Empowering the growth mindset: Next gen people SaaS

The employer-employee relationship is being reshaped and the next generation of HR software vendors are helping employers attract and retain the best talent

At long last, companies are waking up to the reality that the talent they employ is their most strategic, and ultimately differentiating, asset. However, in a somewhat ironic twist of fate, attracting and retaining talent is more difficult than ever before, driven by near decade-low unemployment rates, the much touted Covid-induced “Great Resignation”, and global competition for increasingly diverse and inclusive talent. Employers are also facing hybrid work as the new normal, as well as a generational shift to Millennials as the dominant employee base. 

The task for navigating these challenges is being laid at the feet of HR teams, whose responsibilities now span everything from driving Diversity, Equity, and Inclusion (DE&I) initiatives and improving organizational health and wellness to reducing employee attrition and navigating hybrid work / the return to the office. All of this in turn necessitates a much more strategic approach, and has escalated the importance of People teams to mission-critical as organizations recognize they need to do everything in their power to hire, nurture, and retain top-tier talent.

At the same time, People teams have historically relied on a legacy stack of outdated and inflexible software tools (e.g. ADP, SAP Successfactors, Oracle HCM, and Ceridian) that have acted primarily as systems of record rather than systems of engagement built for a hybrid work-environment and focused on employee user-experiences and organizational ROI. These tools are unable to drive employee engagement and lack the functionality required to enable People teams to operate effectively.

Enter Next Gen People SaaS, the new-age of HR software tools seeking to empower People teams looking to align People operations with overarching company strategy. 

These vendors are going after a massive market opportunity – Paychex, Workday, and ADP alone comprise $200Bn in market cap. That said, the market is not homogeneous, and the dynamics in each segment are nuanced. For instance, while the SMB market is largely greenfield (running many HR processes on paper and Excel), the enterprise market is rife with legacy solutions that are difficult to integrate with and thus organizations are left with tool sprawl, where a spaghetti-mix of 50+ different HR tools is not unusual. 

We at TCV have been lucky enough to partner with next gen HR leaders including LinkedIn, Grupa Pracuj (the largest job board in Poland), Hirevue (AI-driven talent assessment and video interview platform), Perceptyx (employee surveys and people analytics platform), OneSource Virtual (Business-Process-as-a-Service vendor for the Workday ecosystem) and more recently Darwinbox (cloud-native end-to-end HRIS platform for Enterprise), and Humu (enterprise-grade digital training platform). In addition, we have also had the opportunity to both collaborate with and learn from a deep bench of People-team leaders across our portfolio, including TCV Venture Partner Jessica Neal, the former Chief Talent Officer at Netflix. We continue to believe there are enormous opportunities ahead in HR and expect to see innovation arise from every corner of the globe. Here are three of the major themes we believe will shape the HR-tech landscape in the coming years.

#1: HR products built for employees

While we are now used to frictionless, user-friendly tech experiences everywhere in our personal lives, the software tools many of us use daily in the workplace are clunky and counter-intuitive. Next Gen People SaaS is changing this paradigm by putting employee experience at its heart and, in the process, turning systems of record into systems of engagement, driving ever-higher ROI, as well as enabling flexibility with how employees engage with employers.

Best-in-class UX is required for Next Gen People SaaS

Superior UX enables employees to self-serve to a much greater degree, alleviating the administrative burden on People teams. Geographic and vertical context also becomes relevant. For example, offering a truly mobile-native and mobile-optimized (note: not the same as just having an app) UX in emerging markets and frontline industries can be critical in driving access and engagement across the full employee base. This is a key factor that underpins the  strong momentum seen in companies like Darwinbox. Many new-age tools also monitor traditionally “B2C” KPIs (e.g. DAU/MAU, sessions per day), while also continuously A/B testing to drive better user engagement, thereby unlocking workforce insights that legacy tools with poor user uptake are simply unable to access. By utilizing Next Gen People SaaS, People teams can drive heightened employee engagement while also gaining meaningful insights in culture, sentiment, and employee performance.

Employing talent on its own terms

The days of inflexible, full-time, in-office employment are largely behind us. Companies have realized that, in the war to hire world-class talent, the ability to offer flexible employment (e.g. remote work from anywhere in the world, freelancing) can be a critical differentiator. That said, this creates enormous challenges for People teams, as running onboarding and compliant payroll and benefits across full-time and freelance employees in several countries is fraught with complexity. This has driven the rise of a host of new tools (e.g. employer of record, aggregated global payroll, end-to-end freelancer management tools) to simplify this process and alleviate companies of onerous compliance and administrative burdens. We believe these tools will further embed themselves into the core-HR stack of the hybrid workplace of the future.

#2: Talent is at the forefront of HR product innovation

The ongoing war for talent will dramatically reshape the HR tech-stack in the years ahead. Given the criticality of talent as a key differentiator, we expect to see accelerated innovation and the rise of best-in-breed point solutions (particularly for larger enterprises) at every stage of talent management process:

Sourcing

Professional networks, such as former TCV investment LinkedIn, have become staples of the HR toolkit. That said, there are further opportunities to enrich data from existing networks and build more advanced, automated searches powered by AI:  e.g. aligning with an employer’s diversity and inclusion goals, helping to automatically elevate talent at the right stage in their careers, prior candidate rediscovery, etc.

Screening and recruitment

We are seeing two major, and often simultaneous, themes reflecting the growing war for scarce talent – 1) a pivot towards building candidate-friendly recruitment experiences vs. being employer-centric (as much as employers are trying to better evaluate whether a candidate is a good fit for them, savvy candidates are doing the same with potential employers); 2) a pivot away from interview processes focused on subjective individual assessments towards more quantitative, standardized screening that collects dozens of data points along the candidate journey to reach better, less biased recruiting outcomes. 

Enablement

Retaining and nurturing talent have become highly strategic areas for employers, exacerbated by the generational shift towards a Millennial employee-base. We have seen the rise of increasingly sophisticated solutions for engaging and training talent, including a focus on individualizing content delivery. For instance, TCV portfolio company Humu helps teams instill and develop effective workplace habits through the use of behavioral nudges. At the core of Humu’s differentiation is the focus on delivering the right content, to the right person, at the right time.

Although the supply of world-class talent in every department is scarce, nowhere is the effect of the war for talent felt more acutely than in R&D. As ‘technology’ has shifted from being a standalone industry vertical to a horizontal foundation that nearly every industry depends upon, demand for engineering talent has never outweighed the supply more dramatically. Given that analysts continue to forecast a global technology talent shortage of nearly 5M workers by 2030[1], we anticipate this will be a defining trend of the 2020s and will continue giving rise to engineer-focused talent solutions.

While we expect the proliferation of talent-focused point solutions to continue, at the same time, we expect to see other segments of the HR stack begin to rebundle. Many mid-market and enterprise People teams have experienced massive tool proliferation over the last years (some using as many as 50+ different HR apps!) and tool sprawl is now becoming increasingly challenging to manage. As a result, we expect to see many core HR tools (e.g. time & attendance, benefits etc.) naturally aggregate thereby providing HR teams and employees with seamless, end-to-end integrated workflows.

#3: The specialization (and verticalization) of HR

In spite of the fact that both employer and employee needs vary significantly by size, industry, and geography, many vendors historically have offered a ‘one-size-fits-all’ HR proposition. As a result, there have been a number of historically overlooked and underappreciated market segments that represent massive greenfield opportunities when innovators focus on them explicitly. Going forward, as we have seen with broader vertical SaaS over the last decade, we expect to see the rise of verticalized HR vendors who focus on a specific customer segment and offer a much deeper, more tailored proposition than a generic, horizontal platform. In addition to this, we believe there are clear parallels with our theses around the office of the CFO and SaaS as a network whereby the verticalization of HR also gives rise to the opportunity for vendors to offer a bundled solution which in turn can drive TAM expansion, improved retention, better unit economics, and a more strategic relationship with customers. Two major expressions of this that we are focused on are 1) the rise of SMB-focused platforms and 2) tool-building for frontline workers.

