Channeling the Bessemer SaaS CEO Summit

This week I had the pleasure of attending the Bessemer Venture Partners SaaS CEO Summit. Bessemer did a great job putting this event on and it was a real who's who of the SaaS world - Salesforce, Postini, LinkedIn, Eloqua, Intacct, IBM and many more.

I took away several insights from the meeting. I very much enjoyed Bessemer's Top 10 Law's for being SaaS-y - I agree with all of these rules except for law 4 "It’s a whole new ecosystem - Channels are very hard for SaaS companies to build, so don’t base your plan on SIs and traditional ISVs. You will need to sell directly for a long time."

The risk in literally interpreting this strategy is that you will build a company that is incapable of embracing channels, when the time comes that you want or need to. Salesforce and NetSuite are running into this problem today, and it was one of our most difficult challenges at Postini. I've found that there are both technical and cultural reasons for this.

The technical reasons are unique to SaaS - because in SaaS provisioning, contract enforcement, metering and billing are all built into the technical infrastructure of the system itself. With a channel, you need to be able to allow partners to provision new customers and users, you need to support revenue models associated with multi-tier distribution, you need to be able to feed usage information to the partner's billing systems, and you need to provide partners the information they need to address billing disputes. If you don't design the systems at the start anticipating that you are going to have a multi-channel business, you'll find that it becomes difficult or impossible to switch to this model when you need to.

When Postini passed the tipping point where channel partners were coming to us, it turned out that our own internal provisioning and billing systems were the biggest barrier to growth - because the systems were never built with a robust, multi-tier distribution system in mind we literally had the person who ran data center operations making decisions about what channel partners we would and would not sign up to do business with. Needless to say, this wasn't a lot of fun for our VP of channels.

Culture is clearly the second aspect of this. You either build a partner-friendly company culture or you don't. I've worked at companies that are partner friendly - Arbor Software, IBM and Intacct come to mind, and those that weren't. The culture is totally different - it's about trusting and celebrating partners vs a culture where you think you can do everything better yourself. It's about thinking how you can help the partners make money and build a business, knowing that if they succeed you will too. If you don't do this, over time all of your internal organizations become goaled and structured in ways that make it difficult or impossible to add channels or move to a partner friendly operating model. Channels can be counter-intuitive -so it takes a focus and commitment from the CEO level and once you get too far down the direct-only path it becomes very difficult to change.

I'll never forget the senior staff meeting at Postini in which we were trying to debug why were weren't making progress in our initiatives to upgrade our systems to support the channel, a year after declaring channels to be one of our core company strategies. We had invested an enormous amount of senior management and staff effort in time and money, but when things got hot at this meeting one of our most senior executives, whos teams had a big role in needing to do the work that had to be done if we would ever be truly successful in channels, got exasperated enough to admit "I never believed in partners anyway." No wonder we could never move the ball down the field. Never underestimate cultural resistance...

I think that Salesforce and NetSuite are in this difficult position today - where they couldn't be channel centric even if they wanted to because they have so much inertia in their operational systems and cultures. Once you get to their size if you haven't built your internal systems to support channels it becomes to hard and risky to take on this project - it's even harder than a new ERP implementation in the on-premises world. And once you build a very large direct salesforce and your business model around an entirely direct business, it's hard to think about leaving any oxygen for your partners.

Don't get me wrong - Salesforce is a great company that at this point clearly doesn't need channels - they have more business than they can close today and their biggest challenge is probably hiring enough sales people. What I am reacting to is the conclusion that based on Salesforce's experience that SaaS companies either don't need channel or it's hard to build channels - this is the conclusion people could easily make that I wanted to highlight that I think is a mistaken one.

I actually don't believe channels are really that much harder to build for SaaS companies than for any other software business. It's just that when today's large SaaS companies got started, it was too early, and channels weren't ready for SaaS yet - since channels don't create demand, they fulfill it. So Salesforce and NetSuite and Postini built models that were direct focused. To me the law is not that SaaS companies should avoid channels, but rather that you better think about how you can add channels from the time you get started, because if you don't you'll find yourself unable to when you need to.

I also believe that for growing SaaS companies channels represent a strategic way to deal with client acquisiton costs and to preserve cash. Because you earn revenue more slowly in the subscription based model, it can take one to two years before you make up the cost of sales and marketing for acquiring a new client. With a new client from the channel, you gain a smaller ongoing revenue stream but you avoid the high cost of client acquisition. As long as you are watching your operating margins, I think this is a really great way to build the business.

With my crystal ball hat on, I predict that as the SaaS business matures, it will look a lot like the existing software business and have robust on-line, direct and channel distribution - the ability to participate in an ongoing subscription revenue stream is going to overcome the downside of a limited amount of integration and customization revenue from the channel partners perspective.