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This is part 2 of my interview with LucidEra CEO Ken Rudin.  If you missed Part 1, be sure to go back and check it out!  As always in these interviews, my remarks are parenthetical, any good ideas are those of Ken Rudin, and any foolishness is my responsibility alone.

What was the fundraising like?  What do VC’s look for in a SaaS business plan?

Ken:  It’s been interesting.  I feel very fortunate about what we raised, the valuations, and the great Board Team.  The A round went quickly: 7 weeks from first meeting to close.  It went quickly not because of the idea and team.  Deals go slowly because VC’ s want to think and talk.  Nobody needed to think about our deal.  The majority hated it.  A few loved it and went for it. 

When we presented it was 3 guys and 19 PowerPoint slides.  No demo.  Most people said BI is complex, it involves integration which is bad for on-demand, and it’s heavily customized.  But I knew better.  As a consultant at Emergence, I could see people kept reinventing the wheel.  They didn’t all need completely unique solutions.  The phrasing was different, but the essence was the same.   The world really was smaller than people thought.  And it worked.  We weren’t out to meet the needs of 100%, but we can do it for 80%.

Traditional BI is a tool that says we can do anything, but that’s a disadvantage.  It’s like managing a nuclear reactor because all the code is custom.  But we can keep identical schemas and use metadata to make it custom enough.

Bob:  (You never know how VC’s will react to a deal.  It only takes a couple to bite.  My last VC funded deal involved talking to 15 VC’s and the last 2 funded the deal.  The other 13 passed.  These days, there’s a lot of talk as well about going to VC’s later in the cycle, after a version 1.0 product has been built and a few customers are using it in Beta.  Angels often fund the first stage.  I’ve had a couple of VC’s indicate that they no longer fund a  slide show.  Lucid Era is proof that you can buck that trend if you get your idea in front of the right audience.)

What were your biggest fears about LucidEra, and how did they turn out?

Ken:  One of my biggest fears was that we had to sell over the phone.  We couldn’t afford travel and 6 month sales cycles.  This was unproven for me.  A lot of the VC’s wouldn’t believe it either.  They thought we’d need a consultative sale.  But we had a prebuilt solution, not a tool.  It’s finished.  I can show it and they can take or leave it very cheaply and quickly.  Even our 2 largest customers we saw at a trade show at our booth, but otherwise we never met face to face.

What really surprised you as you got more into Lucid Era that you hadn’t anticipated?

Ken:  The biggest surprise we’ve seen just in the last 6 weeks is how fast the big companies have jumped in.  Our plan was mid-market focused.  We didn’t even try to market to our bigger customers, they came to us at a trade show and we closed them within 30 days.

Another surprise was channels.  We’re working with partners.  It took a while for us to figure out what type would work for us.  Traditional SI’s have no interest, which was a negative surprise.  Traditional SI’s want to bill a lot of hours for custom work.  We stumbled across some SI’s who are purely SaaS focused and discovered that SaaS has been disruptive to SI’s just as it has software vendors.  Pure plays are coming on strong and have figured out how to create high margin business around SaaS.  They may teach or use the tool for you, but they don’t have to set it up.  They help do it faster by making it multiple choice and prescriptive.  More importantly they help with best practices.  Which choices should I take for my business?  This has a lot more IP, and isn’t just competing with commodity offshore rates for code slinging.  It also generates repeat business.  More management consulting.  Sales Effectiveness optimization.  Now it becomes an annual service and not just a project.

Bob: (This sentiment has been echoed by every SaaS company I’ve talked to.  The traditional SI’s largely haven’t found their footing yet in the SaaS world.  They will often speak positively about it so as not to be perceived as critical of a major trend, but they don’t know how to actually engage their businesses with it.)

Do you think SaaS is an inevitable bridge that every ISV has to cross in some form or fashion?

Ken:  No.  Even if it was, that would be a real challenge for them.  There are some that will do just fine staying where they are.   Not many, but there are some.  The majority will have to deal with it.  Just because cars came doesn’t mean there are no horses, they are still around.  There’s just a lot less need.  On-demand dramatically reduces the need for conventional on-premises software. 

Bob:  Where are the likely survivors?

Ken:  There are some government mandated things involving military or top secret.

Bob:  It’s pretty hard for companies to embrace both models.

