Our conversation with Greg focused on strategies for growing Software as a Service (SaaS) businesses, big data, and the future of cloud financial systems. Here are the highlights…
INTACCT: You've discussed freemium as a smart strategy for growing SaaS businesses? Why so?
GREG SANDS: A core challenge for SaaS companies is building awareness and generating high-quality leads. We are living in a world where the old-fashioned tactics of top-down selling just don't work well enough anymore. Start-ups need to build a product that attracts users and gives them a way to interact with the software and collaborate with others in the community. This is helpful for the vendor, because early on, they can see if the product is doing useful work and has so-called “product market fit.” But it is also a really good way to build a scalable revenue model. It forces you to be “product first” and if you can deliver value for users and build the paid user base you can build a tremendous business. To make it work, the app has to be self-provisioning and developed for end users not buyers.
INTACCT: I imagine that is pretty hard to do.
GS: Yes, but it's an interesting model for start-ups because it forces the company to build high quality products. The core idea is that at an early stage, the company should focus on building great products that solve real problems for their users and on optimizing product market fit. This allows the team to learn critical lessons about the market and adapt quickly. Another major benefit is lower-cost marketing. So much of SaaS start-up capital is spent on sales and marketing. If a company can achieve product market fit early on, it will also reduce long-term sales and marketing costs. The mindset is: product first, sales and marketing second.
INTACCT: Does the freemium model pose risks for developing a profitable pricing model later?
GS: No, I don’t think so. It just means you need to do a stellar job on the paid product. If you know your market and your long-term users, this can work well. However, if you build a down-market freemium product for smaller companies but know that paying customers will be large enterprise accounts, it's a mismatch. It'll be extremely difficult to build enough value on top of the product for enterprise customers. Instead, build the freemium product for the individual user within the enterprise, and when he or she wants to add features or collaborate with their peers, they need to upgrade to the paid version. There are many good examples of this model, such as Yammer (now owned by Microsoft), DropBox, or Risk I/O in which Costanoa is an investor.
INTACCT: Big Data is another focus of yours. A lot of people think Big Data is yet one more moniker for BI. How do you counter that?
GS: The data volumes in our world today are huge. These volumes are at a much different scale than 10 or 20 years ago. When we were working on launching Netscape, it was clear even then that "Internet scale" was going to be a lot bigger than enterprise scale computing. Enterprise BI tools were beginning to break back then. Over the past several years, social and mobile has dramatically increased scale again and that has led to the creation of new sets of tools for storing and managing all this data. Tools like Hadoop and MapReduce are examples of these new tools.
INTACCT: What is Costanoa looking for in Big Data vendors?
GS: I like to talk about “applied big data” which is the concept that companies can solve new business problems using these technologies. How can we aggregate, curate and originate new and proprietary data, leverage the Big Data platforms and use them to drive business value? A canonical example is Demand Base which is revolutionizing Business-to Business marketing. The company has created a system that attaches business information to IP addresses, so when users visit your site, you can optimize your messages to them based on their company, company size or sector. If someone is coming to you from a small company, your offerings and messages will be different than if they are coming from the Procter & Gamble IP. B-to-B marketing is incredibly inefficient. It’s hard to drive traffic to your site, hard to convert users to leads and hard to convert leads to sales. Big Data technologies like DemandBase applied to this problem can double conversion rates at each step of the process, but B-to-B marketing is just one example of a process where Applied Big Data can change the game.
INTACCT: How do you define a successful start-up, especially a cloud company?
GS: It begins with finding a problem and talking to users. If you can create value for users, especially business users, you can usually build a pretty interesting company. Revenue, profits and business value come from focusing on users and product first.
INTACCT: What changes do you see for the cloud financial sector moving forward?
GS: The world is definitely moving to cloud financials, across companies of all sizes. There is no reason for anyone to have an on-premises financial product, especially in the mid-market Cloud firms eclipse on-premises when it comes to collaboration and features important to CPAs. They can deliver better up-time and security than most internal systems. One thing Intacct has done which is really innovative is building effective channel relationships. They have sought to establish partnerships with companies in local markets. Customers still need people on the ground to help deploy their solution. SaaS has been a direct-sell model traditionally, but the Intacct channel model is one that I think others will follow.
INTACCT: The VC industry has taken a beating in the last few years. Is this a risky time to launch a new fund?
GS: It’s always a risky time to launch a new VC fund—as for any new company. On the other hand, I would say right now is an incredible time of innovation. There have been enough challenges in the VC world that there is less competition now than in years past, so that's an advantage. The top challenge still is to find really great entrepreneurs, and fortunately, there is no shortage of talented people in these newer areas. The SaaS market is growing very quickly. We are still early in the days of finding useful implications of applied big data and the “consumerization of IT” is still developing too. These are substantial trends and there should be many companies created and some big ones built in these categories in the coming years.
INTACCT: Now, how about a couple questions just for fun…
There's a lot of natural beauty in the Bay Area. Where's your favorite place to enjoy the outdoors?
GS: Almost anywhere on my bike. I love riding the hills of the peninsula. Once you get to the backside of the Santa Cruz Mountains, it’s like being in a different world. Tunitas Creek and West Alpine are as good cycling as anywhere.
What is the best movie you’ve enjoyed lately?
GS: I don’t watch movies very often, but did get out recently to see Argo, which I thought was great. Historical fiction is a favorite genre in books and movies but sometimes makes it difficult to separate reality from fiction.
The President’s coming for dinner. What’s on the menu?
GS: I’m calling Sarah Piccolo to come cater. She’s picking up fresh salmon in Bolinas, and making a kale salad with some Morrocan couscous. It’s what she did when we hosted the National Champions Stanford Women’s Soccer team for dinner last year. If it’s good enough for them, it’s good enough for the President. He doesn’t want me to cook.
If you want to stay connected to Greg, be sure to follow him on Twitter (@gsands) and follow the Costanoa Venture Capital blog. You can also follow Intacct on all our social media channels, including Facebook, Twitter, and LinkedIn. To network with other people interested in cloud financial applications, join the Intacct Cloud Accounting group and the CFOInsights group on LinkedIn.
Do you have an idea for someone you think has interesting industry insights we should interview? Send us your suggestions for consideration.
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