We checked in with Gordon Ritter, co-founder and general partner at Emergence Capital, to get the scoop on how the landscape of companies providing industry-specific cloud solutions is evolving. Register now to hear from him live at Box Dev.
What has driven your interest in cloud solutions focused on industry-specific solutions?
The first 10 years of business cloud applications was about horizontal markets - a mile wide and a foot deep. Salesforce is the poster child for horizontal applications focused on customer relationship management across every industry. By now, most of the horizontal opportunities have been covered. The next decade will be about depth. It will be about industry solutions. Industry Cloud entrepreneurs are focused on solving a broad range of issues for a focused customer set, and are creating companies that will be as big, and more profitable, than many of the horizontal cloud companies that have come before them.
You put together an industry cloud landscape in early 2014. What are the biggest changes you've seen in the Industry Cloud space since last year? What new industries/verticals are emerging?
We are in the process of updating our 2014 landscape. We anticipate there will be at least 20-30 more companies, particularly in legal, hospitality and transportation and logistics.
We are also seeing an uptick in industries that we labeled as the “slowest to move to cloud” in 2013 such as government and financial technology.
When we created the first landscape, we also did some research about the 8 factors that impacted Industry Cloud adoption speed, we identified healthcare and education as two of the “cloud-friendliest” industries.
That research was based on eight accelerators and two detractors that are outlined below.
- Dynamic Regulatory Environment: Industry cloud platforms enable rapid and “auditable” deployment of new features or functionality that are required to comply with regulatory changes.
- Dissatisfaction with Incumbents: Users of incumbent software may have grown accustomed to changing their workflow process to accommodate a one-size-fits-all system, but once customers get a taste of a vertical solution designed specifically for them, they realize the lack of value in a horizontal offering.
- High Industry Concentration: Industry cloud solutions enable more efficient sales and marketing processes, particularly in highly concentrated industries in which fewer than 50 companies represent over 80% of revenue.
- Mobile Work Force: Emergence Capital has seen an increasing number of promising industry-specific, mobile-first cloud solutions, and many of these are focused in verticals with high percentages of non-desk workers.
- Value in Data: Cloud architectures are uniquely good at sifting through large datasets, and, cloud companies can capture new proprietary data streams by adding software features that capture new end user data and behavior.
- SaaS Platform Alignment: The ability to leverage platforms such as AWS can dramatically speed time to market and enable a young company to focus on what is specific to the industry, rather than building the underlying infrastructure.
- Industries with Little to No Cyclicality: Industries that tend to be immune from financial cycles are better candidates for cloud solutions for two primary reasons: First, seasonal or annual forms of cyclicality make it difficult to build recurring revenue businesses, the hallmark of most SaaS businesses. Second, moving to a cloud solution often requires some initial IT investment, and this can be hard to make if an industry is in a “down cycle.”
- Visually Dependent: Industries such as real estate, manufacturing, construction and retail rely heavily on visual representations, making industry cloud platforms the best solutions to integrate visual images. In addition, visually dependent industries can leverage the powerful cameras on mobile devices.
- Privacy Concerns: One of the core tenets of SaaS infrastructure is that data is hosted “off-site” in the cloud. In industries such as banking, consumers and regulators are concerned about the potential for security breaches with this data structure.
- Migration Costs: Shifting to a cloud model requires a software transition that can be complicated and expensive. In industries such as transportation or manufacturing, software changes can lead to errors, lost revenue and customer dissatisfaction.
Where do you see the most opportunity as an investor?
We look for five factors when considering industry cloud investments.
First, what we call the “Talent Trifecta.” Successful industry cloud companies need technical acumen, business acumen, and a third skill: domain expertise. All of these skills need to be strongly represented on the executive team. At Veeva, President Matt Wallach’s focus on pharmaceutical companies serves as a perfect complement to CEO Peter Gassner’s product and technology expertise.
Second, we look for deep data. A key advantage of the industry cloud model is the ability to capture data at a granular level across a breadth of customers. Thoughtful industry cloud companies are creating ways to capture, archive, analyze, and use nearly all the data that comes into the system, resulting in compelling insights that were previously unavailable. For example, Opower works with utilities to collect customer energy usage data that can help individual customers modify energy consumption.
Third, we look for referral revenues. One of the most compelling elements of the industry cloud model is that most buyers in a given industry know each other. They attend the same conferences, may have worked together at some point, and travel in similar circles. As a result, industry cloud companies can build a reputation in an industry within a year or two of launch, resulting in a high percentage of reference selling. In fact, customer acquisition costs at industry cloud companies are often 30% lower than horizontal cloud solutions.
Fourth, industry cloud companies need to have massive market share. With a horizontal solution, there’s so much ground to cover, in both geography and business sizes, few companies can achieve more than 5 to 10 percent share. However, companies that focus on a specific vertical can achieve much greater penetration, often leading to a winner-takes-all environment. For example, Doximity offers a secure, social platform for healthcare professionals and doctors to engage with each other. Within five years of launch, 40% of doctors have signed up, making it the primary social network for this particular population.
Last, we look for what we call the “Layer Cake Product Strategy.” Traditionally, industry focused companies were perceived as “niche plays” because they tended to only offer a single application in a single vertical. The new breed of industry cloud companies can leverage cloud infrastructure to offer several layers of value, such as CRM solutions, marketing automation and data analytics. We refer to this multi-layered product strategy as the layer cake approach.
Our perspective is that we bring software and scaling expertise to the entrepreneurs who possess the deep industry knowledge to make an excellent product. The Emergence team is great at utilizing the broad base of SaaS and cloud experience across our network and portfolio to new opportunities we are excited about.
What verticals are getting the most attention? Who's underserved?
There isn’t a specific business unit that I can think of as particularly underserved - I’d say that across the board there is huge potential to improve software in many, if not all, industries. The legacy and on premise solutions that have dominated the enterprise architecture up to now are far inferior to the cloud capabilities that are a reality today. That being said, industry cloud companies ought to have a smart market entry strategy when they’re thinking of disrupting a specific industry. It’s an obvious answer, but the best way to do that is to look for where the software is the worst and target those users to drive early adoption. In terms of industries, the highest potential is in the oldest and most tired incumbents - things like law, police enforcement, and many more areas that have not had easy access to new technological solutions.
Join us at Box Dev to learn more about the opportunity in industry-specific cloud solutions. Early bird pricing ends soon, so register today!