Rise of SMB platforms

People teams in SMBs have historically been notoriously overstretched, understaffed (or even nonexistent!), and undertooled. More often than not, the “core People” platform is pen-and-paper or an Excel spreadsheet that is error-prone, time-consuming to update, and only acts as a very basic system of record. 

Increasingly, as SMBs are having to up their game and offer great employee experiences irrespective of resource constraints, we are seeing a new generation of arms dealers cater to this enormous yet enormously underserved market segment. Given the greater propensity for SMBs to purchase bundled solutions, we believe that vendors who can land with a mission-critical beachhead have an opportunity to expand their footprint and build a single-aggregated People suite for SMBs. 

We see two primary beachheads into the SMB today – the central people data repository (“HRIS”) and Payroll (mission critical from day one). Companies in such a position have a unique opportunity to build an ecosystem of integrations with best-in-breed tools (e.g. for performance, engagement, training and onboarding, interviewing, etc.), further embedding themselves as the epicenter of the new SMB People stack, and potentially over time branch out and cross-sell other People modules and even financial services (e.g. insurance, expense management, etc.). As outlined above, this drives a multitude of benefits (ARPU expansion, improved retention, deeper customer relationship, etc.). 

Given the sheer scale of the SMB base (e.g. SMBs typically represent ~50% of national GDPs[2]), the market opportunity for even national or regional champions is enormous.

Building for the frontline

Despite the fact that nearly 2 billion people currently work on the frontline and nearly every organization employs a combination of desk-based and frontline workers, HR tools have historically catered primarily to longer-tenured, desk-based employees. That said, this is changing as organizations are increasingly recognizing the importance of engaging their frontline workforce, in no small part catalyzed by the recognition of the critical role frontline workers played in helping navigate the Covid-19 pandemic.

The requirements of frontline employees can differ significantly from those of desk-based workers. As a starting point, many frontline workers lack access to a desktop (so being truly mobile-optimized and deliverable to a variety of endpoints is mission critical); they may not have a company email address (which has implications for security as well as means of communication); and they often have more flexible, shift-based working hours (which has implications for time/attendance/payroll). In addition, hiring, training, and onboarding may need to happen in a matter of hours, versus days or weeks for desk-based employees.

We are now seeing the rise of HR tools optimized to service the unique requirements of this historically underserved segment of the workforce. Going forward, mirroring the rise of vertical SaaS in the past several years, we expect to see continued specialization of HR platforms by worker type, which in turn is a stepping stone towards industry verticalization. As with the SMB opportunity, this could in turn drive opportunities to offer bundled HR solutions such as employee learning, time and attendance, and payroll.

What excites us

While great progress has been made modernizing the HR technology stack in recent years, the unprecedented challenges HR teams face when looking to hire and retain world-class talent are more pertinent today than ever before. We believe this will continue to create massive opportunities for problem-solving technology vendors across the HR stack, especially into historically underserved market segments. We at TCV are incredibly excited about what the future holds for HR tech and look forward to backing and supporting visionary teams building the seminal businesses of tomorrow across every corner of the globe.


[1] Future of Work: The Global Talent Crunch, Korn Ferry, 2018

[2] 2020 Annual Report on European SMEs, European Commission; & “Measuring the Small Business Economy,” Bureau of Economic Analysis, US Department of Commerce, 2020

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The views and opinions expressed are those of the speakers and do not necessarily reflect those of TCMI, Inc. or its affiliates (“TCV”). TCV has not verified the accuracy of any statements by the speakers and disclaims any responsibility therefor. This blog post is not an offer to sell or the solicitation of an offer to purchase an interest in any private fund managed or sponsored by TCV or any of the securities of any company discussed. The TCV portfolio companies identified, if any, are not necessarily representative of all TCV investments, and no assumption should be made that the investments identified were or will be profitable. For a complete list of TCV investments, please visit www.tcv.com/all-companies/. For additional important disclaimers regarding this blog post, please see “Informational Purposes Only” in the Terms of Use for TCV’s website, available at http://www.tcv.com/terms-of-use/


How to Create Valuable Relationships with Industry Analysts

The goal of marketing in every industry is to engage customers and influence perceptions. The difference in the B2B technology space is that third-party analysts play a major role in this process. Firms such as Gartner, IDC, and Forrester Research arose with the proliferation of digital technology in the 1980s, and they are now as influential as ever. Your customers are always looking for external validation of your offerings before they buy, and industry analysts can be valuable connections due to their deep understanding of their covered industries, the companies involved, and emerging business trends.

Download your copy of the report and sample vendor briefing here.

This influence is based partly on the analysis that analysts provide, but even more important is the objectivity that they maintain — you can’t “buy” favorable analyst coverage of your company with trips, tours, or favors. You have to earn it by understanding analysts’ needs and helping them do their work. That’s why an effective analyst relations strategy is an important part of category leadership.

TCV recently hosted a webinar on “Best Practices in Analyst Relations” with Peter Sondergaard (founder of The Sondergaard Group) and John Vincenzo (CMO of Silver Peak), in which we discussed the analyst landscape and lessons learned from experts in the field. In this post, we present the essential elements of a successful analyst relations (AR) strategy. You’re probably employing some of these strategies already, but the elements across all these lessons are mutually reinforcing, so it’s worth revisiting and looking for any gaps in your own analyst relations program.

Element #1: Organize and Focus

A coherent analyst relations strategy focused on the research firms with the best coverage for your industry is our first focus. The larger firms present most of the information you would need to qualify them on their websites. You can gather the rest of the information you need through inquiries directly to the firms and by talking to peers.

  • Take a long look at firms that are interested in your company (or already providing you with advisory services), and then widen the search.
  • Don’t overlook smaller, boutique firms that have dialed in your customer base as their target market.
  • You ultimately want to engage with several firms that you can manage operationally but that also have enough market influence to move the needle on customer perceptions. Analyst firms themselves consider 5 to 10 to be a good range.

Once you identify the firms you’ll focus on, form an internal team for each one. Each team should include a representative from marketing, sales, and product, alongside a senior executive sponsor. Any of these individuals might serve on more than one AR team.

Your CEO is implicitly on every team, because analysts will expect the CEO to lead key meetings early in the relationship.

Element #2: Cover the Analysts That Cover You

Success with your AR program requires knowing the analysts better than they know your company. This is easier than it sounds. Given that these firms have been tech and marketing experts for decades, they have some of the most informative websites in the world. In addition to reading public-domain information, subscribe to their research reports and read all relevant analyst coverage of your market every quarter.

As you read, pay attention to these three characteristics of the individual analyst and/or their firm:

  1. The metrics and examples they emphasize
  2. How they present quantitative data
  3. How they present narrative examples of vendor solutions

Knowing these attributes will enable you to develop your presentations (datasets and case studies) in a way that aligns with what the analysts do themselves. The analysts will interpret your data and examples more quickly and intuitively, and it can’t hurt if they notice that this was precisely your intention.

Also pay close attention to the cadence with which analysts conduct research and publish reports. It’s like knowing your customers’ purchasing cycles: You want to be just ahead of the curve, never behind it. Knowing the calendar also helps you schedule regular, timely meetings with your target analysts, both formal and informal. You want to keep analysts current with your products, performance, market developments, and future growth opportunities.

Element #3: Ace the Test

One of most important components of analyst relations, especially with a firm new to your program, is the “vendor briefing” (see example in the TCV presentation). According to Gartner, a vendor briefing is “a research tool for industry analysts, and an opportunity for an IT vendor to present its products, services, and business strategies to analysts who cover the vendor specifically or a related technology or market.” Briefings typically amount to a presentation to the analyst by the vendor, so the onus is on your company to ace the test.

