Testing the market before you build a product

Jason Kottke’s just shared an interesting story about Instagram shops which are doing gangbusters in Kuwait.

A description from ‘shop’ owner Fatima Al Qadiri:

If you have an Instagram account, you can slap a price tag on anything, take a picture of it, and sell it. For instance, you could take this can of San Pellegrino, paint it pink, put a heart on it, call it yours, and declare it for sale. Even my grandmother has an Instagram business! She sells dried fruit.

Amazing. This is not only such a low-impact way of testing the market for a particular product, but it’s so smartly circumventing issues around modern shopping cart systems.

Specifically, the sellers can:

Easily update their inventory from their mobile phone.
Quickly share new inventory across multiple networks.
Easily conduct their business from their mobile phones by leveraging low-cost options like WhatsApp.
Leverage another network without the need to integrate APIs. In this case, by using Instagram directly.

No storefront maintenance, no hosting requirements, no need for a desktop or tablet, no fancy marketing. Just the goods.

This kind of lightweight testing is great for getting an understanding of market interest in your product and can lead to great insights, just like the four noted above.

[Ed.note: This post originally appeared Say Yeah! blog on Friday, July 12, 2013. It has been republished here with permission]

SaaS vs. Traditional Software Licensing Model

Global software vendors are starting to feel the disruptive effects of the software as a service business model (“SaaS”). The SaaS model is growing at an annual rate of 15%-20% and will likely represent approximately 25% of the overall software market in the next 5 years. Although this trend is starting to call into question the viability of the traditional software business model, we are quickly reminded that today 95% of software businesses still earn most of their revenues and profits from traditional perpetual licenses and maintenance revenue streams that continue to experience year-over-year single digit growth.

For the large global vendors, it is difficult to transition from a traditional license to a subscription-based model. If you look at the largest 10 global enterprise software companies including Microsoft, IBM, Oracle, and SAP, less than 2% of their revenues are derived from SaaS.

Global Software Companies With Large Cash Positions Will Be Looking to Increase SaaS Penetration

Here are some of the reasons we believe the transition has been so difficult:

It is hard to move away from the significant upfront fees earned through perpetual licenses to a much smaller recurring monthly fee. This would decrease immediate earnings and negatively affect the valuations of the large public vendors.
The SaaS business model has not yet proven itself in any meaningful way to be viable given the limited number of software businesses that have achieved scale and profitability.
Most in-house development and implementation teams are not structured to build and deliver multi-tenant solutions through the web. This requires significant investment and time.
Traditional sales teams have not educated their customers to accept monthly recurring fees and are not structured to facilitate a low touch sales approach.
IT departments have been reluctant to share sensitive data through the web for security reasons.

However, the SaaS business model has some clear advantages that are compelling to its customers:

There are no significant upfront fees.
The client always has the most up-to-date version of the software.
The software is easily configurable and takes less time to implement than on-premises solutions.
Security has been less of a concern with the introduction of secure data sites and private clouds. Software is being audited to ensure it meets compliance guidelines.
Employee workflow is much more efficient, the software is mobile friendly and can be accessed from anywhere.

There is no question that the SaaS delivery model is more efficient and compelling than an on-premises solution. Having said that, businesses have invested significant time and money in legacy software and in the foreseeable future these businesses will be reluctant to make a change.

As businesses gradually adapt to the SaaS model, it is taking a while for SaaS companies to reach meaningful scale. Selling licenses at thousands of dollars a month (and in some cases hundreds of dollars a month) and educating customers along the way is a difficult path. We estimate that there are only 50-100 private companies in Canada that have reached critical mass in excess of $5 million a year in recurring revenues.

We believe that the limited number of SaaS businesses of meaningful scale has created scarcity in the market, driving up valuations. The ten largest global enterprise software companies have in excess of $200 billion in cash and are looking for ways to increase their exposure to the SaaS market. In June 2013 there were two significant acquisitions: SAP acquired Hybris for $1.3 billion and Salesforce.com acquired ExactTarget for $2.6 billion (8.1x LTM revenues). In 2013, seven companies went public and are currently valued in excess of 6x revenues. Additionally, the group of public SaaS businesses that we track currently trades in a range of 5.0-6.0x 2013 sales.

Software Companies Have Looked to Grow Through M&A And Will Continue To Do So

Although venture capital and private equity’s interest in the enterprise software space is at a historic high, the dollars invested in Q1 2013 is at one of the lowest points in the past 5 years. We believe that three factors are likely driving this decrease in activity:

There are a limited number of SaaS businesses that have reached scale and are supported by experienced management teams.
Most of the venture dollars have been sitting on the sidelines and have been raised by fewer funds that are not readily accessible.
Valuation expectations of entrepreneurs are not in line with those of investors.

Enterprise SaaS Valuations Remain High

We are confident that the SaaS business model will continue to gain acceptance throughout the market and that we will see emerging Canadian SaaS businesses gain critical mass. In turn, these businesses will be well funded by both Canadian and US venture capitalists. In addition, there have been over twenty $1 billion strategic SaaS acquisitions since 2011 and we expect this pace to continue or accelerate as the larger enterprise software players seek to participate in this major market transition.

