TCV’s healthcare team has long been pursuing a thesis around the utilization of healthcare data, particularly for applications in the life sciences industry. Specifically, we believe that companies with proprietary technology that enables them to aggregate, curate, and contextualize healthcare data have a tremendous opportunity to layer on software applications and help address a myriad of downstream use cases for their customers. Our Series C investment in BenchSci, completed in partnership with our friends at iNovia Capital and F-Prime Capital, provides an illustration of this thesis in our portfolio – one of many, we hope, over the next few years. The Series C funding is intended to help BenchSci expand the company’s artificial intelligence and machine learning-enabled software platform into additional applications, rapidly scale headcount, and forward invest in future growth initiatives.
BenchSci was founded in 2015 by CEO Liran Belenzon, Chief Science Officer Tom Leung, Chief Data Officer Elvis Wianda, and co-founder David Chen who met one another through the University of Toronto’s Creative Destruction Lab. The company’s technology platform endeavors to increase productivity and efficiency in the preclinical research process for pharmaceutical and biopharmaceutical organizations. The life sciences industry spends an extraordinary amount on preclinical research as these efforts help develop a pharmaceutical or biopharmaceutical company’s core intellectual property. We estimate global preclinical expenditures at ~$80B annually, or ~40% of total research and development investment for life sciences firms, and scientists at pharmaceutical and biopharmaceutical companies perform tens of thousands of preclinical experiments per year.
Despite this level of investment, preclinical research has long been plagued by inefficiencies. BenchSci’s customers estimate that approximately 80% or more of preclinical experiments performed yield no value to their overall research efforts; relatedly, it is extremely challenging to identify potentially wasteful or redundant experiments a priori. This process continues to be one of trial and error – more “art than science” – and limited technology tools exist to help scientists become more productive. Moreover, the data captured in the context of these efforts exist in disparate, siloed systems, thereby inhibiting information sharing and collaboration even within a life sciences company. Even when successful, a preclinical research process takes between six to seven years on average, thereby delaying time-to-market for life-saving medicines.
The problem described above is the one CEO Liran and his team are determined to solve via technology. The company’s mission is to deliver technology that helps scientists bring novel medicines to market 50% faster by 2025. To do so, BenchSci has built a comprehensive preclinical experiment-focused knowledge graph, encompassing data on over 40 million experiments. Consistent with our framework outlined above, the company has built software and computer vision technology that automates the stitching together and curation of experimental, bioinformatic, and other data from numerous, disparate sources, including its customers’ own internal data. Further, the company’s team of PhD scientists works alongside BenchSci’s product and technology teams to contextualize BenchSci’s 100+ machine learning models and algorithms such that its knowledge graph and results make “scientific sense” to scientist end-users as they leverage the company’s technology platform.
BenchSci’s flagship application was launched in 2017, and leverages artificial intelligence to help scientists select the optimal antibodies and/or reagents to use in their experiments based on experiments previously performed that are relevant to the study in question. This saves scientists significant time and resources – customers indicated to us that they have saved tens of millions in hard costs alone by eliminating redundant/wasteful reagent purchases, not to mention the time savings (several weeks to months per project) and other efficiencies they’ve realized. The company is not stopping there, and we are particularly excited about what BenchSci is going to do next with its breakthrough technology that will shape the future of preclinical research, although we will leave it to Liran and his team to share more in the coming months.
BenchSci’s compelling value proposition, coupled with its reputation for relentless innovation and superb customer service and support, has engendered customer delight, and the company boasts a net promoter score of 80+. Its customers include 16 of the top 20 pharmaceutical companies (by revenue), in addition to over 4,500 leading research centers globally, and its platform is being used regularly by 50,000+ scientists. CEO Liran has scaled the organization to meet latent demand – BenchSci has grown its employee base more than 8x in the past three years, and expects to reach 400+ employees by the end of 2022. The company has been recognized as a Deloitte Tech Fast 50 company and a CIX Top 10 Growth company.
CEO Liran has also lined-up an impressive team of advisors and experts to advise BenchSci on life sciences research and development, organizational culture, and artificial intelligence and machine learning technology, including TCV Venture Partner Jessica Neal (former Chief Talent Officer at TCV portfolio company Netflix).