Like growth equity firms, analyst firms hear pitches on a constant basis. Here’s how you can gear up to stand out:

  • Present your company as vividly as possible, with the CEO leading your internal AR team.
  • Adapt your pitch to the analyst’s preferred briefing agenda (if they publish one); skipping an element they consider important makes it look like you didn’t care enough to prepare.
  • Work in references to the analyst’s own reports or perspectives, to show that you’re already thinking along with them.

As often as you can within the briefing agenda, emphasize differentiators, unique attributes, and trends that are tailwinds for you. You want to be a shining example of what the analyst firm recommends to your customers.

At the same time, however, be realistic. Analysts consider themselves clear-eyed experts on market dynamics — with good reason — so don’t oversell your market position, TAM, or growth prospects.

Two final tips about the vendor briefing:

  1. Before you go in, make sure your website is up to date, particularly regarding reference customers, so the analysts find the same story online as they heard in the room. If an analyst has never heard of you, these references are gold dust when analysts perform initial due diligence.
  2. During the briefing, listen carefully. The analysts may not talk much, but what they ask or mention can give you valuable insights.

Element #4: Leverage Everything

One of the key benefits of a strong AR program is that it can increase your ROI on other marketing efforts. Here are just a few suggestions for how to make that happen:

  • Industry events: analysts attend the same conferences as your company, so arrange to meet them both at the venue and outside of the venue for more confidential (and more informal) conversations.
  • Product roadmaps: analysts love these and know how to use the information without compromising anything proprietary.
  • Case studies: if they’re worth creating for your customers and prospects, share them with analysts as well; better still, develop future case studies to fit analyst perspectives, which are carefully attuned to your customer base.
  • Customer reference system: if your reference customers are amenable, consider making them available to analysts — especially to smaller analyst firms seeking a wider reputation.

Element #5: Keep It Human

We’ve been talking about analyst firms in this article as a shorthand. The reality is, you’ll be dealing with one or a few human beings at each firm. So, relationships matter.

  • If someone on one of your internal AR teams has good personal chemistry with an analyst, put them in first chair.
  • Most firms develop young analysts into senior roles at a steady pace, and regularly rotate senior people into new roles, so treat junior analysts respectfully from Day One — they won’t be junior for long.
  • Work new people into your own AR teams as well, and don’t neglect diversity.

It is also important to play fair. Each party has its own goals and success factors. Sometimes it may feel frustrating that your customers listen to analysts as much as (or more than) they listen to you. That doesn’t mean you can’t lean into areas of natural alignment. For example, you both want thriving markets for innovative companies that make the world work better.

When you have the flexibility to do so, alert analysts to upcoming changes in your business or markets that could impact the timeliness of their publications. It’s also worth your time to give analysts praise or constructive feedback on their reports, because they too are competing hard for every dollar of revenue out there — and you’re their target market.

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The views and opinions expressed are those of the authors and do not necessarily reflect those of TCMI, Inc. or its affiliates (“TCV”). TCV has not verified the accuracy of any statements by the authors and disclaims any responsibility therefor. This presentation is not an offer to sell or the solicitation of an offer to purchase an interest in any private fund managed or sponsored by TCV or any of the securities of any company discussed. The TCV portfolio companies identified, if any, are not necessarily representative of all TCV investments, and no assumption should be made that any such investments identified were or will be profitable. For a complete list of TCV investments, please visit www.tcv.com/all-companies/. For additional important disclaimers regarding this article see “Informational Purposes Only” in the Terms of Use for TCV’s website, available at http://www.tcv.com/terms-of-use/.


FULL POTENTIAL SAAS

We believe that SaaS vendors, particularly vertical and SMB, that provide a “system of record” are seeing massive increases in TAM, competitive moats, and economic opportunity. By extending and leveraging their workflow, data, and account ownership, SaaS vendors are delighting end customers while creating platform and networks.

With opportunity comes competition, both from within one’s category (e.g. application area) or from adjacent categories within one’s vertical (e.g. industry). As boards and management teams wake up to the opportunity, they realize that the race is on to capture the full potential of their vertical.

This post is a framework to help leaders of SaaS companies think through the strategic choices and hopefully increase the odds of reaching their full potential.Strategy is implemented by focused alignment of execution, talent, M&A, organizational structure, functional excellence, and financial and governance/board frameworks. I hope to write about these supporting pieces over time, but I wanted to start with strategy first.

Finally, I think it’s important to acknowledge that very few companies have reached “full potential,” and this framework is inherently aspirational. However, “most entrepreneurs aren’t building a house, they are putting bricks in the foundation of a skyscraper” (Naval Ravikant). Aspiration is important, so hopefully this is an articulation of what is possible.

Special thanks to my co-authors John Burke, Katja Gagen, and Payam Vadi from TCV as well as Tim Barash, Kevin Burke, Henrique Dubugras, Mike Ford, Marc Fredman, Noah Glass, Andrew Low Ah Kee, Ara Mahdessian, David McJannet, Aman Narang, Sankar Narayan, Githesh Ramamurthy, Jason Randall, Bob Solomon, Connor Theilmann, Dan Wernikoff, and Dai Williams for great insight and support in creating this framework to date. We’ve also learned a ton from working with great management teams in the TCV portfolio[1] as well as across a broad network of friends.

Lead the Category

This phase of the SaaS strategy is well understood so I won’t spend much time on it. A SaaS company aspires to:

  1. build a great product (and service)
  2. over time, build an efficient and repeatable go-to-market model (marketing -> sales -> onboarding)
  3. and then “add capital” and execution to press its advantage against sluggish incumbents or poorly capitalized competitors

This is the playbook that Omniture and our portfolio company ExactTarget pioneered a decade ago. Despite massive capital inflows into SaaS and deteriorating economics, this model generally still works today.

On the product side, scale in data + AI can create increasing differentiation. For example, when you start to have more data than anyone else, you can flip your product from being reactive to proactive — having the product tell users where to look and how to optimize the system. Both Xero and Shopify have done this well.

Five other things to think about in this early phase that don’t get enough attention:

  • Scalable onboarding: Onboarding friction can be unaccounted drivers of CAC and churn. A great onboarding process builds the trust and confidence that are the foundations of virality/word of mouth, future cross- as well as third party channel strategies. Carefully measure funnel metrics and be attentive to new customer NPS. Automate early as “throwing bodies at it” can create process debt that will be difficult to unwind later.
  • Expansion: Expansion drives net revenue retention and most of the strategies we are about to discuss. With all sales processes, it’s a lot easier to learn, iterate, and optimize with fewer bodies and less complexity.
  • UI and Architecture: Like onboarding, these can be long-lead time fixes that compound as your business scales and gets more complex. A specific call out is to plan for an API strategy. It can facilitate future partner strategies and increase the value and stickiness of your offering.
  • Pricing structure/strategy: You will constantly revisit tactics, but it’s important to have some sense of how your pricing structure might change over time.
  • Foundations for global, including a work culture that can support distributed executives and operations, and good product feedback loops that incorporate non-home market needs.

Hyperscale Locations, Feed the Beast

A lot of ink has been spilled on forward investing in sales and marketing, and arguably it’s part of a/the “lead the category” strategy. But, it’s worth a call out as it’s important you don’t take your eye off the ball too early. So much of winning and future monetization is getting location market share. When the wind is at your back, go get it done! Market structures have a nasty habit of shifting, future secular tailwinds may abate, or competitors may leapfrog your product or your go-to-market model. If your churn and sales economics are sound, keep “feeding the beast!”

One particularly powerful unlock is Channel. There are verticals and categories, where influencers in a channel are kingmakers and can help you engage with segments that are otherwise difficult or uneconomical to reach.  Furthermore, Channel partners’ engagement and contributions can enrich your products and increase overall customer value. A great example is in tax software, where Xero’s wooing of accountants proved to be an effective source of customers and a formidable competitive moat (thereby disrupting the incumbent provider). Xero went as far as offering free practice management tools to help accountants run and grow their business on Xero.

