Software Litigation

 

 

The idea is not to sell products leading to the sins themselves but to creatively apply the concepts of one or more to your software product to create an appeal and addictiveness factor to your product.  I wonder if the same can be applied when customizing a product / service for a new business or market opportunity. 
 

Lust	Do you touch a deep seeded relational need in people?
Gluttony	Do you tie into a desire for comfort or consumption?
Greed	Do you solve financial or monetary needs of your customers?
Sloth	Do you create efficiency or freedom of time for your customers?
Wrath	Do you provide a forum for dialog, debate or conflict resolution?
Envy	Do you provide customers a higher standard of living?
Pride	Does your product/service provide customers a sense of identity?

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Other posts that may of be interest

SaaS Law - Don't Use the Word "Affiliates"
Entrepreneurial Law - Proof of Concept and Proof of Scale
Good Metrics


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Alerding Castor Hewitt, LLP is an Indianapolis law firm focusing on business law, information technology law (including SaaS law and legal technology consulting), private equity consulting, and business and Internet litigation. 

Recognition of Market -> Recognition of Market Opportunity -> Ability to Meet Market Opportunity -> Meeting Market Opportunity at Profit

I recently just completed Ronald Cohen's book, The Second Bounce of the Ball (hat-tip: Greg Mark). The book is a great study in what it takes to be a successful entrepreneur. Perhaps most important in this regard is being able to read what Cohen refers to as the "the second bounce of the ball". After all, when we enter a market for the first time, it's easy to anticipate initial demand, interest, expectations, etc. But after the ball bounces a second time -- as it always does -- it's not always as clear which direction things will go in. Iasta is one of those companies that successfully read not only the second bounce of the ball, but the third as well. After migrating successfully from being a low-cost full service auction provider into a SaaS vendor with a strong e-sourcing mousetrap, they've once again listened to and read the market, moving in a new but logical direction.

Iasta's latest foray is into the world of what I'll term value-added sourcing and procurement services. Relatively speaking they're not breaking any new ground here. But just as they did in the past, they're copying and adapting an existing business model and delighting customers with both their price points and level of service. And they're doing so successfully, down to working with customers on broad- scale procurement transformations. Yes, you read that correctly. Iasta, that niche Indianapolis sourcing vendor, is competing against the Accentures and AT Kearneys of the world in the area of procurement transformation. And they're doing so successfully.

One of the secrets of their model is maintaining a relatively small full-time consulting team. In fact, nearly all of their team members are contractors with excellent reputations from past roles as consultants at major firms. Iasta is giving them far more autonomy and marking up their services significantly less than what other firms tend to do (e.g., I spoke with one of their procurement transformation leads with significant Big 5 experience who had also worked as a contractor for Denali and Accenture doing similar engagements). With Iasta, he was able to take home a significantly larger percentage of the overall client billings for his time and was also able to save the client material amounts over what bigger name firms would have charged (most likely to put in place more junior resources).

But what class of new services is Iasta offering specifically? For one, they're looking to define and bring to market offerings that, in their words, can help "new customers who aren't in a position to successfully use our software for 12 months until we can get them up to speed". If this requires dropping in more senior team members to drive initiatives in almost an interim management capacity, they'll do it. They'll also do more traditional opportunity and organizational assessments and follow through with customized programs designed to bring companies up to the next level of maturity (interestingly on this note, a number of other services providers in the market use Iasta as their sourcing platform and I suspect they might begin to see Iasta as potentially competitive -- the same problem that Ariba has had with its channel partners in the sourcing area).

In addition to procurement transformation offerings, Iasta is embracing the term "cloud sourcing" to describe a range of other services they bring to bear. These include what they're calling strategic initiatives in the form of energy sourcing and management, green supply chain consulting, MRO transformation and procurement outsourcing. But they're also productizing other cost reduction services based around what they're terming Zero Budget impact programs. These are, in Iasta's words, "8 indirect categories that are difficult to source and are not conducive to auctions".

Zero Budget categories include pharmacy benefits sourcing (delivered via a coalition / GPO model) which delivers, on average, 8-10% savings). They also include non-medical benefits and telecom (both delivered via sourcing events with 7-22% and 15-30% average savings respectively). Other categories that fall under this umbrella include software contracting, MRO/safety supplies, print, fuel management and relocation services.

Iasta has not abandoned more discrete service programs in the least, however. They continue to deliver what they term "tactical sourcing" programs in the form of spend analysis services, sourcing services, optimization services and user training. They're also offering spend analysis as service (including data classification, report and spend assessment surveys), fully managed source services, and staff augmentation around category-specific opportunities. To deliver all of these capabilities, Iasta is leveraging a network of "some 100 consultants" many of whom bring either specific category experience (e.g., print) or other areas of expertise.

