Big enterprise software companies are notorious for trampling over upstarts. Oracle Corp., for one, has made a sport of crushing competitors, either by acquiring them or forcing them out of business. But one area of enterprise software that hasn’t been completely overrun by the gorillas is customer relationship management.
That’s probably why venture investors are still pouring money into a seemingly endless stream of CRM startups with names such as DemandBase, Helpstream, InsideView, MarketBright and Zuberance (see table).
So why haven’t the big boys put a lock on CRM, the way they have with other areas of enterprise software?
“CRM, as practiced by the large enterprise players, has been more about data entry, record keeping and sales management—and less about actually equipping salespeople with tools that can help them close more business,” says Bryan Stolle, who co-founded and then sold product lifecycle management company Agile Software to Oracle before joining Mohr Davidow Ventures as a partner in 2007. “Whether it’s Oracle, SAP or Salesforce.com, none of these products are focused on making salespeople better at what they get paid for.”
Stolle contends that is still a tremendous demand for CRM solutions that help sales and service reps interact directly with customers, noting that the “opportunity is 10 or 20 times bigger than the existing CRM market.” That’s a huge number, considering that global spending on CRM software reached $8.1 billion in 2007, according to market research firm Gartner.
Market of Millions
CRM, as practiced by the large enterprise players, has been more about data entry, record keeping and sales management—and less about actually equipping salespeople with tools that can help them close more business.”
, a general partner at Rembrandt Venture Partners, also sees plenty of white space in the market. “There are 14 million salespeople in North America alone willing to spend money on sales efficiency,” he says
Casilli believes that efficiency is not being delivered by large enterprise vendors. In fact, he thinks CRM players like Oracle and Salesforce are more like operating system vendors. They address core workflow, but they don’t address high-value areas, such as sales intelligence, which can help salespeople sign new customers or land big deals, Casilli says.
Many new startups coming to market promise applications that truly empower salespeople.
One example is InsideView, which recently raised a $6.5 million Series B round from Emergence Capital Partners and Rembrandt. The startup offers an on-demand sales intelligence application that aggregates information from traditional editorial sources, as well as social media sources (such as Facebook and LinkedIn) to increase sales productivity. Monitoring more than 20,000 data sources, the application is designed to help salespeople better identify potential customers and engage in more informed discussions with prospects.
Another startup that promises to empower salespeople is DemandBase, which secured $8 million from Sigma Partners in August. The company has developed a widget that allows customers to turn traffic on their websites into sales leads. Basically, the application lets salespeople reverse engineer IP addresses so they can see who is visiting their site, what company they are from, where they are located and how much time they spend on the site. This information can then be combined with public data from sources like Hoover’s to provide salespeople with the actual names and numbers of hot prospects.
“For salespeople, this kind of information is pure gold,” says Bob Spinner, the Sigma general partner who led the investment in DemandBase.
Even though the technology costs are lower, it can still require millions of dollars in capital to get these companies going.”
While applications like those from DemandBase and InsideView are undeniably cool, many investors wonder whether they can truly support a standalone company or whether they are simply add-ons for the likes of Oracle and Salesforce.com. Indeed, Salesforce openly recruits niche CRM players for its application-sharing service called AppExchange. As of last September, there were more than 800 applications available from some 450 software vendors on AppExchange.
From a venture perspective, being an add-on to a larger CRM offering like Salesforce is not exactly a winning strategy. “It’s hard to ride the Salesforce platform to great success,” concedes Ian Sigalow, a principal at Greycroft Partners. “The truth is that a company like Salesforce only controls about 10% of the market, and many of their customers are small businesses with small budgets.”
Sigalow recently invested in a CRM startup called MarketBright that is on AppExchange. Being part of the Salesforce ecosystem could potentially help accelerate sales, he says, but MarketBright is not counting on it. The company, which helps marketing and sales people qualify leads and execute marketing campaigns, is aggressively targeting customers through an intensive online advertising campaign and a direct sales approach.
The real advantage of Salesforce, says Jeff Crowe of Norwest Venture Partners, is its so-called Platform-as-a-Service offering, which allows CRM startups to quickly build their applications without having to make a huge investment in data centers and other core IT infrastructure. Amazon, Google and IBM also offer similar platforms for building and designing applications.
Thanks to these new platforms, software that used to take years and millions of dollars to develop can now be rolled out in a matter of months and at a fraction of the cost. For VCs, that means some of the gamble is taken out of the equation. But not all the risk is removed. In fact, says Crowe, CRM deals today could be even more risky than enterprise software investments from a decade ago.
There are 14 million salespeople in North America alone willing to spend money on sales efficiency.”
Why? Because every new CRM company has also adopted a Software-as-a-Service model. That means their customers essentially rent the software on a month-to-month basis, instead of buying upfront licenses as they once did. As a result, the cash comes in slower, so the startups need venture capital to stay afloat as they try to gain traction.
“The point is that these companies don’t have much money rolling in up front,” says Crowe. “Even though the technology costs are lower, it can still require millions of dollars in capital to get these companies going.”
Another significant change in today’s crop of CRM contenders is the increasing reliance on social media and other Web 2.0 technologies. Many of these companies refer to themselves as “sales 2.0” vendors because, just like a social network, they make it easier for salespeople and organizations to connect and collaborate with customers and prospects.
“We have several portfolio companies that can be classified as sales 2.0, which really means they offer technology that makes the sales force more efficient,” says Brian Jacobs, a general partner at Emergence. Those companies include Genius.com, InsideView and Verticals onDemand.
Another such company, which Emergence recently funded to the tune of $4 million, is Zuberance. This 2-year-old startup sells software that allows companies to turn their existing customers into a de facto sales force.
Basically, the Zuberance software rewards customers who write online product reviews by giving them points that can be used toward their next purchase. Zuberance also helps publish those reviews on sites like Amazon.com, CNet and Facebook. The idea is that consumers trust word-of-mouth referrals more than anything else. Zuberance says it has enabled enterprise clients to unleash an army of consumer advocates for less than the cost of a single salesperson.
We think the Zuberance team can build a great company because what they are doing actually provides a quantifiable return on investment for their customers.”
“We think the Zuberance team can build a great company because what they are doing actually provides a quantifiable return on investment for their customers,” Jacobs says.
The big question on almost every investor’s mind is whether these startups will survive the current recession.
“The truth is that nobody benefits from a bad economy,” says Stolle of Mohr Davidow. “There is no such thing as a counter-cyclical investment here. Nobody is going to end up selling more because of the recession.”
That said, companies that can cut costs for their customers will do better in this environment than those that can’t, Stolle argues.
That’s one of the reasons he led an $8.6 million round in Helpstream last year. The company’s main selling point is that it can help companies dramatically reduce their customer service costs, while still providing a better overall experience.
Since consumers typically seek advice from other consumers when they have a problem with a product, Helpstream enables consumer-to-consumer interaction on a company’s website through a self-service portal. The portal lets customers search for information, check case status or pose a question to other users in the community.
Companies that use Helpstream find that somewhere between 30% and 50% of all customer queries are handled by Helpstream instead of the company’s customer service department, notes Stolle. “If you can tell CEOs they can get rid of their expensive call centers and still provide a better customer experience, they’re going to listen because this is an area where they can really save money,” he says.
As for the other CRM startups, they are confident they have what it takes to close the deal.