Win the Control Points: Own Your Vertical

This is where management teams are faced with a paradox of choice: “Where should we go next? How should we spend the next incremental dollar? On increasing ARPU, acquiring incremental locations, or expanding into new verticals, geos or segments?” At this juncture, it is my belief that you should focus on winning the control points. In vertical SaaS, there are typically one or two control points, “systems of record.” Usually one control point in the front office (e.g. Point of Sale, CRM, e-commerce) – “that drives sales, that grows the business, that serves as the cash register.” And one control point in the back office (e.g. general ledger) – “where everything else reconciles to.” Hopefully, you provide one of the systems of record, so go build or acquire the other system(s) of record and secure the high ground! 

Pragmatically, a system of record is the last software package a customer will “turn off” in a tough economic time.

I also like to think about the concept of “gravity”:

  • Workflow gravity – the system that all other systems integrate to – it’swhere the most users spend the most time. Not all workflows deliver the same value; in my experience the system of record workflow tends to deliver the most value.
  • Data gravity – the system that creates and holds the most critical information and is the hardest to migrate. That data can be critical to a client for a wide range of applications, from understanding their customers (e.g. CRM) to managing risk (e.g. compliance). Data also can be critical in two-level situations, such as loan underwriting (e.g. a bank underwriting a merchant’s risk via POS data) or supplier information management (e.g. a client managing risk by validating supplier capabilities and quality). Data depth and scope also create gravity where AI technologies can be highly productive.
  • Account gravity – the user/sponsor of the system is the highest-ranking individual in the customer organization; it’s the system that requires the biggest financial outlay, etc.

Winning the other system of record is not easy. By definition, a system of record is hard to displace and unless the market is greenfield pen and paper, competition can be challenging. You may be able to do it organically with product innovation, but M&A can be the more desirable path if “integration debt” is manageable. If M&A is not possible, a slow winnowing of your competitor may be the only approach available to you.

If you own multiple systems of record in a vertical, the benefits are enormous:

  • Customer delight: automation from integrated workflows and potentially unified data and data models allow efficiencies and offerings unavailable before
  • “SaaS as a Platform and SaaS as Network” opportunities
  • Stronger account ownership to capture incremental spend and drive more efficient growth
  • A new level of durability and stickiness

A good example is Veeva. The company started in 2007 with the launch of a CRM and a sales automation platform for pharma sales reps (e.g. record their activity, keep track of the doctors they meet with or drop off samples for, etc.). After becoming the dominant player in that category, Veeva saw an opportunity to move backward into research and development for their life science customers (developing new drugs, conducting clinical trials and bringing those drugs to market). In 2011 Veeva launched Vault, a suite of applications that first centered on the core content management needs for clinical trials, regulatory submissions, and quality documentation. The company then expanded to include a series of core data applications that help manage clinical trials, quality processes, safety processes, etc. Veeva is expected to finish 2019 with $1.1B in revenue (26% YoY Growth) and 37% EBIT margins. Vault represented 51% of total revenue and grew 38% YoY. Analysts also estimate Vault meaningfully expanded Veeva’s addressable market. 

Another recent example might be front office player Shopify’s $450M acquisition of 6 River Systems to move into back office fulfillment and warehouse management. Some financial analysts estimate that merchants spend up to ~10-15% of their GMV on logistics which could potentially provide multiples of Shopify’s current take rate.

Expand Headroom

With category leadership comes high market share and potentially high saturation. Long-term growth is driven by location growth, as there’s generally a finite share of wallet you can access. It’s important to invest in the S-curves of geos, segments, and adjacent verticals that can unlock new location TAM. This can take a couple of tries before you’re successful, so start this during your growth phase when there’s less pressure on maximizing profitability.

Extend Through the Value Chain

This stage of growth can be transformative. By leveraging the strengths of your core customers, you can expand into a new market with a new set of customers. Typical patterns include moving from front office software to extend to your customer’s customers, or from back office software and extending to suppliers. These can be riskier bets, but success can pay out big here:

  • Increased TAM
  • Workflow that spans multiple parties and creates increased customer value and vendor stickiness
  • Two-level network effects

Supplier

Extension seems to work best by “following the money” and leveraging purchasing power. TCV portfolio company Ariba articulated the “golden rule”— He with the gold rules! By using their leadership in procurement software at large corporate buyers, Ariba extended to build a robust suppliers software business for merchants that serviced those corporate buyers. More recently, Avetta has followed a similar path in the supplier information space by building a strong two-level network effect. We believe corporate clients want to be on Avetta because it has the largest network of suppliers, and suppliers want to be on Avetta because it has the most corporate clients. Avetta’s advantage gets stronger as it scales. Moreover, Avetta has an opportunity to help suppliers do more than just manage compliance information. As a result, Avetta sees growth in helping suppliers grow and operate their business.  

CCC is on the third generation of this approach. They started by serving large auto insurance carriers and then extended into autobody repair shops that serve the carriers. CCC is now in the process of expanding to parts suppliers. By getting all the key constituents on its software platform, CCC is able to leverage AI and automation to massively reduce friction and provide a great customer experience across all steps of the auto insurance process.

Employee

The employee opportunity is similar to the supplier opportunity in terms of “following the money.” Companies can use integrated payroll or time & attendance offerings to establish a relationship with the employee. Employees are also consumers who represent significant B2C opportunities such as consumer lending, insurance, etc. There are big dollars here, but perhaps less opportunity to build significant network effects.

Consumer

The consumer/demand opportunity is the white whale. We believe that SaaS companies tend to capture ~ 50-100bps of GMV for software subscription, whereas online demand channels can take 15-20% of GMV in categories such as hotels and restaurants. In addition to the massive revenue opportunity, Consumer also represents a strategic flank worth monitoring carefully. Online marketplaces have large competing salesforces that engage with your merchant customers and have strategic interests encroach on the software layer to try to control supply.  Booking.com bought Buuteeq and Hotel Ninjas to vertically integrate into hotel supply. Uber is rapidly expanding its driver offering to over-draft protection, a debit card, and likely lending over time to manage driver churn. This is another example of increasing marketplace + SaaS convergence.

That said, success stories of extending SaaS to Consumer are rare. Few SaaS companies have consumer product DNA, the funds, or the skills to build a consumer brand. While a SaaS provider can have a high market share of merchants in a vertical, it’s rare that it has the supply ubiquity that an online marketplace would require. Eventbrite is one of the few companies that has landed as a software tool for creators, built liquidity, and created a marketplace.

Some derivative Consumer monetization models include:

  • Consumer pay: FareHarbor approaches tour and activity operators with a free to merchant, consumer pay model: “We’ll build your website and booking engine for free, with no work on your part; you just pay us for payment processing and the customer will pay us a booking fee.”  
  • Channel management: SiteMinder offers channel management to help hotels manage existing channels in real time. SiteMinder has extended that value proposition to “Demand Plus,” an offering that helps hotels easily expand into new channels to scale demand.
  • Existing customers: While 15-20% marketplace take rates may be sensible for new customer acquisition/discovery, companies such as Olo are looking to move existing customers to lower cost channels through their dispatch offering while taking a much lower percentage of GMV.
  • Customer Co-opt: By seeing consumer data pass through their systems, some SaaS vendors are building consumer profile databases that they might monetize over time. In the recruiting market, we’ve seen players leverage job distribution tools to build a candidate database. Shopify similarly has built a large shopper profile database across all their merchants. While Shopify hasn’t monetized directly, the uplift in conversion rate is likely significant. This model is the most capital efficient but can create conflicts with the vendor’s core merchant customers.

The biggest benefit of extending through the value chain is that it gives you a beachhead and a right to win in a new vertical to start the “full potential” growth cycle again. As you do this, it’s important to reconsider your end market and focus. When Ariba transitioned from procurement software to supply network, they started to represent a front office “system of record” for their suppliers. In doing so, Ariba was both a large enterprise “procurement company” and an SMB “supplier enablement company.” The question was: “Which priority should dominate?” When extension leads to conflicts, there are no easy answers. As such, it is important to acknowledge that this growth strategy is ever-evolving.