Stay tuned for additional analysis of Iasta -- including software enhancements and pricing trends / observations / levels -- as this series continues.

PART I

While I'm not an old man just yet -- even though some might say that I have my curmudgeonly tendencies, not to mention liking to get to bed hours before Letterman comes on -- I have been around the provider side of the Spend Management world long enough to see dozens of vendors move from writing their initial business plans into their formative years and later into additional stages of maturation. Such is the case with what used to be a small provider I always enjoyed talking to and catching up with, Iasta. I've known the founders of Iasta since before they knew me. When I was at FreeMarkets, Iasta initially set out to copy our full-service sourcing model (and they did succeed in undercutting us on price and winning deals from time to time, as various salespeople reminded me when asking: "Who the heck are these guys from Indianapolis.")

Back in those years Iasta's three founders were heck-bent -- that's Bible Belt / Indy speak for hell-bent -- on creating a viable business model. And while they weren't sourcing guys, they knew a good business model when they saw it. As I got to know Iasta's three founders and became friends with David Bush at the time, it became clear that the Iasta business model was evolving from one of full-service capabilities into a self-service sourcing platform (along the lines of Procuri, Bay Builder and others). Early on in this migration, Iasta competed primarily on price, but as its features and capabilities grew, they started to win deals on more than just their willingness to undercut FreeMarkets, Ariba, Emptoris, Procuri and others. In fact today, they're often among the pricier options in certain deals. But they continue to win more than their fair share of deals in the areas in which they compete (primarily e-sourcing, spend analysis and optimization).

Last week, I had the chance to catch up with Iasta at their reSource event roadshow, as it swung through Chicago. In a series of posts this week and next, I'll dig into how Iasta continues to morph as it grows at one of the fastest rates in the overall market. In this first post today, I'll tackle some of the basics regarding their history and growth, sticking to the facts and figures. But perhaps most important, as a first question to tackle, is how did three guys from Indy create a thriving business in the Spend Management world without outside investment and with little or no initial knowledge of how the sector worked?

They listened to customers, that's how. And this remains a strategy they continue to employ to this day. In fact, starting out in 2000 through 2002, they followed their customer's requests to focus on fully managed auctions. Then in 2003-2006, they rode the SaaS e-sourcing wave. And more recently, they've grown through both customer and solution diversification, in addition to pushing a core sourcing platform that continues to garner accolades from users.

Today, Iasta has approximately 100 customers using their applications. Most of these are typically Global 1000 companies. They also have 50 services clients today (with a strong overlap between the two areas). These numbers not only represent what's been a strong level of customer acquisition in recent years, but also strong revenue growth overall (which is a signal that e-sourcing and related markets aren't seeing the type of pricing pressure that many initially hypothesized they would).

In fact, Iasta has realized a trailing three-year growth rate of 256%. This includes 77% growth in 2008. In Q2 alone, they saw 121% growth between the 2008 and 2009. And they've signed 32 new clients year to date. Moreover, 27% of the recent quarterly growth has come from software license sales (which represent what over 90% of the time amounts to a perpetual annuity).

Compare these numbers with Iasta's competitors and you'll quickly realize this is a company that is on the move. Moreover, the growth is all the more impressive if you consider they've done it without any outside cash infusions. Iasta remains 100% owned by the management team. They've also not yet hit a commercial inflection point, needing to bring in a truly heavy hitter in the sales area. So in other words, not only is all of this growth truly organic and real, it's evolved without the typical investments in sales, marketing and other areas that often require millions of dollars in a Series B financing round.

Stay tuned for the rest of this series looking at Iasta's growth. Next-up: a quick-hit investigation of Iasta's platform and related sourcing services.

 

Most entrepreneurs believe a bunch of myths about financing new companies that hinder their efforts to raise money. Here are a few:

Myth 1: It takes a lot of money to finance a new business. Not true. The typical start-up only requires about $25,000 to get going. The successful entrepreneurs who don’t believe the myth design their businesses to work with little cash. They borrow instead of paying for things. They rent instead of buy. And they turn fixed costs into variable costs by, say, paying people commissions instead of salaries.

Myth 2: Venture capitalists are a good place to go for start-up money. Not unless you start a computer or biotech company. Computer hardware and software, semiconductors, communication, and biotechnology account for 81 percent of all venture capital dollars, and 72 percent of the companies that got VC money over the past 15 or so years. VCs only fund about 3,000 companies per year and only about one quarter of those companies are in the seed or start-up stage. In fact, the odds that a start-up company will get VC money are about 1 in 4,000. That’s worse than the odds that you will die from a fall in the shower.