The Tough Call on Startup Conferences

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A great dialog recently broke out on Twitter after this tweet from Debbie Landa calling out Alberta and Quebec startups to step up and have a presence at the upcoming GROW conference in Vancouver. Having my home in Alberta I immediately put the call out to a number of the great startups currently in the province. The consensus reply I got back was ‘too busy building and getting customers!’

We all know those entrepreneurs and investors (probably the worst offenders!) who find a conference to attend every week. I often wonder how they actually build a company when they devote so much time to the conference circuit. Even in my own life I have recently been making attempts to limit the number of conferences and events I attend as they can really get in the way of work and family. However, there are some that you just can’t miss. I would definitely put GROW into that bucket, but should startups as well?

GROW is unique as it has quickly become the top startup conference in Canada and almost half of attendees are from the US. This provides a great opportunity for entrepreneurs to connect, learn and move their companies forward. So why are some startups not taking advantage of this opportunity? Probably not a single answer to this question, but I want to share a few theories.

First, lets quickly review why an entrepreneur should attend a conference:

Customers! Obviously if there is a conference that brings together the majority of your target customers you need to be there.
Fundraising. Don’t expect to go to a conference, meet an investor and get a check. However, it is an opportunity to gain visibility for your company, initiate relationships with potential investors (or better yet, with the entrepreneurs they have invested in) and show them why they need to follow-up.
Recruitment. Startup conferences attract a lot of talent and it can be a great opportunity for your company to gain visibility for the purpose of recruiting.
Partnerships. Many conferences attract execs and corp dev people from large tech companies. This provides a great opportunity to meet with them and pursue that partnership that can take your company to the next level.
Influencers. I have already mentioned the visibility a conference can give to your company. To compound this, there will likely be many bloggers, journalists and influencers present that may write about your company after the event.
Learnings. Technically this isn’t a real word, but I love using it. Good conferences will have thought leaders speaking that will challenge your understanding of the market, technology and building a company. These experiences can be priceless.
Community. There is nothing quite like the energy and camaraderie that an entrepreneur can experience at a great conference. Entrepreneurship is hard, can be depressive and often lonely. Being surrounded by peers rallying around defying the odds and building a successful company is sometimes needed to push through the hard times.
What have I missed?!?

For a more general conference like GROW that are not focused on a particular industry – compare this to Debbie’s other hugely successful conference, Under the Radar, that focuses on the enterprise and attracts many top CIOs and CMOs – it is hard to justify attending to connect with customers unless you are a consumer company. If you fall into this category then you need to attend conferences like GROW to reach the influencers that can provide social proof for your product and provide quality feedback.

So, back to the original question. Why wouldn’t a company attend GROW? If you are a seed company it may be a financial issue. Debbie pointed this out as well. If you have raised a Series A finances should not be the issue. Travel time may be though. Canada is a big place. Coming from Quebec would require two additional days to travel plus the time for the conference. This is the similar challenge New York startups face in attending conferences in the Silicon Valley.

I believe a key factor in all this is the vertically-focused nature of many Canadian startups. I have long been of the belief that there are certain companies you just can’t build anywhere other than the Silicon Valley. They may start somewhere else, but need to end up there. Case in point, Pinterest, which started in Kansas City, but quickly moved to San Francisco. In Canada, it is a great place to build SaaS companies, specifically vertical SaaS companies. This includes great companies like Wave, Shopify, Clio, Hootsuite, Jobber, Top Hat, Freshbooks, TribeHR, Unbounce and the list goes on.

Lets quickly fly through my above list in the context of many of these SaaS companies:

Customers. Very unlikely that Clio will find lawyers or Jobber find landscapers at GROW.
Fundraising. These companies all have great investors behind them already.
Recruitment. For local Vancouver companies this item makes a lot of sense. Tough for startups anywhere else in Canada though.
Partnerships. Vertically-focused SaaS companies need to partner with industry specific organizations and companies (legal, accounting, transportation, etc.). Unlikely they will be attending a startup conference.
Influencers. Unlikely that a big blog hit from Robert Scoble is going to reach SMB owners.
Learnings. This is valuable, but not just for the CEO. My suggestion to the CEOs with companies farther along is to send someone from your management team if you can’t attend.
Community. Definitely still a factor, but if you are a Series A company or beyond you may not be able to prioritize for this as much.

In conclusion, it appears that a vertically-focused SaaS company from outside of Vancouver would have to work harder to prioritize attending a conference like GROW. Personally, I think that there is a balance here and if these companies are going to attend at least one conference for the learnings and community it should be GROW. Or, as I mentioned above, at least send someone from your company.

Selfishly, I am a fan of what Debbie has built in GROW and it would be great to see every startup across the country there in addition to the many from the Pacific Northwest and California that attend. However, founders are faced with tough prioritization items everyday and I don’t feel it is my place to push them if they feel their time is better spent heads-down with their team building the company. What do you think the balance is?

Regardless, GROW is going to be a great event with a ton of top entrepreneurs, investors and startup people!

[Editor’s Note: This post originally appeared on Kevin’s Once A Beekeeper blog on June 30, 2013]