Deepen Functionality/ Monetization

Deepen Functionality/Monetization doesn’t literally mean waiting to pursue this step until all other strategies have been completed. It’s more a reflection of priorities. Acquire as many customers as you can, win the control points, and you will likely have many of these profit pools locked up to pursue in the future.

In winning the key control points, for the same reason a single system of record has a lot of “gravity,” you now have an even stronger opportunity to turn your product into a channel. This enables entry into adjacencies with data, workflow, and account ownership advantages for you as well as for the end customer. The most extreme example is the “platform/ecosystem” play, where you monetize third party vendors that want access to the channel your product has become (e.g. Salesforce, Intuit, Shopify). However, most commonly a SaaS vendor will pursue additional monetization with in-house or white-labeled products.

Another key consideration in prioritizing adjacent function/monetization is consistency with your core go-to-market channel and proximity to key decision makers. Go-to-market will determine the financial leverage of the cross-sell and often the overall success. The core advantage of SMB software here is that often the decision-making is relatively consistent and concentrated across software purchases.

Every vertical is different, but there are some common functionality/monetization patterns emerging. Each of these patterns deserves its own write-up, but for the sake of brevity here are some highlights:

  • “Integrated payments -> integrated banking”: The attachment of payments to SaaS has been well covered. That trend is expanding to the attachment of integrated banking. I had an opportunity to interview two of the smartest people in the business, Tim Barash and Jackie Reses. Square is out front here with broad based merchant and consumer plays. To understand the magnitude of the opportunity, Square’s Subscription & Services (most of which are financial services) are expected to reach $1.3B in 2020. This represents 23% of 2020 total GAAP revenue and 47% of 2020 Total Gross Profit (incremental gross profit is ~90%). Brex is earlier in its progression, but we’re excited to see how the company leverages its initial corporate card and expense management offerings to extend into broader financial services.

  •  “Follow the workflow”: At times SaaS companies have actually observed customers at work or mapped out the physical sites to understand all the areas their workflow touches as areas of expansion.
  • “TAM shark”: HashiCorp CEO David McJannet describes expansion as “TAM Shark,” constantly circling the biggest, fastest growing (most change/opportunity) markets. He requires product managers to report on market size and growth of all adjacent categories to make sure they are focused on the biggest opportunities. Generally, over a 2-3 year period companies have one, maybe two opportunities to build distinct add-on businesses. Make sure you’re picking the biggest markets and therefore the biggest payoffs.

Summary

If the typical SaaS playbook is “Lead the Category” and “Hyperscale Locations,” clearly the full potential for vertical SaaS players is dramatically larger than conventional SaaS wisdom would suggest. We’re excited to work with — and hopefully invest in —the frontier players as they explore the “Full Potential of SaaS.”  

If you found this useful, let me know, and we’ll continue to publish and explore the topic. I look forward to hearing your adds, edits, and challenges.

Caveats

  • There’s a tension between aggregating as big a profit pool as quickly as possible vs. “winning the market.”
  • This framework is characterized as a sequential strategy. In reality, most companies are pursuing multiple steps concurrently, and the sequence is more a reflection of prioritization.
  • Time horizon: this approach is a long-term strategy to winning, which may often be at odds with short-term maximization of valuation multiple and financial performance.
  • This approach is informed by a U.S./western/mature approach. In emerging/more greenfield markets, less focus and value chain expansion earlier in company development may make sense.

The views and opinions expressed are those of the authors and do not necessarily reflect those of TCMI, Inc. or its affiliates (“TCV”). TCV has not verified the accuracy of any statements by the authors and disclaims any responsibility therefor. This blog post is not an offer to sell or the solicitation of an offer to purchase an interest in any private fund managed or sponsored by TCV or any of the securities of any company discussed. The TCV portfolio companies identified above are not necessarily representative of all TCV investments, and no assumption should be made that the investments identified were or will be profitable. For a complete list of TCV investments, please visit www.tcv.com/all-companies/. For additional important disclaimers regarding this document, please see “Informational Purposes Only” in the Terms of Use for TCV’s website, available at http://www.tcv.com/terms-of-use/.

[1] See TCV’s SMB and Vertical SaaS investments at the end of the document.


At the Cutting Edge of the Governance Risk and Compliance (GRC) Sector – Leveraging Compliance Data to Drive Business Value

By Nari Ansari and Gal Peleg

Compliance seems to divide enterprises into three categories: those that primarily publicize it as proof of “good governance,” those that actually push the boundaries far enough to bring consequences, and everyone else with their heads down, trying to address whatever regulatory standards govern their industry and the seemingly ever-changing nature of those standards.

Now a fourth group is emerging, charting their own course. These enterprises are turning compliance to their advantage by mining compliance data for digital gold: insights that increase efficiency and competitive advantage. Like the governance crowd, they have automated many compliance functions with emerging software solutions. They are looking at the resulting data with fresh eyes and using it to improve their businesses.

More Regulation…

Most people think of compliance in terms of rules and regulations imposed by lawmakers and other governing bodies, for good reason: there is a proliferation not just of new regulations but of whole new regulatory frameworks such as Dodd-Frank and GDPR. Even long-time frameworks such as SOX, HIPAA, and FCPA continue to evolve. Yet at the same time, many enterprises are setting rules of their own to address an increasingly complex environment that includes global supply chains, cybercrime, trade wars, Brexit, and other evolving risks.

In the end, it doesn’t matter where the rules come from: compliance, and the documentation that comes along with it, is essential for managing risks and maintaining brand reputation. The roster of damaged brands from just the past few years illustrates what can happen when risk and compliance management break down.

Until recently, enterprises managed compliance risks with home-grown, often siloed and disparate initiatives that focused on people and processes. The components included manual record-keeping, time-consuming audits, constant training, ever-lengthier supplier questionnaires, C-level compliance positions, and board-level reporting. The reams of information gathered and presented were considered useful mainly for answering a simple question: Are we compliant or not?

Then a new question arose: Can we at least automate and digitize risk and compliance data, like we have done with so many other processes? The answer to that question is clear: We can, thanks to a growing community of companies providing governance, risk, and compliance (GRC) technology solutions that automate the process of collecting, aggregating, analyzing, and presenting relevant data while reducing their costs to the organization.

…Meets Smarter Compliance

We believe that just as homegrown compliance structures created the opportunity for digitization, a critical mass of companies are now positioned for a new opportunity that may eclipse the earlier one. Data that was once viewed merely as fuel for the compliance machine can now be considered a strategic output in its own right, with value to the business beyond compliance.

Whether it’s a bank mining Know Your Customer data to pitch targeted travel insurance to its customers or a CPG manufacturer analyzing complaint data from the Consumer Financial Protection Bureau to improve its manufacturing methods, we see an opportunity for companies to extract incremental, “offensive” business insight from large risk, compliance, and regulatory data sets.

Why Now?

This opportunity represents a convergence of what may seem unrelated factors. But let’s remember that in a globalized, highly competitive economy there are few trends that arise in isolation.

The first trend we note is a dramatic change in the people sitting in the chief compliance officer (CCO) chair. Russell Reynolds Associates analyzed the career backgrounds of 72 CCOs in banking, insurance and asset management and reported that “gone are the days of principally legal and compliance executives nabbing the top job in the compliance function.” So who’s getting the job instead? According to the report, it’s “broader-focused appointees from consulting, risk and audit. This new breed of appointees would be well-positioned to contextualize compliance (and the associated cultural change) in the wider picture of the organization.” In other words, compliance executive leadership is not just for lawyers and specialists – it’s for multidisciplinary executives who are as fluent with brand value and enterprise risk as they are with the P&L and operations.

