SM: The surprising part of the story, one of the reasons I decided to cover it, is that I have not seen too many major trends in our industry in the Valley that all of the VCs did not run after. The venture industry is like lemmings. Everybody is running after the same trends. Someone figures it out, and everyone else chases. My own analysis is as follows: based on the time period, 2004 to 2007, it was also when Web 2.0 happened. People were chasing Web 2.0 and they got blindsided and missed the SaaS wave.
BJ: I think that is part of it. I also think that software is a product. Software as a Services is a service. If you look at every other category of investment in the venture business they are products. Communications systems, semiconductors, biopharmaceuticals, and software are all products. The knowledge that exists in venture firms is how to build a product company very quickly. It does not apply to service businesses. It is very different.
SM: What is different between the two in your opinion?
BJ: First of all, it is whom you hire. The people you hire in a service business are different than a product business.
SM: In what way?
BJ: A product business is transactional. You sell something, you get the money, and the relationship is over. A service business is about serving 24×7.
SM: You have to secure the renewal.
BJ: Exactly. It only makes sense if the person comes back for more. We know from experience that people who have been successful in product businesses are generally not successful in the service business.
SM: To be fair, large software deals are also reliant on customer satisfaction. They have not always been so. Siebel is notorious for selling products that were never implemented. By the time we got to the mature software industry, people realized they had to help customers derive value from their products.
BJ: I am not saying there is not value in products. It is simply a different mentality. We see this all around the Valley at the end of the quarter. What are you going to do to get the deal? You are going to discount, you will make promises, and you are going to try to force a sale. That is not the way service businesses sell. They have to create win-win. You have to have trust in your provider. In a product business, as long as you get the product, you don’t really care what happens to the business after.
The revenue trajectory of a service business is very different. It is laying out recurring revenue streams. If you chart the revenue trajectory, it looks different. You have to value these companies differently. You develop the technology differently. You compensate the sales people differently. You have different bankers to talk to about going public. These are very different animals.
The challenge that Jason and I felt in our former firms is that we would bring a good strong service business to the partners, but the other partners were inherently product people. That is true of most other firms. We have great respect for other SaaS investors, but we know their partners do not have the same appreciation for the realities of building a service business. It is harder to create a strong SaaS practice when you do not have the support of all of your partners.