Sramana Mitra: It’s very exciting that small businesses can afford technology at a completely different order of magnitude.
Chris Gatch: Yes, it’s amazing. The capital required to start businesses now is dramatically less. The dollars involved in VC rounds have gone down as a result of cloud technology. What’s cool is that the stuff the progressive entrepreneurial set – you know, these born-on-the-Web companies – have been taking advantage of for a few years is now moving even to the Main Street small businesses, which is where I’d say we live. We’re the average small business. It’s cool to see it making it down to those kinds of companies.
SM: The other thing we’re seeing is that lots of new startups are building technology that caters to these small businesses.
CG: Yes. I read one statistic that said that 85% of software developed this year is being developed in the SaaS model. That’s the cool thing. The rate of innovation is so much faster because the barrier to entry is so much lower for companies to get started.
SM: I’m not talking about the fact that it’s a SaaS. I’m talking about pricing and the target market. There’s a tremendous amount of software that’s being developed in the SaaS model that targets the very small business market. You talked about ADP earlier. One of my friends did a company called Pay Cycle that’s an ADP competitor, but it catered to companies with fewer than 20 employees. Intuit bought the company for $170 million, and it caters to a market segment and a price point that for them are very different. The way software developers look at it is different. There are products that are $350 a month, and there are products that cost $3.50 a month. The target markets are different.
CG: Yes. No doubt.
SM: You talked about acquisitions earlier. Cbeyond acquired a PBX company. Talk to me a bit about what kinds of companies you would like to acquire to fill out your portfolio. Now that you have a channel of small and medium businesses, what other products or functionalities do you want to bring into your portfolio and offer to your customer base?
CG: We did make two acquisitions in 2010. Those are the only two we’ve made since we started in 1999. We’re predominantly a company that grows organically. When we make acquisitions, it’s about capability and not about buying revenue, so to speak. We’re not a company you’re going to see making a lot of acquisitions. That being said, the areas we’re trying to grow in are network, cloud, and security. Companies and partnerships that can enhance our capabilities in those areas in a way that makes sense to our small-business target market are always interesting to us. Part of what I do in my role is look for those kinds of partnerships.
SM: What about channel deals? Do you have any kind of channel deals where you would identify, let’s say, capabilities you want to test or stuff that looks interesting but you don’t know how it would play out in the customer base? Would you do revenue share deals with those companies?
CG: We do have channels beyond our direct selling organization. About 80% of our revenue is through our direct sales organization. Those are consultative sales reps who go out and knock on the doors of small business owners, meet with them, and guide them in the process of how to take advantage of our services and to improve their businesses. We do have a wholesale channel program as well. We work with various types of wholesale partners. One group is what we’ll call typical local value-added resellers (VARs) who position our services as part of their relationships with their clients. We do pay residuals to those VARs. Then we have some larger reseller type of arrangements with some of the large distributors – companies like CW, for example. And then there are some specialized classes of VARs that are local in nature but larger. We have relationships with some companies like that resell our services, and we procure their services for feet-on-the-street fulfillment of services at our customer locations. If a customer needs his LAN updated or modified or a PC rebuilt, something that’s beyond what we can do with our in-house capabilities, we source that back to some of those partners in local markets.
We do at times choose those various channels to test certain products before we take them across the board to all of our partners. At times, we develop products that are only for one channel or another.