The second trend we note is increased use of AI/ML. The transportation sector is a leading example, in part because it is heavily regulated. Shipping companies, notably UPS, now place dozens of monitors on their vehicles for compliance with internal and regulatory rules – and then apply AI to the monitor data to optimize delivery routes and driver behaviors in ways that squeeze out fuel costs and improve customer satisfaction. Fleet operators are further served by solutions from the likes of Keep Truckin, Samsara, and Geotab, which help improve driver safety and increase the precision of preventive maintenance.

The third trend is the evolving consumer privacy landscape. Ironically, more robust data protection and security regulations such as GDPR can actually serve to enhance business value by increasing the trust between companies and their customers. In its January 2018 report, “How GDPR is an Opportunity to Create Business Value”, Gartner notes that “handled effectively, there is great potential to obtain consent to increase data access, use, and sharing rights — aligned with goals of a wider organizational data and analytics strategy. This can help drive competitive advantage, while also helping to achieve compliance in other countries and regions.”

Examples of Leveraging Risk & Compliance Data to Drive Business Value

These are examples of companies that are helping advance the use of risk and compliance data for improving everything from customer experiences to supply chain performance to more effective emergency response:

  • Avetta’s customers use Avetta to certify compliance quality of its suppliers (green flag, yellow flag, red flag) and then mine the data to identify which suppliers are best trained and best equipped for certain on-site jobs.
  • Higher education institutions have long collected data to achieve and maintain external accreditation. Watermark Insights helps universities and colleges not only collect, digitize, and report on that data to demonstrate effectiveness, but also to use it to inform curricular changes and improve student outcomes. 
  • AxiomSL’s financial services clients utilize its data integrity and control platform and its risk calculation and reporting solutions to satisfy regulatory requirements across the globe systematically.  With trusted data, banks are now also able to identify opportunities to fine-tune capital/credit risk and deliver compelling business insights across the enterprise.
  • Global Trade Management solutions from the likes of Descartes and Amber Road (now a part of E2OPEN) have long been used to satisfy mandatory export compliance obligations (e.g. restricted party screenings) and to remain abreast of regional duty programs and tariffs. But by marrying these regulatory datasets with companies’ more “traditional” supply chain data (such as bill of materials and transportation fees), clients are now able to more accurately forecast true landed costs (the total price of the shipment including customs, duties, taxes, tariffs, etc.), all the while minimizing risks and delays.
  • Rave Mobile Safety enables schools to automate collection of and access to critical facility information (e.g., floor plans, alarm information), which they need to remain compliant with fire department ordinances – and it also provide 911 dispatchers and first responders better real-time capabilities when emergencies arise.
  • Information governance and eDiscovery vendor Nuix is well known for its deep technical capabilities in high speed processing and analytics around vast data sets, typically in the context of litigation and investigations.  But enterprise clients are also able to leverage the platform to create “data lakes”, making data more accessible for re-use in future investigations, litigations and data management programs, helping reduce costs.
  • Biopharma companies rely on software from ETQ for much more than compliance with FDA requirements; they also leverage the data to mitigate and prevent high-risk events, scale operations more effectively, and streamline their go-to-market activities.

There are many other examples of organizations across industries utilizing technology from GRC vendors to not only achieve their risk and compliance objectives, but also advance their strategic objectives.  The trend is still very much in its early days, but it provides an exciting avenue for continued growth in the sector.  As an experienced technology focused growth equity firm, TCV is committed to investing in the category innovators in the GRC space and has invested in such companies as Avalara, AxiomSL, Avetta, LegalZoom, Rave Mobile Safety, RiskMetrics Group, and Watermark Insights. 

***

The statements, views, and opinions expressed are those of the speakers and do not necessarily reflect those of TCMI, Inc. or its affiliates (“TCV”). TCV has not verified the accuracy of any statements by the speakers and disclaims any responsibility therefor. This interview is not an offer to sell or the solicitation of an offer to purchase an interest in any private fund managed or sponsored by TCV or any of the securities of any company discussed. The TCV portfolio companies identified, if any, are not necessarily representative of all TCV investments and no assumption should be made that the investments identified were or will be profitable. For a complete list of TCV investments, please visit www.tcv.com/all-companies. For additional important disclaimers, please see “Informational Purposes Only” in the Terms of Use for TCV’s website, available at http://www.tcv.com/terms-of-use/.


Webinar: Evolving from SaaS to Marketplace: Key Lessons for Tech Leaders in Making the Jump

The opportunity set for SaaS is on the rise. The original SaaS model that revolutionized software is now enabling SMB and vertical SaaS companies to evolve from tool companies to market makers. Pioneers of these new SaaS models not only provide a tech platform to service providers, but also strengthen their position by extending into marketplaces. When these providers aggregate enough supply, they leverage their data and mindshare advantages to create two-sided marketplaces that enjoy powerful network effects. The result is a much stronger financial profile, deeper moats, and a significantly larger TAM.

TCV recently hosted an offsite focused on emerging trends that we believe are dramatically expanding the opportunity set and economic strength of vertical and SMB SaaS companies. 

We were fortunate to have Brian Rothenberg as a speaker. Before joining a leading new early stage venture firm Defy as a Partner, Brian was on the leadership team that took Eventbrite from startup through IPO – while evolving the company from a SaaS platform for event venues to a marketplace for live experiences.

In this conversation with John Burke, EVP at TCV, Brian explains the steps and structures necessary to accomplish this strategic transformation and reach scale. He also offers priceless tips on timing and managing relationships with original SaaS clients that leaders can apply as they focus on dramatically expanding their addressable markets.

To talk about SaaS opportunities and get a copy of the presentation, please contact John Burke or Katja Gagen at TCV.

The statements, views, and opinions expressed are those of the speakers and do not necessarily reflect those of TCMI, Inc. or its affiliates (“TCV”). TCV has not verified the accuracy of any statements by the speakers and disclaims any responsibility therefor. This post is not an offer to sell or the solicitation of an offer to purchase an interest in any private fund managed or sponsored by TCV or any of the securities of any company discussed. The TCV portfolio companies identified, if any, are not necessarily representative of all TCV investments and no assumption should be made that the investments identified were or will be profitable. For a complete list of TCV investments, please visit https://www.tcv.com/all-companies/. For additional important disclaimers, please see “Informational Purposes Only” in the Terms of Use for TCV’s website, available at https://www.tcv.com/terms-of-use/.


Banking Evolution & Revolution—Fireside Chat with Jacqueline (Jackie) Reses, Head of Square Capital, and David Yuan, GP at TCV

We believe that many SMB and vertical SaaS companies are starting to exhibit platform characteristics.  Some of these companies are beginning to build consumer and supplier networks that are expanding the SaaS model dramatically. 

We recently brought the pioneers of these new SaaS models together and were fortunate to have Jackie Reses share her thoughts on the emerging lending opportunity for SaaS. Witty, wise, and incredibly insightful, Jackie is a total superwoman. In addition to running Square Capital, Jackie serves on the board of the San Francisco Federal Reserve Bank and is a former board member of Alibaba. She also worked in private equity for 20 years.

Dave: Great to talk to you, Jackie! Is it true you started your career on the dark side, as an investor?

Jackie: Yes, I worked in private equity for 20 years. I just kept going forward. I had a mid-life crisis without the crisis, as I like to call it. I ran parts of a large private equity firm, but I much prefer being on the operating side. I still invest and that’s my fun side project. But I love working at Square. It’s a really fun place to be.

Dave: Square is certainly on a tear. Maybe we could start and just talk a little bit about that. Very few companies reach your scale, and then accelerate. But that’s what you’ve done at Square.

Jackie: Yeah, it’s exciting. We have driven strong revenue growth at scale since we went public.  It’s interesting to think back to when Square was starting with payments and building on that. That really was the catalyst for what we should build in an ecosystem in a very different way. Since then, we have built ancillary products around payments like point of sale, loyalty, employee engagement, lending, and payroll around an ecosystem.

Dave: You mentioned that every one of your products is an onboarding product. You don’t think of “land and then expand,” it’s all onboarding, it’s all “land”?