“BenchSci plays an important role in curating and contextualizing healthcare data to increase productivity in the preclinical research process,” says Jessica, “and I look forward to supporting Liran and his team as they continue to scale.”
Growth metrics and accolades aside, what also impressed us about BenchSci is Liran’s unwavering focus on fostering BenchSci’s culture. Liran believes the company’s distinguished culture is instrumental to its success, and he endeavors to build an inspiring, inclusive, and equitable work environment where employees are set up to thrive and have a meaningful career. Starting with Liran, it was clear during our diligence that BenchSci’s employees pursue continuous improvement and a high-degree of transparency and candor. The results speak for themselves – BenchSci has been named a certified Great Place to Work® and is a top-ranked organization on Glassdoor. We are excited to add Jessica Neal to BenchSci’s advisory board to help Liran continue to develop and grow the company’s culture as BenchSci scales through its next major inflection points.
“Our recent Series C raise enables us to build and deliver a next generation AI solution for global pharmaceutical companies that will enable scientists to exponentially improve their preclinical R&D work,” says BenchSci CEO Liran Belenzon. “We are a mission-driven organization intent on achieving success beyond success, and I’m excited that TCV recognizes our market-leading potential and has chosen to back our meteoric hypergrowth.”
We are off to the races in our partnership with Liran and the BenchSci team, and are incredibly excited to help build a category-defining, generational software company that drives productivity and efficiency in the preclinical research process, thereby bringing novel, life-saving medicines to patients faster.
***
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 interview and 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/
Software development is a $2 trillion industry – yet today’s “software supply chains” have become increasingly challenging to govern and secure as agile development practices have evolved in the modern cloud era. Legit Security, a recent addition to TCV’s portfolio family, is on a mission to change that by providing end-to-end governance and security throughout the entirety of the software development lifecycle.
Software now plays an important role in nearly every business; it is one of the most critical assets empowering organizations to create efficiencies and competitive differentiation. Software development practices are constantly evolving to improve business agility and enable new digital business models, but as a result, software supply chains are also changing, have become highly complex, and are increasingly difficult to govern and secure. Too often, the code, pipelines, development infrastructure, and third party resources within the software development lifecycle (SDLC) are left insecure, exposing the organization to potential breaches and software supply-chain attacks.
The damage inflicted by software supply-chain attacks has gained publicity following events such as log4j and Solarwinds. However, these attacks were not isolated, and it’s estimated that software supply chain attacks are increasing at a rate of two to six times per year. As a result, the importance of bringing security and governance to the entirety of the software supply chain is becoming top of mind for businesses globally.
Introducing Legit Security: Security for software supply chain environments
Legit Security, an Israeli-based security company founded in August 2020, aims to address this acute pain point by providing a security platform that protects the pipelines, infrastructure, code, and people within software supply chains so that businesses can stay safe while releasing software quickly. The platform provides security and developer teams with a “single pane of glass” to secure the SDLC by scanning development pipelines for gaps and leaks, the SDLC infrastructure and systems within those pipelines, and the people and their security hygiene as they operate within it.
Legit Security’s platform aims to remove blind spots and automate governance and compliance for the software supply chain. The platform uses an automated discovery and analysis engine to identify vulnerabilities, measure and track the security posture of teams and development pipelines, and ensure compliance to regulatory and governance frameworks in real-time. By using Legit Security, security and development teams can manage risk more effectively and increase efficiency by focusing on what’s most important.
“Legit provides a single pane of glass to mitigate software development risk. We’re now able to inventory all our SDLC systems and security tools, view developer activity, and detect and remediate vulnerabilities across them fast. Legit’s security scoring also allows me to measure the security posture of different teams and show progress improving it.” – Bob Durfee, Head of DevSecOps at Takeda Pharmaceutical Company
Deep cyber security expertise
TCV is investing in Legit Security through its recently-announced Velocity Fund, which aims to invest in expansion-stage companies in its sectors of interest.
The founders and executive team of Legit Security have deep experience in cybersecurity. The founders all came from Checkmarx, a leading application security testing business, and had initially met in the Israeli military’s intelligence unit. As cybersecurity researchers and team leads for the renowned Israeli Defense Force’s Unit 8200, they gained real-world security experience with the offensive and defensive tactics specific to software delivery pipelines.
