August 22nd, 2006
AppExchange as SaaS exit route
Venture-funded on-demand startups must now take into account a new exit route when developing their business plans. Virtually no one these days has the stamina to hold out all the way to a successful IPO. A trade sale to another player is the preferred and only realistic option for most. Web 2.0 startups dream of being picked up early by Google. Now any on-demand startup joining Salesforce.com’s AppExchange ecosystem must be able to explain to their backers what makes their business an attractive acquisition target for Salesforce.com.
This is a change of tack for most AppExchange partners,Don’t get too big: Salesforce prefers a bargain whose primary reason for joining has been to market their wares to Salesforce.com’s almost 25,000-strong customer base. It’s the biggest single concentration of on-demand customers and dramatically cuts the sales and marketing costs of reaching those prospects (although one drawback is that so many vendors have recognized this and piled in, making it the most competitive space in which to try and sell an on-demand offering).
Now there’s another opportunity/risk to weigh. As first Sendia and now Kieden have demonstrated, becoming an AppExchange partner raises your visibility with Salesforce.com and puts you in the frame for potential acquisition. (Don’t get too big, though: Salesforce.com prefers a bargain). The risk is that you’ll get passed over and Salesforce.com will buy one of your competitors, leaving you in the unenviable position of having to compete with a Salesforce.com-branded offering at the same time as relying on Salesforce.com’s AppExchange platform as a major plank in your sales and marketing strategy. Uh-oh.
On balance, I don’t think it’s going to deter many entrepreneurs, who naturally regard their own company as the best in its field and therefore will see the AppExchange option as a win-win: either Salesforce.com sees your potential and you get bought out early, or you become so successful that your company’s value rises beyond Salesforce.com’s preferred acquisition budget.
VCs may take a less sanguine view, however. On-demand startups therefore are going to need to think through their answer to the question, "What if Salesforce.com buys one of your competitors?" If that thought process leads to more of them thinking beyond the Salesforce.com ecosystem to other on-demand customer bases and partnering opportunities — making them less dependent on AppExchange as a sales and marketing tool and more diversified in their market penetration — then that’s probably no bad thing at all.
Phil Wainewright is a commentator and strategist on emerging software industry trends. See his full profile and disclosure of his industry affiliations.
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