Myth 3: Most business angels are rich. If rich means being an accredited investor — a person with a net worth of more than $1 million or an annual income of $200,000 per year if single and $300,000 if married — then the answer is “no”. Almost three quarters of the people who provide capital to fund the start-ups of other people who are not friends, neighbors, co-workers, or family don’t meet SEC accreditation requirements. In fact, 32 percent have a household income of $40,000 per year or less and 17 percent have a negative net worth.

Myth 4: Start-ups can’t be financed with debt. Actually, debt is more common than equity. According to the Federal Reserve’s Survey of Small Business Finances, 53 percent of the financing of companies that are two years old or younger comes from debt and only 47 percent comes from equity. So a lot of entrepreneurs out there are using debt rather than equity to fund their companies.

Myth 5: Banks don’t lend money to start-ups. This is another myth. Again, the Federal Reserve data shows that banks account for 16 percent of all the financing provided to companies that are two years old or younger. While 16 percent might not seem that high, it is 3 percent higher than the amount of money provided by the next highest source — trade creditors — and is higher than a bunch of other sources that everyone talks about going to: friends and family, business angels, venture capitalists, strategic investors, and government agencies.

Insights On SaaS Startups

1.  You are financing your customers.  Most SaaS businesses are subscription-based (there’s usually no big upfront payment).  As a result, sales and marketing costs are front-loaded, but revenue comes in over time.  This can create cash-flow issues.  The higher your sales growth, the larger the gap in cash-flows.  This is why fast-growing SaaS companies often raise large amounts of capital.  My marketing software company is an example.

2.  You’ve got operating costs.  In the shrinkwrapped software business, you shipped disks/CDs/DVDs (or made the software available to download).  There were very few infrastructure costs.  To deliver software as a service, you need to invest in infrastructure — including people to keep things running.  Services like Amazon’s EC2 help a lot (in terms of having flexible scalability), but it still doesn’t obviate the need to have people that will manage the infrastructure.  For a startup, the people cost to manage the IT stuff can be significant (since the team is very small).  So, even though hardware and infrastrucutre are cheap, managing it can take a significant percentage of the startup’s time.

3.  It Pays To Know Your Funnel:  One of the central drivers in the business will be understanding the shape of your marketing/sales funnel.  What channels are driving prospects into your funnel?  What’s the conversion rate of random web visitors to trial?  Trial to purchase?  Purchase to delighted customer?  As a SaaS startup grows, a lot of leverage can be found by understanding the shape of the funnel and removing the “leaks” (i.e. where are you losing business)?  For example, if a lot of people are signing up for the trial, but very few convert to paying customers, you should dig into what the early usage pattern is.  Are people logging on at all?  If so, where are they getting stuck?  Remove the friction that is keeping customers from getting value and you’ll unlock some revenue.  Do this at all stages of the funnel (focusing on the easy stuff first).

4.  Install Knobs and Dials In The Business:  One of the great things about the SaaS business is you have lots of aspects of the business you can tweak (examples include pricing, packaging/features and trial duration).  It’s often tempting to tweak and optimize the business too early.  In the early days, the key is to install the knobs and dials and build gauges to measure as much as you can (without driving yourself crazy).  Get really good at efficient experimentation (i.e. I can turn this knob and see it have this effect).  As with most experiments, don’t change too much at the same time (even though you think several different things will all have positive effects).  The reason is simple:  If you change more than one thing, you won’t really know what really happened.  Unless you have lots of data points, simple tests are usually better.

5.  Value the Visibility:  One of the big benefits of SaaS businesses is that they often operate on a shorter feedback cycle.  You’re dealing in days/weeks/months not in quarters/years/lifetimes.  What this means is that when bad things start to happen (as many experienced during the start of the current economic downturn), you’ll notice it sooner.  This is a very good thing.  It’s like driving a fast car.  Good breaks allow you to go faster (because you know you can slow down if conditions require).  But, great visibility helps too — you can better see what’s happening around you, and what’s coming.  The net result is that the risk of going faster is mitigated.

Enterprise 1.0 occurred during the great mainframe expansion that began in the early 1950's and ran until the minicomputer revolution in the early to mid 1970's. Enterprise 1.0 was characterized by "Big Iron" mainframe computers with a few thousand dedicated connections to the machine, and once-a-day batch processing. IBM was dominant in this field with several other players that together were referred to as "IBM and the Seven Dwarfs." The dwarfs were Burroughs, UNIVAC, NCR, Control Data, Honeywell, GE and RCA, later after mergers referred to as "IBM and the BUNCH" (Burroughs, UNIVAC, NCR, Control Data, and Honeywell). Operating and application software were initially written in-house by programmers dedicated to their mainframe systems, until mainframe adoption spread into most large enterprises in the late 1950's and early 1960's.