CEO & Co-Founder Roni Fuchs was formerly Senior Director and Head of Software Composition Analysis at Checkmarx, after his previous startup Lumobit was acquired by Checkmarx less than a year after its launch in 2018. Previously, Roni was a senior software engineer at Microsoft. Liav Caspi, CTO & Co-Founder of Legit Security, and Lior Barak, the company’s VP of R&D and Co-Founder, share similar backgrounds: all three overlapped at the Israeli military, Lumbobit, and Checkmarx. Chris Hoff, VP for Worldwide Sales was most recently Regional VP of Sales at Duo Security, having previously held sales roles at EMC, Kaspersky, Cognos, Watchfire/IBM, and CA Technologies. Derick Townsend, VP of Marketing, was most recently VP of Product Marketing at Ping Identity, with prior marketing leadership roles at UnboundID, DXC, ServiceMesh, CA Technologies, iTKO, and IBM.
Shifting left: The vast “DevSecOps” opportunity
So why are we so excited? Well, on top of the deeply relevant and honed skills that run through the company from its highest level, we believe that Legit Security is on to something big and important in the application security space. Over the past five years, as application development practices have evolved, the notion of “DevSecOps” (development, security, and operations) or “shifting left” has become increasingly popular.
“Shifting left” aims to make security more agile, repeatable, and automated, ultimately empowering DevOps teams to bring products to market faster. Existing application security solutions generally operate in isolation, resulting in silos throughout the pipeline. Further, blindspots can exist along development pipelines and SDLC systems and infrastructure, including GitHub / GitLab repos, which are not covered by traditional application security tools. In addition, the disparate nature of traditional AppSec tooling requires security teams to navigate across the numerous point solutions to try and stitch together insights into potential vulnerabilities, often leading to “alert fatigue.”
Legit Security bridges this gap by spanning the SDLC with automated discovery and analysis capabilities that include auto-detection of code repositories, build servers, artifact repositories, and deployed security products such as Snyk and Veracode along with their security coverage. When your SDLC changes, it’s automatically detected by Legit. The platform provides hundreds of best practice software supply chain security policies that can be enforced directly in the product, as well as a unique Legit Security Score to manage risk, track security posture, and monitor compliance to regulatory and governance frameworks in real-time.
This holistic, end-to-end insight enhances governance at various checkpoints, empowering enterprises to derive greater value from existing security tools. It’s no coincidence that customers frequently describe the Legit Security Platform as their “application security command center.”
Where are we now?
Legit Security has now emerged from its pre-launch phase, during which the company has been busy acquiring customers (from Fortune 500 companies to fast moving software-driven businesses), building a platform for demanding enterprise environments, and securing funding from top-tier investors,including TCV. The business has already grown significantly with new offices in the U.S. and Israel, and an expanded team, as well as connections with important partners and advisors.
I’ve known co-founders Liav and Lior for many years, since our time working for the Israeli Defense Forces. We gained invaluable experience there, but perhaps most important was learning that ‘anything is possible’ in cybersecurity with the right talent, focus, and resources.”
Roni Fuchs, CEO & Co-Founder, Legit Security
After military service, the founding team members worked in leading cyber security companies across Israel and recognized a growing gap between traditional AppSec tools and a new generation of rapidly evolving, modern software development environments. The gap was growing and traditional security tools and vendors were unable to catch up.
“Because of the adoption of agile development, cloud, and modern development pipelines, the approach needed to secure software releases has fundamentally changed. It’s no longer just about ‘the code’. Software is now assembled in multiple steps across a supply chain leveraging many trusted contributors, pulling artifacts from countless repositories, built, and assembled on underlying infrastructure that must be securely configured, and all the while providing speed, agility, and efficiency. These modern supply chain environments created a sprawling new attack surface – one that is increasingly exploited by over 2x-6x a year, depending upon the analyst, government agency, or vendor report you read.” – Roni Fuchs, CEO & Co-Founder, Legit Security
TCV team members Matt Brennan (TCV General Partner), Tim McAdam (TCV General Partner), Mark Smith (TCV Venture Partner), and Alex Gorgoni (Investor) are excited to partner with Legit Security, helping to guide the company through its next critical phase of growth. Our team has witnessed first-hand the enthusiastic response of customers as they learn about the unique positioning and scope of the Legit Security platform, and its ease of deployment.
