Posts Tagged: saas

Does free/freemium work in the enterprise?

When developing a business model, every software and app start-up eventually faces the same core question: Should we focus on monetizing customers or driving usage?

For consumer apps, this question has been answered (or mostly answered): the best approach is to offer a free service to help attract and retain users. As Fred Wilson put it: “When scale matters, when network effects matter, when your users are creating the content and the value, free is the business model of choice.”

After you reach enough scale, you can start monetizing in such a way that won’t introduce too much friction to the user experience. For example, one could argue that native advertising like Google Adsense or Twitter’s sponsored tweets actually add value to the service. Consumer apps can also choose the freemium path to monetization and upsell customers to premium subscriptions – Spotify, Skype, Ancestry.com, and Dropbox are some good examples.

Likewise, free is the way to go for mobile apps. As this chart shows, paid mobile apps are virtually dead – your mobile app will either need to be ad-supported or have in-app payments.

But what about enterprise apps?

The monetization question is much tougher for enterprise products. While free rules the consumer world, it can be a different story in the enterprise…

  • Offering an app/service for free can send the wrong message. Here, free can be equated with low quality. Business users and managers might worry a free product isn’t sophisticated enough for their needs or they might not like to have ads in their enterprise product.
  • While viral growth and network effects exist in certain enterprise settings (for example, communication and file-sharing products and in industries like legal), network effects are typically more limited in a B2B environment compared with B2C. That means that a free strategy won’t deliver the same payback in terms of ramping up your user base as it would with consumer products.
  • Free isn’t necessarily sustainable with B2B. Acquiring business users may prove too costly, forcing start-ups to raise incredible amounts of money to finance aggressive sales and marketing efforts for a free app.

In the enterprise, freemium models generally work in two situations:

  1. You target a large enough user base
  2. The product becomes more valuable over time…either through a network effect like with Skype or Dropbox or because of data lock-in as with Evernote.

When free won’t work: How to implement paid subscriptions in the enterprise

If you’ve determined that a freemium model just won’t work for your product and users, there are a few things to keep in mind to maximize your chances of success with a paid subscription:

  • The most popular strategy is to offer a free trial in order to encourage sign-up. The exact length of the trial period varies, although 30 days is the most common. Just make sure you give the customer enough time to adopt, get used to, and hopefully come to depend on the product. Also, be flexible in terms of extending the period if it will lead to a more successful evaluation and sale.
  • Choose a pricing model that encourages usage within the company. For example, if you have one core feature that drives usage and adoption, then make that free or include it in the base package. Likewise, if you need a certain number of people to adopt your software, be flexible around the number of seats that represent the threshold for each tiered pricing level.
  • Make sure that your “paywall” doesn’t create any friction when it comes to sharing data with other players in the industry or within the organization. Enabling collaboration will not only make the tool more useful but might also generate viral growth. So make sure your service offers some kind of easy sharing and a free read-only option.

While free services dominate the consumer world, that model is not necessarily going to work for enterprise apps. Make sure to evaluate monetization strategies within the context of your specific product, and not someone else’s.

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Selling to the enterprise: “Sell to few” vs. “sell to many”?

A key investment thesis here at Version One is that we like to invest in companies that “sell to many” over companies that “sell to few.” This preference isn’t necessarily due to market size, but rather the structure of the market: are there only a few dozen customers that might buy your product or are there thousands, or even tens of thousands of potential customers?

Practically all consumer companies fall into the “sell to many” category, but what about on the enterprise side?  How do we differentiate between B2B start-ups that sell to many vs. sell to a few?

1. “Sell to few”: Traditional enterprise sales

Start-ups in this category typically have a target market composed of dozens to low thousands of large (Fortune 500) companies. Selling into this market requires the traditional enterprise sales approach, comprised of a large ‘boots on the ground’ field sales team that works with key decision makers (e.g. CTO, VP of HR) in the customer organization. These are long sales cycles, often with multiple departments and stakeholders involved. And often, enhanced business services – such as custom product development or professional installation and consulting – are involved to complete the sale.

Startups that succeed with this approach tend to have founders with deep connections in the industry they serve, and often previously worked for one of the large incumbents in the market.

