Why the next great SaaS company will look nothing like Salesforce

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Why the next great SaaS company will look nothing like Salesforce

Posted 5 minutes ago by Aaref Hilaly (@aaref)
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Aaref Hilaly Crunch Network Contributor

Aaref Hilaly is a partner at Sequoia Capital and a serial entrepreneur who previously founded CenterRun and Clearwell. He serves on the boards of Clari, Guardant Health, Skyhigh Networks and several other private and public companies.

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For years, a truism in software investing was that the value of application software lies in data, not in technology. Companies like Salesforce, Workday, and ServiceNow are valuable because they are the “system of record” (SoR), or single source of truth, for their customers’ most valuable information, such as customer records or employee data.

As a result, they become deeply embedded in their customers’ business processes, making them hard to rip out. That gives them tremendous revenue predictability and pricing power. The technology itself — databases combined with workflow engines — is not particularly innovative; it’s the information captured by the technology that’s important.

The newest crop of software applications turns this logic on its head. They mimic consumer companies by using technology as a “wedge” to gain widespread adoption and don’t even try to become systems of record.

Instead, they are “systems of engagement” (SoE), meaning apps that employees actually use to get their work done. For example, take Slack, which Forbes recently identified as the most valuable private cloud company.

The data in Slack is either low value (“water-cooler” conversations) or already lives in existing systems of record. The same is true for many other fast-growing apps, like Intercom (customer interaction), Clari (sales), Culture Amp (employee feedback) and Front (shared inbox).


Digging deeper, the specific areas of technology where these companies have innovated are ones that historically people have ignored — integration and design.

At big companies, integration is the ugly step-child of any product roadmap: everyone wants it to work, but no one wants to work on it. Here’s an example: a senior executive at a leading SaaS company tells me that twenty people from different groups across the company show up for the “billing meeting”, where it’s decided how billing will integrate with core features. But no one wants to work on the billing team, creating those integrations.

Startups have capitalized on that by creating high performance, scalable integrations, solving hard technical problems like how to sync without putting excessive load on the underlying system.

Entire companies, such as our portfolio company Okta, for single sign-on, or Segment, for analytics, are now built on integration alone.

Integration companies, while not glamorous, can build market power by positioning themselves at the center of an ecosystem and creating an “ecosystem network effect”, whereby they become a de facto standard. Okta and Segment are both on their way to achieving this.

But most new applications use integration to gather, organize, and analyze data. They win the hearts of their users through great design. That’s no small challenge, given growing data sets, shrinking screen sizes, and ever shorter attention spans, which is why the concept of design has become a huge differentiator.

It works because it’s a win-win. Startups creating systems of engagement get users and revenue, by leveraging data in the systems of record. They also increase the data’s value, by using it more and adding to it. That makes the big software vendors happy, as (they believe) it increases their customer lock-in and helps them become more of a platform.


What’s not clear is whether this will continue. Large companies like Salesforce want to innovate through technology. For example, the center-piece at this month’s Dreamforce, its annual conference, is a new artificial intelligence (AI) initiative marketed as “Einstein”, which layers predictive models over its existing applications.

Conversely, once a startup’s product is being used every day like Slack, it may start keeping more information within it and over time wean people off whatever they were using before (Outlook, Sharepoint, etc).

The game-changer could well be artificial intelligence: if AI software could extract signal from the unstructured product feedback in Intercom or the sales forecasting information in Clari, the data in those systems could become more valuable than the limited fields captured in today’s systems of record.

But that’s a long way off. For current startups, the message is clear. Don’t try to be Salesforce to Seibel, Workday to Peoplesoft or Coupa to Ariba. Those battles are over, and won’t be repeated. Instead, use technology — integration, design, perhaps machine learning or AI — as your wedge into the market.

Play nice with existing systems, and then analyze how people are using your product. Feed that back into new product development and drive more engagement, ideally creating a virtuous cycle between usage and design that keeps you ahead of competitors.

For examples of who does this well, look no further than the large consumer companies. It’s no coincidence that the two most awe-inspiring enterprise businesses today (AWS and Google Apps) both have a consumer heritage.

That’s the winning strategy for today, and most likely tomorrow.

Featured Image: Ismagilov/Shutterstock
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  • Salesforce

  • Salesforce Ventures

    • Founded 2009
    • Overview Salesforce Ventures invests in the next generation of enterprise technology to help companies connect with their customers in entirely new ways. Portfolio companies receive funding to accelerate their growth and gain a competitive edge through access to the world’s largest cloud ecosystem and the guidance of salesforce.com’s innovators and executives. With Salesforce Ventures, portfolio companies …
    • Location San Francisco, CA
    • Categories CRM, Cloud Computing, Enterprise Software
    • Website http://www.salesforce.com
    • Full profile for Salesforce Ventures
  • John Lilly

    • Bio John Lilly is a Partner at Greylock since 2011.John is currently on the Board of Directors of MessageMe, Clearslide, Citrus Lane, Code for America, and several unannouced investments. He leads Greylock's investment in Dropbox and led our investments in Tumblr (acquired by Yahoo in 2013) and Instagram (acquired by Facebook in 2012). John previously served on the boards of directors of TripIt …
    • Full profile for John Lilly
  • Workday

  • Intercom

    • Founded 2011
    • Overview Intercom is a fundamentally new way for internet businesses to communicate with customers, personally, at scale. It's a customer communication platform with a suite of integrated products for every team—including sales, marketing, product, and support. Our products enable targeted communication with customers on your website, inside your web and mobile apps, and by email. This contrasts with the …
    • Location San Francisco, CA
    • Categories CRM, Apps, Software, Mobile
    • Founders Eoghan McCabe
    • Website http://www.intercom.com
    • Full profile for Intercom
  • Clari

    • Founded 2012
    • Overview Selling is hard. Clari makes it easier. As a team, we know and live sales. We obsess over how to apply data science, beautiful design, mobile, and cloud technology to create a user experience people love – all to make sales teams more effective and productive. We help sales executives know whether they will hit their forecast and how to ensure record quarters in the future. We help sales …
    • Location Sunnyvale, CA
    • Categories CRM, Sales, Analytics, Software
    • Website http://www.clari.com
    • Full profile for Clari
  • Okta

    • Founded 2009
    • Overview Okta is the leading provider of identity for the enterprise. The Okta Identity Cloud connects and protects employees of many of the world's largest enterprises. It also securely connects enterprises to their partners, suppliers and customers. With deep integrations to over 5,000 apps, the Okta Identity Cloud enables simple and secure access from any device. Thousands of customers, including Experian, …
    • Location San Francisco, CA
    • Categories Security, Enterprise Software, Telecommunications
    • Website http://www.okta.com
    • Full profile for Okta
  • Culture Amp

  • Front

    • Overview Find the right teammate to reply to your messages and make unanswered emails and tweets a thing of the past. Comment on messages Avoid dirty forwards cc and bcc with easy‑to‑use comments to communicate internally with your team. Stay in the loop Get on top of things with the real time activity feed and notification center designed for you.
    • Location San Francisco, California
    • Categories Apps
    • Website https://frontapp.com/
    • Full profile for Front

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