This is a sector we expect to be active in over the coming months, too, and we look forward to being a part of it.
***
The views and opinions expressed are those of the author and do not necessarily reflect those of TCMI, Inc. or its affiliates (“TCV”). TCV has not verified the accuracy of any of the data or statements by the author 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 interview and 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/.
If the best way to create the future is to build it, then the best way to understand a possible future is to listen to those who invest in it. Gartner interviewed several leaders at TCV to better understand their views on the future of high technology and high-tech providers. The views expressed below represent TCV’s view on its operations and the future. These opinions are TCV’s own and independent of Gartner positions. Throughout the interviews, the following themes emerged regarding the forces and factors driving technology investments and future success:
Top-line revenue growth has replaced cost efficiency as the primary job for technology — it is now Job. 1.
Insight is the source of effective strategies for achieving growth through differentiation and specialization.
The pace of change is accelerating across the frontiers of technology, including how rapidly companies and consumers adopt it — and few competitive advantages are as decisive as speed.
Technology architectures are in the midst of a generational change that is driven by more than the cloud or Hyperscalers.
TCV has invested in these insights, focusing on companies with the technological potential to support rapid, substantial growth in large, untapped markets. Figure 1 shows the ideas and connections TCV leaders described as the future of high tech.
Figure 1. TCV’s Perspective on Technology-Accelerated Growth
Growth Is Job 1 for Technology
“When you cut through all of the jargon and acronyms, the biggest difference for software and tech over the past five years has been in supporting growth,” says McAdam, who contrasts the growth imperative with technology’s prior jobs of taking costs out or getting cheaper computing power.
“Technology has created operating leverage via business process automation. Now technology’s value rests in driving top-line growth.” This changes the nature of technology, how it is valued, and what it does, according to McAdam.
“Growth is the uber premise when we think about disruptive technology solutions and the digitization of everything that drives our investment themes,” McAdam explains. “Consider CFOs. It used to be that an old-school CFO would be cost-oriented and say yes if the solution saved money and drove EPS. CFOs of today still care about this, but not as much as they care about taking market share from the competition. The clearest way a tech company can get a multibillion-dollar market cap — one that is 10, 20, 30 times revenue, is to provide a product that allows customers to transform their businesses and grow faster than the competition.”
Building for Scale and Speed
Applying technology in support of revenue growth requires TCV to work with companies on their go-to-market (GTM) strategy. TCV uses the ratio of revenue growth to sales and marketing expense (see Figure 2a) to identify points of friction and efficiency.
Figure 2. TCV’s Sales and Marketing Ratio
The calculation indicates how much new growth the company is achieving for every dollar spent on sales and marketing. If the ratio is 50 cents every $1 spent on sales and marketing generates 50 cents in new growth. The lower the ratio, the more opportunity there is to increase efficiency or effectiveness.
Figure 3 illustrates how the sales and marketing ratio can visually depict the performance of a company’s sales and marketing efforts. (Note these ranges are for illustration only; typical ratios vary by industry.)
Figure 3. Illustrations of Sales to Marketing Ratio
Source: TCV
TCV is using technology in a number of ways to move the needle:
Implementing analytics and diagnostics to identify growth obstacles, and documented strategies to better orchestrate key GTM practices across sales and marketing.
Facilitating forums and collaboration where leaders share ideas and best practices and road-test ideas with other executives.
Leveraging GTM practices that are based on best practices within the portfolio and providing other TCV companies with ready-to-programs to speed time to value.
TCV’s head of Marketing, Katja Gagen, added: “We see companies using technology to optimize their go-to-market capabilities. This can range from publishing thought leadership on growing sales pipeline or refining their messaging. The difference with technology is that companies can actively benchmark themselves against industry best practices.”
Blending Human Insight with Analytics to Identify Growth Potential
“We track nearly 10 million companies in our database,” notes Tim McAdam, a general partner at TCV. “We then do a deeper analysis of 2,000 to 3,000 candidates per year in order to select 12 to 15 companies in which to invest.” This puts our information on prospective companies into an analytic engine running proprietary algorithms created from the firm’s domain knowledge, sector expertise and 26 years of investment insights.
The result for each candidate is much like a credit score — a snapshot of investment worthiness that guides subsequent analysis and decision making. As McAdam explains, “Any given result is statistically valid because of the high number of other companies we have ranked against the same set of metrics. It’s an empirically driven assessment of the company’s areas of strength and needs for improvement.”
