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For Executives, Entrepreneurs, and other Digerati who need to know about SaaS and Web 2.0.

Archive for April 29th, 2008

Startups Buying Startups…

Posted by Bob Warfield on April 29, 2008

Lots of news lately about startups buying startups: Strands acquires Expensr,  Zyb bought Immity, BuzzLogic acquires ActiveWeave, yada, yada.

Why do it?  Why would a startup want to be acquired by another startup?  Where’s the liquidity in that?  Why would a startup want to acquire a startup?  Isn’t that eye off ball?

Increasingly, one hears about these transactions, and the VC’s are quite interested in talking too.  And why not?  Startups are companies too, and they can use acquisitions to gain most of the same advantages big companies gain through buying other companies.  Let’s look at just a few of the reasons it might make sense:


Let’s dispatch this issue up front.  Immediate Liquidity is usually not on the agenda for a startup acquiring another start up, but it may be greatly accelerated and it may beat the alternative.  If a struggling startup is having a hard time getting to the next stage, it may be easier to merge with a stronger startup than to keep going it alone.  This is particularly true in this age when many companies are building products that are more like features or modules of a larger suite.  If their market is hot, they can make it all the way to buiding their own larger suite.  If it isn’t, or if they’re too late to the party, they may have to join someone else’s game.

From the acquiree’s perspective, it’s all about it being better to have a smaller slice of a much bigger pie.

Talent and Technology

When I was working for Borland back in its heyday, this was the number one reason we acquired so many little startups.  Our ideal profile was to identify a team of brilliant technologists who had built a wonderful product but just couldn’t manage to develop the sales and marketing chops needed to hit it big.

Finding great talent was hard, and building out a great product even harder.  Acquiring a little startup that had already gotten critical acclaim from customers was a way to shortcut the need to start from nothing. 

Often such acquisitions make it possible to tackle new markets that weren’t in the original plans, or they may simply make it possible to accelerate the plan of record by not having to build everything from scratch.

Market Share / Critical Mass

This is another motivation for acquisitions that I’ve seen taking shape.  Momentum is everything, and if a couple of strategic applications can rapidly pyramid the momentum, it’s well worth it. 

Filling Out the Story

Very often customers are telling the larger firm they’re missing an important piece of the puzzle, and some smaller entity may already have the piece in hand.  It takes a lot of work to build out a big vision and all of its pieces.  If a smaller firm is available that answers a question your customers are asking that you can’t currently answer, why not do a deal so you can give it to them?

Expect More Startups Acquiring Startups

Expect to see more startups acquiring startups, it makes sense for many of the same reasons bigger transactions have made sense.  The real issue will be getting all the parties aligned on the transaction.  The critical issue in every acquisition is valuation.  Nobody wants to acquire a company that everyone agrees is worthless.  But, will the acquirer have an over-inflated sense of its own worth relative to the acquiree?  Can the respective Boards of the two companies grasp the vision for synergy and figure out how to do a deal that makes sense for everyone?

That’s the real challenge, and those who are good at it will have a powerful new tool to grow startups faster at their disposal.

Posted in strategy, venture | 1 Comment »

Integration and Expertise Matter More for SaaS

Posted by Bob Warfield on April 29, 2008

I recently had lunch with an executive one of the more successful SaaS startups in the Valley.  Our conversation ranged far and wide over many topics, but eventually I wanted to understand their product differentiation.  There are several players in the space, what had these guys been successful in emphasizing?

The answer was a surprise to me:  integration with other SaaS apps.  As he put it, “Our customers care a lot more about this than they used to when I worked for a perpetual software company in the same space selling to bigger enterprises.”

This was completely at odds with my logic before the lunch.  SOA and fancy integrations had seemed entirely a feature that catered to giant Enterprise IT that had to have things their own way and were willing to boil the ocean to get there.

After a bit of further questioning, it became obvious why the SaaS customers might care even more than their big company counterparts.  SaaS typical sells to SMB’s.  These smaller organizations have minimal IT staffs.  I once talked to a SaaS company whose professional services group had to deal with the CFO being the only IT staff that could answer questions and help get the software going.  That’s small!

When you have a large IT group, you can afford to, and indeed, may even want to dedicate some of them to building the integrations.  When you have a small group, if the vendor can’t do it for you, it probably won’t ever get done.  So it isn’t that the little guys care more, they’re just helpless to get any kind of solution if they care at all.

What does this mean for SaaS vendors?  In this case, having out-of-the-box tight integration with other SaaS vendors (or On-premises packages) was a big differentiator.  It lowered the deal friction (less to worry about on the custom install side) and increased customer satisfaction (hey, we could never get these two systems to talk before!).

Today, I read in one of Jeffrey Monaghan’s posts the following:

It is important to be viewed as the expert when you are selling a product…but it is imperative when selling a service. Customers are buying a promise from you. And an expert is perceived as someone who is most likely to deliver. Everything you do should scream “We’re experts!” Collateral material, websites, even the way your sales team dresses.

Jeffrey is making a slightly different point than the integration point, but it’s really the same story again, isn’t it?  Small businesses can’t afford to hire Accenture or somebody to come partner with their software or sevice vendor to help them out with “Best Practices” or “Business Process Re-engineering.”  The software itself had better have all that built in, and the vendor had better look like the experts, and be prepared to help educate the customer as much or as little as needed.  It can’t be an extra cost option.

This is just another thing I really liked about how Rally Development’s web site is set up.  There is that perfect mirepoix of product marketing, best practices (and in their University, clearly there’d be experts there!), and community.  Rally is just a site I came across by accident when two different people asked if I knew of them.  Their site really resonated with my idea of what a small company should be doing with the web to get the word out.

How about you, are you the experts in your area?  Shouldn’t you be?

Posted in Marketing, saas, strategy | 6 Comments »

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