2. “Sell to many”: the scalable SaaS approach

Selling to many in the enterprise typically involves selling either to SMBs (where the owner/operator makes the decision on their own) or selling directly to end users (employees) in the organization.

Yammer and Unbounce are perfect examples of SaaS tools that are adopted directly by the end users. In these cases, employees feel a particular pain point and find a solution to address it. Based on the lower price points, these employees often pay for the product with their credit card, without asking IT for permission or assistance with implementation. These acts can often be start of a viral growth curve in the enterprise. Enterprise products that present a high-value daily utility for the people involved can have a high virality potential.

The SaaS model, with its inherent low customer acquisition costs (CAC) and ease of deployment, makes it possible for companies to be successful when focusing on the SMB market, as well as niche verticals. While traditional software monopolies needed to be “all things to all people,” cloud start-ups can focus on one area and do it extremely well.

Final thoughts

Both approaches can create large and important companies, but they require different kinds of founders and investors that understand the nuances of each approach. At Version One, we’ve identified that we’re a more effective investor when focused on the ‘selling to many’ approach.

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Key investment themes

Every venture capital firm narrows its investment focus one way or another…perhaps by geography, sector, and/or stage. In some cases, it’s the result of conscious planning; in other cases it’s a natural evolution as a fund starts making investments.

For example, at version one ventures, we’re focused on early-stage (seed and Series A) opportunities in e-commerce, SaaS, and marketplaces/platforms across North America. Even that categorization covers a rather large swath of today’s start-ups, and it was only natural that this broader focus was narrowed down to several particularly strong opportunities and areas of interest.

Looking back at the past 18 months of version one’s activities, five key themes have emerged:

1. Vertically integrated commerce (investments: Julep, Frank & Oak): Last September, I wrote an article for TechCrunch outlining why vertically integrated retailers represent the next wave in e-commerce. By controlling the entire supply chain, these companies bring products directly to consumers from the factory without the bloat of the traditional retailer. This translates into high-quality products (whether eyeglasses or t-shirts) at significantly lower prices and better margins. In addition, a unique product lines means no competing with Amazon.

2. Vertical SaaS (investments: Frontdesk, Jobber): In the new era of enterprise software, the winners will be purpose-built, vertically sliced tools. Why? The vertical approach helps companies capture market share more quickly than if they were trying to build out a broad, all-things-to-all-people solution. It also means lower customer acquisition costs and lower capital requirements.

3. Online education (investments: Top Hat, Talentbuddy): There’s a big opportunity to disrupt the current education market. Mobile and social product experiences are making learning more affordable, efficient, engaging, and effective for all involved.

4. The hardware renaissance (investments: Upverter, Tindie): Hardware start-ups have long taken a back seat to software, but today it seems that everybody is talking about the Maker Movement. Numerous innovations (like Arduino Robot Kit, UDOO, and Spark Core) are making it easier than ever to develop hardware. Today an entrepreneur can walk into a VC meeting with a prototype from a 3D printer and proven market interest on Kickstarter. While version one hasn’t directly invested in a hardware start-up, we’re focusing on the platforms that are powering this hardware revolution.

5. Mobile marketplaces (investments: Clarity, Instacanvas, and one soon-to-be-announced investment): The near ubiquity of mobile is reshaping the way marketplaces are created and operated. As Matt Cohler noted, mobile devices make it “vastly quicker and cheaper than ever before to ‘wire up’ both sides of a market.”

I am still excited about the potential of all five themes, but it’s inevitable that in the coming year, some areas will evolve and new ones will be added.  Stay tuned…

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Can enterprise SaaS products be viral?

Image representing Yammer as depicted in Crunc...

Yammer sreenshot

“Going viral” is often the holy grail for Internet startups, who hope to quickly scale to hundreds of thousands of users (then hundreds of millions) with relatively low user acquisition costs.

However, in a recent blog post and presentation, Andrew Chen argues that SaaS products aren’t viral:

“For consumer internet entrepreneurs that are working on big markets, getting to virality is hard enough. There are plenty of sectors, like commerce or moms, where it’s almost impossible to achieve sustained viral growth, just because of the dynamics and narrow nature of the audience. When you turn your attention to SaaS products that are narrow in industry and profession, it’s even harder.”