TCV uses this information to differentiate each of its portfolio company’s situation and connect it with experienced people and resources in support of the company’s success. McAdam compares TCV’s role to that of a coach, “we recognize that the founders of our portfolio companies are deeply invested in their firms. We seek to provide advice for them with humility, intellectual honesty and insight, with an eye toward finding solutions that move them forward.”
Growth requires a different Technology Architecture and Infrastructure
Matt Robinson, a TCV principal, explains that “high-tech architectures shift about every decade. Today, the increasing importance of speed, extensible solutions and consumption-based business models is the driver of evolution in architectures and infrastructure. If my technology is designed to drive your top-line growth, then your growth becomes my growth,” Robinson explains. “Our architectures and infrastructures need to be seamlessly integrated together.” Thus, the business case for architecture evolution is at least as important as the technical innovation from cloud and Hyperscalers.
The Future of High Tech — High Growth Potential
TCV does not see the future as one of consolidation around a few large well-capitalized companies — either Hyperscalers or so-called digital giants. “It is an old argument to think that everything will consolidate,” McAdam notes. “That view makes sense only if companies stop finding new ways to grow.” While he believes that Hyperscalers are important, he sees their role as “more of a channel to a stream of future technology-intensive growth and innovation rather than a competitor in the application/solution space.”
The financial crisis of 2008 came as a resounding shock for countless companies, including many in the financial industry itself. But not for AxiomSL, a leading provider of cloud-enabled software for governance, risk, and compliance (GRC) regulatory reporting solutions to the financial services industry.
AxiomSL was founded by Alex Tsigutkin and Vladimir Etkin in 1991. As data management experts they had seen disorganized, unintegrated GRC processes even in highly regarded financial firms. “Everywhere I went, it was the same. The data was all over the place, in different systems and different departments,” explains Tsigutkin, CEO of AxiomSL. “We saw a real need to bring all of this enterprise data together at a granular level.” Large financial institutions soon began adopting AxiomSL’s software to assemble data they used for assessing risks and reporting financial results to investors and regulators.
Then the repeal of the Glass-Steagall Banking Act in 1999 freed financial institutions to diversify into a wide range of new activities, and GRC processes took a back seat comparatively. The new priority was financial innovation and growth, to extend the United States’ position of prominence in global finance. “For years, the government and regulators didn’t put that much pressure on financial institutions,” Tsigutkin points out. “That changed completely after the 2008 financial crisis, and that’s when AxiomSL really took off.”
By this time, the company’s software data management platform and related algorithms organized operating data to align with the latest requirements of various regulatory authorities in multiple countries globally. These category-leading capabilities spurred AxiomSL’s sales growth into double-digit territory. International business began climbing too. “We were growing like wheat in the fields,” says Tsigutkin, a native of Ukraine.
But growth also brought some challenges. AxiomSL had always given its customers attentive support, especially when they were new to automating GRC processes. With rapid growth, that level of care was becoming harder to sustain; a successful strategy for landing and expanding clients was reaching its limits. “It’s very difficult to do everything on your own, especially dealing with a large and growing client base at the same time,” Tsigutkin says. “I felt this was a great opportunity to put some expert disciplines together. When I got advice on how to do that, it was to bring top notch growth equity into the mix.”
So Tsigutkin invited growth-stage investors to present their ideas for AxiomSL, including TCV, a firm he knew well from regular interactions in the past. With around $2 billion already invested in fintech, TCV understood that AxiomSL’s business could grow even faster for three interrelated reasons: an explosion of data in the financial world, proliferating regulations around the globe, and sharply higher consequences for financial companies that mismanaged them. With tighter financial discipline, more proactive sales efforts and scaling up systems and processes, AxiomSL believed it could become not just a category leader but the global standard for risk management and regulatory infrastructure solutions for the financial services industry.
“As we talked with private equity firms, TCV was distinctive in a number of aspects,” recalls Etkin, the company’s CTO. “They had proven success with fintech and GRC companies, so their long-term vision for AxiomSL and their approach to collaborative business-building really stood out.”
