of Americans who crave access to the internet with “free internet”.
Except the so called “free internet” will have rules that essentially limit which parts of the internet you can visit and for how long.
You are free to go about this free internet as long as you visit the following 1763 websites, using only these 2 browsers and refrain from other parts of the internet unless you want to pay for them above and beyond.
How many people in America want to have this second-class internet? In fact, we have fought tooth and nail in this country over the last 20 years to keep the internet from turning into any single company’s “information superhighway” or any single company’s walled garden AOL.

Andreessen, Netscape and Facebook

Marc Andreessen, who as Facebook board member, supports the Free Basics program vehemently fought against the monopoly of Microsoft — and their decision to bundle Internet Explorer for Free. This Wired article on Netscape vs Microsoft explains this in detail.

Among other moves, Microsoft’s browser would be improved, made faster, and offered online for free.

The lesson we all learned from the attempts by the big companies to dominate the internet by using their market power and offering “free” is that we need to beware of the free.

The Power of Default

What Microsoft was trying to achieve in late ’90s was the ability to default our browser choice to Internet Explorer and make it difficult, if not impossible, for an average person to switch to Netscape.
We also know that Apple Maps on iOS is dominating ever since it replaced Google Maps as default.
In fact, the value of being default option is billions of dollars. Google paid over $1B to Apple to be the default search engine choice in Apple’s iOS devices.
In other words, a ‘free internet program’ that pre-selects a set of apps for the average new millions of users in India could potentially alter who wins in India — and is therefore worth billions of dollars.

Final Words

While I disagree with the “Free Basics” program of Facebook, I do think that its possible that Mark Zuckerberg and his team were genuinely trying to help millions of people go online.
I grew up in a socialist India which was backwards by most standards, and therefore, just like my online friend Marc Andreessen, I want to see private companies solve big problems enabled by a free & fair capitalist system. While he may be on the other side of this debate and have made some questionably worded tweets — I believe Marc is coming from a place of intellectual honesty and nothing but respect and admiration for India and its people.
We are all fortunate to live in a world where billionaires and thought leaders like Zuckerberg and Andreessen not only engage with the challenges at a global level but they do so on Facebook and Twitter where we can all express opinions, outrage and then come together to find ways to achieve our stated common goal — let’s get the next billion people online faster.

The Strong Shall Inherit the Nasdaq

admin · February 3, 2016 · Leave a Comment

I wrote this post on Feb 3, 2016 — and like clockwork two years later, its timely again. The Dow Jones and Nasdaq are tanking and people are out with stories of imminent end.

The Future is Still Amazing

This too shall pass

The unicorn, the billion dollar startup, is finally dead. The same columnists and magazines that turned every startup funding or launch story into a unicorn event are now busy proclaiming its decimation.

I have seen this movie before and I am here to tell you that reports of unicorn death and extinction are greatly exaggerated.

Unicorns Are Not Dead, Winter Is Here

Companies that have real usage and unit costs that support eventual profitability are going to be just fine. The huge decline in oil prices has brought down equity values, both public and private. This means companies ranging from Netflix to Apple are being valued up to 30 percent less and the S&P and Nasdaq are both down double digits.

Observers who are focusing narrowly on newly IPO-ed companies like Fitbit and the pre-IPO valuations of startups are often coming up with explanations in isolation.

The house of unicorns is not cold; winter is upon us. The biggest reason why Netflix and ServiceNow are down has nothing to do with their performance, or the performance of their B2C and SaaS sectors.

The winter of low oil prices means that the biggest investors like sovereign wealth funds of oil rich nations are under pressure to sell, or at least stop buying. That combined with losses incurred in energy by hedge funds and investors means there is high aversion to taking risk. All of that and slowly rising Fed rates have combined to create a perfect winter storm for equities.

The Strong Hibernate, The Weak Die

The winter is not without consequences. In the last few years, many investors who missed out on genuinely amazing future billion dollar businesses like Uber and AirBnB went into FOMO mode (fear of missing out). They started investing in B2C startups that looked ‘as bad as Uber and AirBnB’ when those companies were founded. The thinking was often that many businesses that look bad at first glance can become huge winners.

Well, we ended up investing in startups that were bad businesses not just at first glance but also after any number of years. Losses at scale just scaled the losses — it didn’t change the economics.

These startups that never really had a shot in my view are now getting trimmed back. Some like Homejoy have had to shut down while others like food delivery startups are fighting for survival.

The Strong Shall Inherit The Nasdaq

In the real recession of 2008, I learned a huge lesson. The mortgage and banking crisis pushed almost all assets down to unbelievable prices. You could buy Netflix, Amazon, LinkedIn for the fraction of today’s prices. At that time, these companies were somewhat genuinely impacted by weakening consumer demand which hurt due to layoffs.

But today, we live in a near utopian economy, at least here in the United States which contributes majority of earnings for many of these tech companies. The unemployment rate is lower than ever in last 10 years, demand is healthy, and everyone has more money than a year ago thanks to tanking gas prices.

In two years, the strongest tech companies — public and private — with real, growing usage and sound unit economics will be huge.

The strong shall inherit the Nasdaq. Invest wisely.

The Stack Fallacy™: Why Big Companies Keep Failing

admin · January 23, 2016 · Leave a Comment

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. 
Source: http://xkcd.com/435/

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 Fallacy™provides 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.

When do SaaS Startups get M&A Offers?

admin · December 21, 2015 · Leave a Comment

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 rewriting. This 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.
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