Jackie: Like lending we consider it to be a product that will onboard into Square. We have two parts of our lending business. One is the business lending, and that’s something we launched with Square sellers, and we extended it outside of Square in the United States.

And then we also have an Installments product which has been incredible. Installments is a consumer lending product that can have a customer pay for large purchases with installments, which provides the buyer with payment flexibility.

That said, I think about Square Capital first. My job is to grow Square Capital. That should stand on its own. The product itself has to be remarkable.

When we launch a new Square Capital product, we launch it because I think about all inbound customers into Square for lending and then create a cycle throughout our ecosystem to evolve as they learn about other products.

Dave: You talked about Square and the multiple product lines and high rate of self-onboarding. How core is self-serve to Square?

Jackie: It’s the way we start on every product. They have to be self-serve, elegant and fast as a means to make them remarkable. Driving your thought process around self-serve forces you to create simplicity and ease of use. 

Dave: You’ve described several different businesses that have arguably very different DNA. SMB, point of sale, consumer cash, credit, etc. How does that work in the same organization?

Jackie: I think lending is the one that everyone has the hardest time with. If anyone thinks that payments are regulated, lending is like 10x that.

Managing risk and the dynamics of a high-growth company are very different disciplines. I think that’s probably the hardest thing I deal with as an executive at Square. The dynamics of credit risk can really hurt sellers, and they can hurt us, and they can hurt our ecosystem of investors.

And so top line growth on a lending business is not the goal. I think you have to have a very different level of responsibility and a discipline that is almost the inverse to payments, where topline revenue growth can be the goal.  

You need to remain focused on what’s good for the end merchant. There are some lenders out there that have a goal of maximizing loan size. I think that’s irresponsible. We try to maximize a loan that helps sellers grow. That’s a very different mindset. We are also very fortunate that we don’t have channel or customer acquisition costs which helps us take a pretty responsible approach.

Dave:  Right. There is a real trade-off between growth, risk, and merchant health. How do you measure your success, what are the metrics you report on?

Jackie: It’s originations and different views of defaults. We could double our loans if we wanted to tomorrow. Yet, you double it at the loss of small businesses who can’t afford the debt that you’re giving up. The one limitation of credit is that there is a natural debt capacity of what these companies can afford based on their cash flows. And you’ve got to make sure you’re really good at how to predict that and then manage it so you’re not putting companies at risk.

Dave: Let’s talk about the risk side. Companies in an earlier phase want to learn. They want to train their algorithms. So in some ways having defaults is actually a data point to trigger. How do you get through that initial learning period?

Jackie: We do the same thing. Although I have to say that many refer to models which really aren’t machine learning models – the data set is too small to be driven off of machine learning. 

It’s hard to train models when you have a really narrow data set. Many lenders use basic heuristics to limit who they lend to.  That is not a machine learning model – its addition and subtraction in a ton of excel. 

Loan losses also can be instructive for model training, so you need to be willing to invest in your weakest credits in order to learn.  If you look at the public fintech lending companies, very few of them have actually been successful at long term customer acquisition and default profiling. It’s a hard, capital intense business and takes years to do. We think of lending as a platform to help our sellers grow.  The regulatory environment and the amount of capital required to do this is just really high.

Dave: What about payments data?

Jackie: The payments data is super useful but you have the fidelity of moment to moment transactional changes.  Matching risk, credit, behavioral and bank data together with payments is very powerful!

Additionally, for model training, its instructive to look at why sellers de-activate off of our system. Insights around business failure and fraud can also be a helpful part of the equation. 

Dave: You mentioned just how different being a lender is than the rest of Square and orientation around growth, versus risk management. How did you actually set it up so that it was able to perform this task culturally? Did you wall it off?

Jackie Reses: I thought about it every day. To be honest I think we’re very unique and lucky at Square because the way we are owned and run is with a long-term orientation, which most public companies are not.

Being focused on the long term, you can set up the ethos of what you need it to be. Because it’s the right answer for that kind of business long term. But we talk about it every day because it’s really easy to lend money, and it’s really hard to get it back.

And then the compliance is huge. I have everything documented in a way that’s profoundly non-tech. And that’s in a product that’s highly automated. We practically have a lean lending team. And then I have to have all these policies and reviews and committees. It’s the only product at Square that has a board committee.

We’re growing fast, but you got to be really strict about it and stand up if you see issues.

Dave: Let’s switch gears a little bit. I’d love to take advantage of your experience with Alibaba. The dynamics in China seem totally different.

Jackie: Totally different. QR code based, facial recognition based, sound based.

Dave: Do you think there’s a future state in China where you do have to worry about some sort of disaggregation or actually consolidation of the payment infrastructure?

Jackie: The dynamics in China are really different because there was an escrow system that existed 10 years ago in China because there were no logistics, and there was no trust. If you were going to order a package in China, you never knew whether you were going to get it, how you were going to get it, because neither system existed around credit and shipping. They just didn’t exist. And so the idea of an escrow system was the genesis of how Alipay got started. It really became a predominant payment rail. And it did so in an environment where it matched its sister company which controls 60 percent of the eCommerce in China. So those dynamics are really different than the dynamics that exist in the United States today, where the proliferation of credit options is extraordinary. In the U.S., there is no logistics issue with the way we think about freight and the multiple players. You can trust that if you send a package by FedEx it will actually show up.

All these dynamics of eCommerce that we take for granted in the United States are really the reason why there’s such a tight band of competition in China. I think WeChat is interesting. WeChat evolved after QQ started. Tencent built an unbelievable business and their second version of it has just been extraordinary because it’s become like a full utility app for everyone in China.

So now you have these two non-bank players in China competing with one another. Neither have really been able to get into the United States. I don’t know whether you noticed, but you’ll start to see Alipay showing up at a register. Go ask how many transactions have actually happened at that counter. There’s the notion of these Chinese tourists that are coming here but they use UnionPay.

That said, there’s not a lot of demand for it at this point in the United States. I think they’ll have a better time in Southeast Asia where they’re more connected and Japan, because they’ve got the Softbank connectivity that still owns a huge portion of Alibaba and Alipay. I just think it will be much harder in the United States.

David Yuan: Well Jackie, that was incredible! Thanks so much for taking the time to share your views.

###

The statements, views, and opinions expressed are those of the speakers and do not necessarily reflect those of TCMI, Inc. or its affiliates (“TCV”). TCV has not verified the accuracy of any statements by the speakers and disclaims any responsibility therefor. This interview is not an offer to sell or the solicitation of an offer to purchase an interest in any private fund managed or sponsored by TCV or any of the securities of any company discussed. The TCV portfolio companies identified, if any, are not necessarily representative of all TCV investments and no assumption should be made that the investments identified were or will be profitable. For a complete list of TCV investments, please visit www.tcv.com/all-companies. For additional important disclaimers, please see “Informational Purposes Only” in the Terms of Use for TCV’s website, available at http://www.tcv.com/terms-of-use/.


The Consumer Opportunity — Fireside Chat with Ian Siegel, CEO of ZipRecruiter, and David Yuan, GP at TCV

TCV recently hosted an offsite on companies extending into consumer, supplier, and employee networks.

ZipRecruiter is one of the few companies that have been able to extend into consumer demand. We were fortunate to have Co-Founder and CEO Ian Siegel join us and share his thoughts on ZipRecruiter’s journey.

***

Dave: So maybe to kick us off, tell us a little bit about yourself and ZipRecruiter.

Ian: Sure. ZipRecruiter is an online employment marketplace that I co-founded in 2010. Based in LA, we use Artificial Intelligence (AI) to actively connect people to their next great opportunity.  We’ve helped over 1.8 million businesses of all sizes (from SMBs to Fortune 500 companies) with their hiring needs. Tens of thousands of businesses use us every month to find their next great hires and millions of job seekers search for jobs on ZipRecruiter on a monthly basis.  

Dave: We’ve been talking to each other for a while, and your first demand side offering was allowing employers to use your distribution software application. And if they weren’t getting applicants fast enough, they could push a “boost” button and get more applicant flow. That was a recruiting facing experience. Explain what’s going on in the background.