TCV invested in AxiomSL in June of 2017, and the new partnership moved fast. “TCV knows how to focus on what’s key for scaling a company, not just growing in the same way,” Tsigutkin explains. For example, TCV pinpointed the need for industrializing sales, sales leadership as well as more robust processes for planning and budgeting. “They also helped us understand how to use equity to attract and reward people,” Etkin notes, which enabled the company to recruit multiple new executives with significant experience scaling similar organizations.
“TCV saw in AxiomSL a category leading industry-specific software business with next generation technology, a highly satisfied client base, a mission-critical use case, – and most importantly, product-centric co-founders and partners in Alex and Vlad who had deep subject matter expertise and a strong growth orientation.” recalled Nari Ansari, TCV general partner and former board director at AxiomSL.
The collaborative approach between AxiomSL management and TCV helped AxiomSL accelerate growth, increasing software revenue over 150% in three years. Its ControllerView® intelligent data management and analytics platform could provide thousands of reports across dozens of jurisdictions and more than 100 regulatory agencies. From 60 employees during the financial crisis, the company had grown to nearly 900 globally. According to Tsigutkin, “having such a strong team really helped us to build a world-class organization.”
Consistent with TCV’s longstanding investment thesis for governance risk and compliance solutions, change and complexity can provide for significant opportunities for leading software vendors. Indeed, AxiomSL’s positioning for its offering set has been as a “Platform for Change” given the constantly evolving regulatory environment for financial services market participants. As the business entered 2020, that change orientation would become even more paramount.
“As COVID-19 started in early 2020, the world changed quickly, and the swiftness of market happenings was adding increased complexity for banks and regulators alike. During this period, AxiomSL’s value proposition in understanding and managing risk continued to demonstrate its importance and the business saw sustained momentum throughout 2020,” remarked Amol Helekar, a TCV principal.
When the pandemic hit, AxiomSL as an organization had to adapt as quickly as its customers. “Being with TCV during this period was absolutely a blessing,” Tsigutkin recalls. “First they helped us to stay calm and provided very sound advice about our talent strategy and the welfare of our valued Axiom team members. Then they helped us focus on execution and growth. Moving more into digital marketing, for example, really enabled us to keep growing in 2020. TCV also supported us as we increased our investment in cloud offerings which became even more important in a distributed COVID world for our bank clients.”
AxiomSL’s hyper-growth during the TCV partnership resulted in consistent market share gains. Along with the company’s strong profitability, blue chip client list and technology leadership, these attributes brought interest from outside parties, particularly private equity firms. As Rick Kimball, TCV founding general partner and former AxiomSL board director remarked, “Alex, Vlad, and the team transformed the organization during our partnership while deftly executing a growth agenda that expanded the business on multiple dimensions.”
In the fall of 2020, TCV worked collaboratively with Alex, Vlad, and the AxiomSL management team to assess this external investment interest and prepare the business to explore various alternatives. Ultimately this brought an offer from private equity firm Thoma Bravo to acquire a majority stake in the company. The new investment closed in December of 2020 in one of the largest GRC transactions of its kind, and Tsigutkin took a moment to reflect, “Our growth is due in no small part to the contributions of TCV, who has been a critical partner for AxiomSL for the past three years as we grew the franchise at a record pace.”
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.
Finally, 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.
Lead the Category
This phase of the SaaS strategy is well understood. A SaaS company aspires to:
build a great product (and service)
over time, build an efficient and repeatable
go-to-market model (marketing -> sales -> onboarding)
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 our 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.
We also like to think about the concept of “gravity”:
Workflow gravity – the system that all other systems integrate to – it’s where 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
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.
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.
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. We 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 us know, and we’ll continue to publish and explore the topic. We 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.
TCV is delighted to announce that Gopi Vaddi, a seasoned investor with broad international experience, has joined the firm as a General Partner. Founded in 1995, TCV has invested over $13 billion in more than 350 consumer and enterprise technology companies, including $2 billion in Europe, where Gopi will be focused. TCV investments in Europe include Believe, FlixMobility, Brillen.de, RELEX Solutions, RMS, Sitecore, Sportradar, Spotify, The Pracuj Group, and WorldRemit.