Andrew goes on to make the point that virality in the enterprise has a lot more to do with product category and SaaS startups can stack the odds in their favor by developing a product that’s inherently social (i.e. communication or file sharing), can be used by anyone in an organization, is used daily, and targets extroverts.

While virality may be generally tougher in the enterprise than consumer markets, SaaS products can benefit from viral effects far more than Andrew’s post implies. In the enterprise, viral growth is not only driven by the social nature of the product, but also by the superior utility of a product that helps us do a better job across different departments and companies.

Here are three ways that SaaS products can spread:

1. Within the enterprise: Enterprise collaboration products have traditionally lacked a deep social layer but the success of Yammer has shown what kind of viral growth a social enterprise product can unlock. By making cross-departmental communication easier, unlocking knowledge in the enterprise and creating tighter connections between employees, social enterprise products present a high-value daily utility for the people involved and therefore have a high virality potential.

2. Within an industry: Some industries are traditionally very connected, creating a large opportunity for products to manage information flows between companies in the same vertical. For example, in the legal world, lawyers from different firms often interact while working on a case for their respective clients. In the construction industry, dozens of companies often collaborate on a project and exchange information on a daily basis.

3. Between companies: Each company is made up of a tightly knit ecosystem of dozens, hundreds, or thousands of suppliers, vendors, and partners. With daily cross-company interactions, colleagues and companies are incentivized to adopt whatever new tool they see would make their own job easier and more efficient. This could be in areas like cash flow management (Pollenware), purchasing (Kinnek) or work force management (Work Market).

Bottom line for SaaS startups

SaaS companies that streamline daily information exchanges within or between companies have a good opportunity to experience strong viral growth. Virality in the enterprise boils down to useful products and collaboration, and SaaS companies that understand this potential will scale more quickly than others and create the next generation of enterprise solutions.

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Announcing Version One Ventures

I am excited to announce today the launch of Version One Ventures, a new $15 million micro-VC fund. Version One will back outstanding web and mobile entrepreneurs across North-America with $250,000 to $500,000 investments in Seed and Series A rounds.

The fund builds on my successes with over 35 angel investments which include six exits – among them acquisitions by Google, Twitter, Salesforce, and Groupon. My simple investment thesis: back passionate entrepreneurs who are trying to solve a big problem with a strong product vision.

Version One came to life in the same way that most start-ups evolve. I bootstrapped my first angel investing projects with my own funds, found product-market fit and in the past 2 years have gotten significant traction with exits and follow-on rounds for portfolio companies (most recently for social publisher Wattpad, crowdfunding platform Indiegogo and educational network Edmodo).

With the Internet rapidly moving into everybody’s hands, today’s entrepreneurs will be in the position to build the companies we all dreamt of in 1999 when I started my own start-up JustBooks.The timing was therefore right to take my “angel investing project” to the next level and create a larger fund with a big vision: to become one of the most respected early-stage funds in North-America by being a trusted and helpful partner for entrepreneurs.

As a former entrepreneur myself, I feel the most rewarding aspect of being an investor is to help other entrepreneurs start, build and scale companies and to pass on some of the lessons I learned the hard way over 8 start-up years. Helping others to achieve greatness is what venture capital is all about and how I see my role.

I am fortunate to have found outstanding investors who share this vision. Led by Jeff Mallett (the former President and COO of Yahoo), Version One Ventures is backed by over a dozen successful American and Canadian Internet entrepreneurs as well as a number of high-net worth individuals.

Version One’s typical investment will be $250K to $500K in Seed and Series A financing rounds in consumer Internet, e-commerce, SaaS and mobile companies. To date Version One has already made 5 investments: Top Hat Monocle (interactive learning platform), Julep (multi-channel beauty brand), Jobber (business management software for contractors), Instacanv.as (Instagram artist marketplace) and Sunnytrail (social intelligence platform).

I am very grateful to a number of people who have helped me grow as an investor, especially Albert Wenger and Fred Wilson from Union Square Ventures, Jeff Clavier from SoftechChris Fralic from First Round Capital and Christoph Braun from Acton Capital. Thank you for your support and mentorship.

Version One is open for business – stay tuned (@versiononevc)!

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