At that time, independent software companies emerged to write specific applications. The Computer Usage Corporation (CUC) was founded by two former IBM employees in 1955, and by 1967, CUC had 700 employees in 12 cities. The Systems Development Corporation (SDC), a division of the RAND Corporation, was formed in 1956 to develop a large air defense system. SDC employed hundreds of programmers and was referred to as "programmer university". The Computer Sciences Corporation was formed with five founders in 1969, and had 68,000 employees by 1990. Most of these early entrants into independent software development were formed by programmers writing custom programs for individual customers. By the mid-1960's, however, independent software companies began developing and marketing software packages that could be used by many different types of customers. One innovator in this era was Informatics, which wrote and sold the hugely popular Mark IV database in the mid-1960's.

Although minicomputers were developed in the 1960's, their widespread adoption in the 1970's marked the flourishing of Enterprise 1.0. Digital Equipment Company, formed in 1964, was the first successful minicomputer maker, but other companies along Massachusetts route 128 joined in the growth of the minicomputer market during the 1970's: Data General, Wang Laboratories, Apollo Computer, and Prime Computer. Tracy Kidder won a Pulitzer prize for his non-fiction book The Soul of a New Machine, detailing the development of Data General's minicomputer. In 1984, there were 91 minicomputer companies in the United States. By 1990, there were less than 10.

The last hurrah of Enterprise 1.0 was the flourishing of software companies developing products for the minicomputer market. Some names were American Software (1970), Tesseract Systems (1970), Walker Interactive Software (1971), ASK Computer and Ross Systems (1972), Compuware (1973), Cyborg Systems (1974), Computer Associates and SAS Institute (both 1976), and Candle Corporation, J.D. Edwards, Oracle Corporation, Softool (all formed in 1977). The most successful enterprise software at the time was Computer Associates, which acquired dozens of software product companies. A well-known pioneer during this period was John Cullinane who in 1968 founded Cullinane Software, which was the first software product company to go public, in 1978.

The PC platform was the death knell for minicomputers as client-server architecture took over the enterprise in the early to mid-1980's, heralding Enterprise 2.0. Enterprise 2.0 was marked by data continuously available and updated, millions of connections to the network rather than mere thousands, and data available from the network almost anywhere, rather than just at a terminal connected to a mainframe or minicomputer. The client-server architecture required entirely new software at the system level, management level, and at the client level. With decentralization and distribution, the advent of networks, and Marc Andreesen's Mosaic user interface to the Internet (later commercialized at Netscape), Enterprise 2.0 was at its height, and another flourishing of enterprise software companies took place. There were not only Netscape, Microsoft, Oracle, Peoplesoft, Sybase, Informix, Platinum Technology, BMC, BEA, and Red Brick, but also Arbor, Aurum, Broadvision, Scopus, Simware, Sun's Java platform, and hundreds of other companies offering platforms, management software (e.g. Remedy's helpdesk software), security software, enterprise applications, and of course even client-level applications. The industry consolidated again in fits are starts over the next decade, accelerated by the recessions in 1990-91, the mild slowdown in 1994-95, and the tech bust of 2000-2002.

Today, the software industry is at the threshold of Enterprise 3.0, where data is continuously updated and available all the time from multiple devices anywhere in the world, with billions of connections to systems and users through online networks that are not tethered to a specific enterprise's system. Saas and Cloud computing are part of Enterprise 3.0, and cloud vendors are capitalizing on the infrastructure needs of the new paradigm. Enterprise 3.0 is characterized by vendors solving highly specific problems and providing highly customized solutions for customers by bringing together just the resources needed for that solution, and doing so on a model where almost all the infrastructure and development are outsourced in one form or another. The hosting of the data may be outsourced to a hosting company, the software development might be outsourced to a development team, other software might be purchased on a Saas model, and storage might be purchased on a terabyte basis from a cloud vendor. The ability to collaborate and affiliate easily are central to effecting these solutions for customers and making money in Enterprise 3.0.

There is a flourishing of SaaS, cloud, and infrastructure vendors filling market spaces in new Enterprise 3.0 sectors. Companies like Cast Iron Systems, Cloudera, Corticon Technologies, Gridapp Systems, Instantis, Kace, Marketo, Mobclix, Nirvanix, SOA Software, SmartVault, Vkernel, Wize, and Zetta are a few of the companies penetrating the multitude of new segments opened up by the Enterprise 3.0 paradigm. Many of these companies have received venture funding, and the venture capital community is once again very interested in enterprise software, albeit looking for specific niches that each venture group perceives as potentially high growth. Fortunately, Enterprise 3.0 offers a superabundance of these niches for investment capital. Accordingly, venture capital is alive and well in the new enterprise software market, and that is reason for optimism in the enterprise software industry.