Gopi is an excellent fit with TCV’s long-term strategy and
focus of investing across geographies and domains, often far from major
technology and financial hubs. He was born and raised in India, took degrees in
business administration and electrical engineering in the U.S. and India, and
has experience investing in the U.S., Europe, and Asia. Most recently, he was a
partner at Providence Equity’s growth fund, where he worked on growth buyouts
and minority investments in software and payments. At TCV, Gopi will focus on
software and software-enabled businesses covering business applications, vertical
software, digital marketplaces, and infrastructure software.
“We take as much care in adding a new partner as we do in making a new investment,” said Jake Reynolds, General Partner at TCV. “Gopi’s success springs from the same qualities that have driven TCV for nearly a quarter-century: deep domain knowledge, keen market insight, and a passionate commitment to helping entrepreneurs achieve category leadership. He also complements the firm’s broad growth-biased investment approach with expertise in software buyouts and buy-and-build investing.”
Gopi understands TCV’s approach, just as we recognize the value he has brought to his investments, including a willingness to roll up his sleeves and work side by side with management. As a citizen of the world who started his career as an engineer and data modeler, he has an innate ability to identify and partner with the next generation of category leaders and the entrepreneurs steering them.
We are thrilled to welcome Gopi to the team.
The General Partners of TCV
***
The
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/portfolio-list/. For additional important disclaimers regarding this post,
please see “Informational Purposes Only” in the Terms of Use for TCV’s website.
It began over dinner.
Nancy and Randy Flamm, who worked for competing suppliers of materials to small
manufacturing companies, were out with a shared customer who wished that his
factory had the kind of MRP and ERP software that large manufacturers had. Randy
sensed opportunity: As production manager at a small manufacturer in the early
1980s, he had written his own software for inventory and scheduling. In short
order the Flamms quit their jobs, took a second mortgage on their house in Los
Angeles, and launched IQMS.
They had 100 customers
within a year.
The innovations came quickly.
Randy converted his software to the newly introduced Windows platform, creating
one of the first Oracle-based client-server programs for small manufacturers.
Then he connected the application to factory equipment so that the machines
automatically sent operating information to a data warehouse. Next, he linked
the warehouse to back-office financial and human resource systems for the
industry’s first end-to-end solution. He changed the whole game by delivering
comprehensive views of factory performance in real time.
Now IQMS enabled small
factories to do what the big ones did: monitor operations moment by moment
around the clock, adopt lean principles, organize just-in-time supply chains, cut
downtime with proactive maintenance, and determine production cycles and unit
costs within minutes and cents.
Growth
and Challenges
With growth came both challenges
and opportunities. The Flamms had moved IQMS to Paso Robles, a wine region midway
between Los Angeles and San Francisco, which made them one of the handful of
high-tech companies near mid-state universities such as California Polytechnic
University (“Cal Poly”). But then Silicon Valley began attracting talent from those
schools, and the Flamms had to get creative with their recruiting. One tactic
was doing interviews on local talk radio, encouraging parents and grandparents
to tell college-age kids that Paso Robles had its own high-tech employer.
Meanwhile Randy was the
company’s CEO, CTO, and software designer, and nearly everybody in the company
reported to him. Nancy, the controller, pulled in her brother and his wife to
run sales and marketing. When the Flamm’s babysitter Shannon Holloway showed
interest in IQMS, they discovered she had management talent and hired her, too.
At the 20-year mark, IQMS
had annual revenue of $35 million, no debt, a strong competitive position – and
the Flamms were turning down dozens of investor inquiries each year. When they
decided to recapitalize in 2014, one company stood out. “TCV was heads above
everybody else,” Randy Flamm says. “We spoke the same language, and everything
they ever said was exactly what happened.”
Strong
Partnership
“IQMS caught our
attention well before we invested, because of our experience with other founders
who achieved the same kind of technological and competitive breakthrough,”
explains Jake Reynolds, general partner at TCV who led the investment with
fellow general partner Kapil Venkatachalam. “We weren’t worried that they had
taken little or no outside investment, because that meant they were going to judge
us based on what we could do for their business, not the size of our check.”
TCV presented a roadmap
for moving IQMS toward cloud-based, SaaS solutions that generated revenue from
subscriptions rather than licenses. TCV also advocated for tools to surround
the company’s customer-focused products with stronger support and professional
services, and for increasing speed by building out the software architecture to
a true multi-tenant solution. Significant investments in all these areas would
take several years to accomplish but prove decisive for scaling the company.