Ian: We distribute job postings to more than 1,200 sources. That includes job boards, aggregators, talent communities, social networks, etc. We send jobs to online destinations where talent may be congregating and then we pay those sources on a per-click basis for the traffic they can deliver to us. And then there’s TrafficBoost, our own job promotion product. Employers can buy a “Boost” and get more quality candidates faster.

Dave: Great. So, you have this distribution software, and then the “boost button” which is like performance media buying for lack of a better description. And then you started your own candidate profiles. How does that work?

Ian: Good question. The tricky thing about our category is that it represents a point-in-time need. One of the things you need to contemplate when you have consumers, for example, in restaurant reservations or looking for a job, is that they need you for a moment, and then they’re theoretically going to go away. You have to start thinking about what you can do to get a data lock. What are the things you could add to your service? That means they don’t just use you this time but there’s an advantage to using you in subsequent visits or a subsequent need for that service.

We started moving from résumés to profiles. Imagine you are a nurse: You come to our site and upload a résumé. We’ve become very good at enriching résumés and identifying the single skills that employers are really looking for—for example, a nursing license number turns out to be the only thing you need in your profile to be inundated with interest from hospitals and healthcare providers. As a result, you are persistently being found by new employers who can give you subsequent offers.

Our theory is that job seekers never want to miss a great opportunity that’s coming through. There’s this misnomer about the job search category which is that there’s an active and a passive job seeker profile. The reality is that a person who is eagerly full-time searching for work represents only about 12% of the total job-seeking population. The other 88% are people who are somewhere between dissatisfied and happy at their current job but are willing to learn more about new opportunities. 

Dave: So, basically, you’ve gotten the consumer applicant to engage with you, which is quite different, right? You’re running essentially a SaaS business, and then you have to build a consumer business on top of it?

Ian: After two years in, we realized that, no matter how many cool features we put into our product, employers were (and are still) using us for one thing: access to job seekers. The more people we have on ZipRecruiter, the more employers we attract, the more new jobs we have, and the more people we get.  

It’s a virtuous circle.

And so suddenly, we’re not just in the employer business: We’re also in the job seeker business. 

Dave: So how did you go and do this? 

Ian: When our aided brand awareness peaked in the U.S., it became much more important to make sure that job seekers also knew about us. Which is why most of our engineers are now working on some form of search algorithm or search interface. We are deeply thoughtful about focusing on job seekers because, fundamentally, we sell to them.

Dave: Okay. You made the switch, which was tricky since you recognized that you potentially competed with some of your suppliers, and you had to go all in on brand. Or not just brand, but a switch from a business to a consumer business brand.

Ian: It’s always harder to get the buyer than the seller. If you have the buyers, the sellers will come to you. To get to that next level in our category, it’s important to be first and top of mind. When someone decides they’re ready to look for a job, you want to be synonymous with job seeking so they go straight to ZipRecruiter to look for work. 

Dave: How do you balance ongoing management of your product teams and the focus of the organization between both customer groups? Because in reality, you still need to maintain some amount of excitement and engagement around the recruiters while you’re sort of shifting to job seekers. How are you thinking about that?

Ian: It’s such a good question. Let me take you through an exercise that was a real-world problem we had in our business. All of you are hiring managers, right? Would you like it if someone submitted a résumé to you, and ZipRecruiter corrected the grammar? The underlying question is “Do you consider spelling errors and grammatical errors a signal that tells you something’s up?”

Dave: Massive signal.

Ian: Right, signal. If I ask that question to the job seekers, they really don’t like typos. That’s a real-world problem I’m faced with. Who is our customer? The answer is nuanced and depends on the situation. How did we decide who that customer was? In that particular example, we did not correct their spelling and grammar.

Another example: We are the number one-rated job search app on both iOS and Android. How did we become number one? With one simple feature: We tell job seekers when an employer looks at their application. That’s it. The number one thing job seekers hate more than anything is what they call the “résumé black hole”, i.e. when they apply to a job and never hear anything back. In this case, we made the choice for the benefit of the job seeker.

Dave: What about the team? Was it a separate build? Was there significant change since this is a very different business?

Ian: Our product team members were all revenue-focused, which is to say employer-focused. So, we decided to split the team and have one subteam focusing on job seekers and the other subteam focusing on employers. We made a significant investment to support the job seeker subteam and, in some areas, we have multi-year timelines because you can either play to make money or you can play to win. And to win in our category, you need liquidity. You can’t have a marketplace without some form of elite brand recognition and differentiation. 

Dave: Absolutely, great point to end with. Thanks so much Ian!

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The statements, views, and opinions expressed are those of the speakers and do not necessarily reflect those of TCMI, Inc. or its affiliates (“TCV”). TCV has not verified the accuracy of any statements by the speakers and disclaims any responsibility therefor. This interview is not an offer to sell or the solicitation of an offer to purchase an interest in any private fund managed or sponsored by TCV or any of the securities of any company discussed. The TCV portfolio companies identified, if any, are not necessarily representative of all TCV investments and no assumption should be made that the investments identified were or will be profitable. For a complete list of TCV investments, please visit www.tcv.com/all-companies. For additional important disclaimers, please see “Informational Purposes Only” in the Terms of Use for TCV’s website, available at http://www.tcv.com/terms-of-use/.


SaaS as a Platform, SaaS as a Network: Building the Next Generation of Vertical and SMB SaaS Leaders

By David Yuan, General Partner at TCV

My colleague John Burke, TCV Executive Advisor Tim Barash and I recently hosted an offsite focused on a couple of emerging trends that we believe are dramatically expanding the opportunity set and economic strength of vertical and SMB SaaS companies.  We call these trends “SaaS as a Platform” and “SaaS as a Network.” 

“SaaS as a Platform” recognizes the power of vertical/SMB SaaS to leverage end to end workflows to build “rails” to their merchant’s customers, suppliers and employees. There’s massive economic capture, customer delight, retention benefit, and data insights that are garnered in monetizing these rails through financial services, employee services, and supplier services.

“SaaS as a Network” takes that evolution one step forward. When a SaaS provider starts serving a high enough density of merchantsthey can leverage that strength to build two-sided market places with the merchant’s customers (more on consumer networks–see my talk with ZipRecruiter CEO), suppliers, and employees. Now that SaaS vendor has now created a marketplace that can enjoy powerful network effects that rival consumer businesses like Airbnb, Facebook, and Apple. In addition, because marketplaces models tend to extract a take rate on GMV, for that SaaS vendor, the TAM and unit economics explode (in a really good way).

We believe SaaS as a Platform and SaaS as a Network offer a step function expansion of the SaaS business model, and is one of the most important themes in software investing. 

To this end, we’ve invested in a number of companies, including AvettaCCCGoDaddy, Grupa Pracuj, Klook, LegalZoom, SiteMinder, Toast, and Xero, that we believe are starting to benefit from these trends.

We’re super excited about these trends and my colleague John Burke will be publishing more on this topic! 5/16/19 Update:

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The views and opinions expressed in the post above are that of the author and do not necessarily reflect those of TCMI, Inc. or its affiliates (“TCV”). This post is not an offer to sell or the solicitation of an offer to purchase an interest in any private fund managed or sponsored by TCV or any of the securities of any company discussed. This post is intended solely for prospective portfolio companies and their agents regarding TCV’s potential financing capabilities. Executive Advisors are typically independent consultants who are not employees of TCV but have a strategic relationship with TCV and/or provide valuable advice or services to TCV or its portfolio companies. The TCV portfolio companies identified above, if any, are not necessarily representative of all TCV investments, and no assumption should be made that the investments identified were or will be profitable. For a complete list of TCV investments, please visit www.tcv.com/all-companies/. For additional important disclaimers regarding this document, please see “Informational Purposes Only” in the Terms of Use for TCV’s website, available at http://www.tcv.com/terms-of-use/.