Smoke & Mirrors Alert: What is Salesforce Trying to Say?

May 21, 2007 by Sinclair Schuller

Although most people don’t realize it, plenty of advertising and announcement techniques use “sleight of hand” style approaches to exploit your first glance and focus your attention on the content of the ad and an intended message rather than seeing the truth. This technique is common among propagandists and corporations alike. Let’s look at some examples:

• Undoubtedly, you have seen the phrase “Made with All Natural Ingredients” on food packaging. Many consumers see that and think – Wow, it’s an all natural product! Well, no. The phrase is simply stating that at least one ingredient in the food product is natural – all the rest can be artificial, and the label would not be telling a lie. This statement creates a large gap between understanding and meaning, giving the advertiser plenty of “wiggle room.”
  
• “No soap cleans better” or “No detergent kills more bacteria than X” is another one of my favorites. To a casual reader, this is generally understood as a claim that a specific cleaning product is better than the rest – it defines a less than clause. The true meaning, however, allows for the case that all other detergents clean equally as well as the subject product, meaning that it in fact cleans no better. This creates a situation where “No detergent kills more bacteria than X” and “All detergents kill the same amount of bacteria”
  can in fact be synonymous.
  

Generally, using these tactics help out a ton when trying to position a product or service. So what does this have to do with Salesforce.com? Well, they’ve become quite keen on using this approach (aka smoke & mirrors). A couple of weeks ago, Phil Wainewright asked the question “How is AppExchange really doing?” where he highlights that they’ve played “fast-and-loose” (what a great phrase!) with their numbers in touting the “popularity” of Apex & the AppExchange. Salesforce.com has conveniently made sure that all of its CRM customers are considered Apex customers. According to this page, Apex as a platform is used by 32,300 customers. That makes it seem like the Apex platform has been privy to massive adoption. Just like all natural ingredients or killer soap, however, their assertions lack the necessary clarification. Salesforce.com, the CRM product, is counted in those figures. So as Mr. Wainewright asked, how well is AppExchange really doing? In October of last year, Josh Greenbaum called analyzing AppExchange a “guessing game” and I wrote an article on some of the applications found in the AppExchange.

Well, looks like Salesforce.com is at it again.

A press release issued today announced the AppExchange Venture Network and states that “More than $225 million has been invested in two dozen companies on the AppExchange.” At first glance, you think – Wow, venture money is really flowing to software companies building apps on the AppExchange. What did we learn about first glances? You guessed it – this has some artificial ingredients! The statement is intended to give off the message that money is pouring into the AppExchange. This is nothing but marketing at its best. $225 million most likely has been invested – but it went to building the companies and their primary SaaS offerings, and not their Salesforce.com integration do-hickeys. Salesforce.com is using the companies and their funding as a proxy marketing message, almost like mathematical syllogism: since A>B>C then A>C. Better yet, let’s look at the possible roots of the message: Since $225 million has been invested in two dozen companies, and those companies each built integrations between Salesforce.com and their application and published it on AppExchange, then “…$225 million has been invested in two dozen companies on the AppExchange.”! I can see how building these messages can be addicting! Now, spin that into the general purpose platform message of Apex, and you have a platform with hundreds of ‘applications’ – right.

What do you think? Do you see these marketing tactics used frequently? Have any good examples that you’d care to share?

read more

The SaaS Investment Landscape

Apr 27, 2007 by Matt Ammerman

Although many in the SaaS-choir have long since been sold on SaaS, it seems that venture capitalists are finally joining us.  Existing firms are padding their portfolios with SaaS companies.  More interesting, though, is the fact that firms are forming with core strategies focused on SaaS investment.  Why is this?  Perhaps the most definitive evidence comes from market research as illustrated in Phil Wainewright’s most recent article “Resistance fades as SaaS goes mainstream”.  Bullet points like ‘Adoption is surging‘, ‘Resistance is fading‘, and ‘Deployments are multiplying‘ instill great confidence in the minds of financiers. That’s right, as investors see more research from sources such as Gartner and Saugatuck indicating that SaaS is viable and sustainable, it becomes a much prettier investment picture.

As always, the proof is in the proverbial pudding:

Warren Weis from Foundation Capital says “Software as a service is clearly a very interesting area because of the ease of selling into these types of environments where users can use it without a big IT implementation … We have about 11 of these types of (SaaS) investments and they’re doing very well… we’re looking for new investments in that area.”

Jeff Horing from Insight Venture Partners says ”SaaS offers a more predictable revenue stream and lower research and development expenses to software vendors than packaged software products.”  He continues, “Overall, if you can build a successful company it’s a much better business model than license sales.”

Horing says he and other investors at his firm are skeptical about growth for companies looking to make their mark by selling enterprise software applications, as opposed to those that market the SaaS model.

VCs have had time to watch the progress of early SaaS companies.  They’ve seen stability and better yet, growth.  Evidence is found in the performance of these four SaaS companies over the past two years (CRM, RNOW, VOCS, and SVVS):

 
(bigger)

It’s no wonder SaaS companies whet the VC community’s collective appetite. IPO valuations of SaaS companies such as SalesForce.com, NetSuite and RightNow Technologies have come in as high as 10X revenue (although not the general case)!  Now there’s a nice exit.

Obviously, SaaS investments come with considerations, both positive and negative.

The Pros

• Demand from the enterprise IT community
• Predictable and stable revenue
• Predictable cashflow and growth
• The market for SaaS is expected to grow to 25% of all new business software by 2011 (Gartner)
• SaaS is an easier sell than traditional packaged software
• See Wainewright’s article for more.

The Cons

• A longer time to achieve cashflow positive (longer development times and amortized revenue model)
• Higher startup capital requirements

What do you think? Are you looking to invest in SaaS companies? Are you planning any SaaS deployments within your organization? What’s holding your back? We would love to know your thoughts, share them though comments!

read more