Just as importantly, TCV
had abundant experience with transitioning founder-led, family-run companies to
experienced manage teams. That’s why everyone was delighted when Gary Nemmers,
formerly COO of HighJump Software, agreed to become IQMS’ new CEO in 2015. Nemmers
was a veteran of other founder-led businesses, and he had helped grow and scale
multiple businesses and prepare companies like HighJump for its successful exit
via acquisition. “The first time I met Randy and Nancy, we clicked, and I knew
it in my gut that the time of the transition was right,” Nemmers recalls, and
that was the beginning of IQMS’ next phase of rapid and sustainable growth.
Smooth
Management Transition
Respectful of IQMS’s
close-knit culture, Nemmers worked closely with TCV and brought in seasoned
veterans to take leadership positions the company had never staffed before, including
Matt Ouska as CFO, Dan Radunz as CTO, and Cheri Williams as SVP of professional
services. Under Nemmers’ leadership, the team formalized and aligned the
company’s core business processes so they could accelerate product management
and development, serve more customers, and scale more efficiently than in the
past. They also established an office near San Francisco to increase the
company’s accessible pool of software talent.
“Our mantra was ‘people,
processes, playbook’,” says Nemmers of his first year leading IQMS. “Once we
added a few key people, we could bring in strong processes across the entire
firm and establish playbooks to do things in a consistent, repeatable way.” As
for working with private equity, his advice to other CEOs is equally clear.
“You listen to and align with your board and your investors. At the same time, you
follow what has made you successful in the past because that’s why they hired
you to run the company.”
New
Growth
IQMS flourished and
significantly increased its customer base. Growth was not always smooth, but
TCV had Nemmers’ back. “License revenue is inherently lumpy,” he points out,
“so sometimes revenue was a rollercoaster. We’d crush our plan one quarter and
miss the next, but we had a plan and knew how to execute. The board was super
helpful in thinking long-term and strategically versus focusing on quarter-to-quarter
swings. They were great sounding boards.”
With a broader and deeper
solution set plugged into a professional marketing engine, IQMS emerged as one
of the top software providers for small and medium-sized manufacturers around
the world. The company naturally started attracting attention from the strategic
players in the ecosystem. “We knew that IQMS offered the best route for enterprise
software providers who wanted to expand into the SMB space,” Nemmers points out,
“so we played from strength. It wasn’t just the enterprise players evaluating
IQMS, it was also us looking for an ideal fit.”
Strategic
Exit
Dassault Systèmes of
France stood out for exactly that reason, and Nemmers seized an opportunity to kickstart
the conversation. During a visit to Europe, he picked up the phone and called
Philippe Charles, SVP of manufacturing and supply chain for Dassault. “I told
him I was in Zurich and a whole day had opened up on my calendar,” Nemmers
recounts. “He said ‘Give me five minutes.’ Then he called back with an invitation
to meet him and his team in Paris, and that was the beginning of the great
relationship we built with Dassault over the next year and a half that led to
the merger.”
Nemmers and his team had carefully and strategically grown the business and poured energy into building relationships with customers, serving 1,000 manufacturers located primarily in the U.S. whose 2,000 manufacturing facilities in 20 countries produce for the automotive, industrial equipment, medical device, consumer goods, and consumer packaged goods industries. The core MES and ERP platform could be expanded with more than 20 additional modules including CRM and payroll, all integrated in a single database.
“Dassault is a strategic
vendor for enterprise manufacturers and was looking for a way to get into the SMB
segment,” explains Venkatachalam. “Initially we talked about channel
partnerships, but we had a feeling the discussion would pivot toward something more
strategic.” Nemmers worked with TCV to conduct a robust M&A process that
included more than 20 strategic vendors and investment firms. Dassault won the
deal and completed the acquisition in early 2019.
The two companies already
share around 600 customers, who use both IQMS solutions and Dassault’s
SolidWorks platform to run their factories. From this foundation, IQMS can
market to over 55,000 SolidWorks customers and Dassault can now address the
world’s estimated 250,000 SMB manufacturers. Even the timing is perfect,
because so many SMB manufacturers are now replacing legacy software that is
reaching end-of-life. Randy and Nancy Flamm are happily ensconced on their
ranch near the Pacific coast, while Nemmers guides his team and IQMS through
its integration with Dassault and onward toward even greater success.