Ken:  Mixed companies have a civil war inside.  This is true for SI’s too.  But the mixed company may not really be behind SaaS.  They just think it is the thing to do.  It’s fashionable.

Any other advice for those who would start a SaaS business?

Ken:  I think for me, don’t just think, rethink.  What I mean is SaaS is not taking an existing enterprise software application and delivering it as SaaS.  All you’ve done is change delivery.  Rethink the whole purpose of the application.  We redesigned what BI means.  It’s not a tool, it’s a solution.  People don’t want drills, they want holes.

Who are the SaaS companies you look up to?

Ken:  Salesforce.com is the poster child, and I have personal background there as well.  I also have a lot of connections with NetSuite.  I spent a lot of time on their advisory board.  I remember discussing churn rates and hardware and so on that they won’t talk about outside.  I look up to them.  They have done a phenomenal job.  NetSuite is SAP On-demand.  Salaesforce is best of breed CRM on demand.

What are your thoughts about Salesforce’s Force?

Ken:  We’re big fans of it.  We believe in opening the platform and you’ll see us do it with our own platform.  They have great buzz and some successes, but they have a lot of work ahead.  It is still early stage. 

One of the things I think they’ll run into is that as it becomes more flexible with Apex code, they open a Pandora’s Box.  No-software is no longer true.  Someone can write code that doesn’t work, and it isn’t Salesforce’s fault.  The brand delivers a certain promise, but 3rd party apps can be challenging.  It’s not simple anymore.

Are they encouraging too much customization?  Is it Siebel again?  If so, there will be lawsuits between customers, SI’s and Salesforce when customization fails.  It’s a risk, not a prediction.  I’m not saying this is bound to happen, just that it could if the situation isn’t managed very carefully.

What are your thoughts on being in the BI market where all the significant traditional players have been bought?

Ken:  It creates a great opportunity for us.  The last big independent got bought.  All the tall trees in the forest are cut down, so the undergrowth has a chance.  Those guys will not innovate for years, they’ll be integrating not innovating.  All the new innovation will come from smaller players like us.

We also said, wow, if major companies are buying these guys for such high prices, there is probably some real value in BI.  Makes customers start thinking about what their BI strategy should be.

Bob:  (It’s an interesting situation, where the big pure plays all got bought by even bigger companies.  Oracle got Hyperion, SAP got Business Objects, and recently IBM got Cognos.  Having watched these sorts of acquisitions for years, I don’t have any problem believing Ken’s view that we won’t see much innovation in BI from them for a long long time.  Integration is a difficult process, and often the best people choose to move on, or at least become very distracted.)

Do you think we’ll see something similar in all the other perpetual markets?  What does it mean for SaaS in general?

Ken:  For any segment that has large independents, we will see something similar.  Any time there are too many small players there will be consolidation.  Eventually, I think we’ll see that in the SaaS SI world to get critical mass.

It’s the end of the current cycle.  The next generation steps up.  It happened with CRM.  SFDC took over and the rest were acquired.  It’s happening with BI.  These shifts don’t take away the need from customers, the just change the players.

Bob:  (I agree wholeheartedly that we’re at the end of the cycle for on-premises software.  It’s very hard to get a new on-premises enterprise company funded no matter what the idea may be.  I just had lunch with someone with a small private on-premises company and they’re having a tough time.  They know they have to get a SaaS offering going.)

Can the big guys get into SaaS successfully?  SAP with ByDesign?  Oracle now talking more about it?

Ken:  It’s like changing your DNA.  I wouldn’t say it’s impossible, but it is as close as you can imagine.  I call it the “battle within” or the “civil war.”  All the divisions are involved, not just sales.  Marketing, Engineering, Finance, everybody hates it.  Marketing hates it because you’re marketing against your own products.  SaaS sells on simpler.  Simpler than what?  You’re slamming your cash cow.  You can’t say anything interesting without damaging one product or the other.

Bob:  (Again, this is a sentiment echoed almost everywhere I’ve visited. The best approach to transition is to try to isolate some areas that can be pure SaaS with no in-house on-premises competitor.  New products and verticals work well.  I call this the “protected game preserve” strategy and I’ve written about it before.)

Next Installment

In our next installment, we’ll get Ken’s perspectives on the sales process as well as the scoop on Lucid Era’s innovative database architecture.  Stay tuned by getting on the data feed or e-mailing list for the blog.  Just check out the options in the little box below my picture at top of page.