Apocalyptic for Seed Funded MBaaS Vendors
Have you been reading about the “Series A Crunch“?
Alexia Tsotsis (who should know!) compared the situation now to the famous RIP Good Times email that came out of Sequoia in 2008.
The short version is that the huge influx of Angel and SuperAngel investors has created a glut of seed funded companies, VERY FEW of which will ever get Series A financing. We’re in essentially what Marc Andreesen called a nuclear winter for Series A financing (back in 2008).
In this article by Sara Lacy of PandoDaily (who knows everyone!) she writes:
Companies we never really got to know are simply starting to fade away. Multiply that by literally a couple thousand, and that’s what 2013 is going to look like in Silicon Valley, and to a lesser degree some other startup ecosystems. “The numbers just don’t add up,” says Jon Callaghan of True Ventures. “There are a minimum of 2,000 companies per year getting funded and coming out if incubators, and there are only 750 VCs that call themselves ‘active.’ But when you look at who is doing at least two deals a quarter, the numbers fall to just 200 firms. Those firms are only going to do a few Series A deals a year.” When you look at the number of firms who invest at least $1 million a quarter for at least four straight quarters, the number drops further: To a paltry 97 firms.
Small MBaaS Players Won’t Be Able to Raise VC Money
lets take a look at the Mobile Backend-as-a-Service (MBaaS) space from this perspective. These are companies that provide mobile developers with APIs and SDKs to quickly drop in cloud services into apps. This means that apps won’t need to write their own cloud backends, thus saving time, risk, and cost and enabling developers to focus on front-end and end user concerns.
Unlike Starbucks drinks, MBaaS vendors fall into three groups, big, medium and small.
The bigger ones: Several vendors that are counted among the MBaaS crowd have raised serious bucks. I count among those companies like Appcelerator which has raised $50.2 M and APIgee at a cosmological 72.1 M. I see Appcelerator as a full Enterprise Mobility player (who got into MBaaS via acquisition of Cocoafish), and you can see from their crunchbase entry that competitors include Adobe Systems, Sencha, Xamarin. I see APIgee as an Enterprise API Management company which only lists Mashery as a competitor (although 3scale also competes with them and to a lesser extent WsO2) who got into MBaaS through acquisition of UserGrid. So these bigger players won’t have liquidity problems, but they aren’t so much pure-play MBaaS players either.
The midsized ones: So in the next group you see players like Kii(profitable), Stackmob (7.5M), Kinvey (7.02M) and Parse (7M). I see these companies in the “Safe” zone for the Series A Crunch being that they each raised about 7M give or take. I’m including Kii in this group because Kii does not have to worry about the “Series A Crunch”. Kii is a profitable company which itself has it’s own Venture Capital fund. These companies fit into the “pure play” MBaaS model as well, not having offerings in API Management or Front End Client tooling like Sencha or Appcelerator.
The Small ones: It’s in this last group where you see some serious concerns. Companies like Cloudmine, FatFractal, Applicasa (500k), Cloudyrec, iKnode, ScottyApp, QuickBlox and others havent raised Series A and may be caught up in this crunch. The lucky ones may be acqui-hired or merged into bigger companies as Cocoafish was by Appcelerator or Trestle was by Flurry. Obviously these are privately held companies, so they may have a huge cash hoard that we don’t know about. But probably not. If you look at it from the Venture Capitalist perspective, the entry price for Series A for MBaaS is $7M given the competition. There really aren’t any firms left who are burning to do a deal in this space who can pull together a Series A like that. I personally know a small MBaaS player who has been out raising money for the past six months or more with no luck.
Small MBaaS Players Run Out of Cash, Try to Sell Themselves
In this kind of environment, it’s hard to see there being enough early revenue in this market to sustain the large number of players. Unfortunately, the buyers may not be there. When polled, some of the top analysts in the space indicate that the consolidation is not going to happen very quickly. Ray Wang, Analyst from Constellation seems to think MBaaS consolidation will take 3 years.
Michael Facemire from Forrester and one of the leading researchers in MBaaS (due to his seminal report MOBILE BACKEND-AS-A-SERVICE: THE NEW LIGHTWEIGHT MIDDLEWARE?) Is convinced that the bigger players don’t even see the space as happening yet:
Altimeter Group’s Chris Silva chimes in on how the big vendors will offer full stacks but that only the Best-of-breed alt(ernative) vendors will (grow to) be large/successful.:
MBaaS Price War?
Also, the smaller players may feel a revenue squeeze if there is early commoditization, “dumping” by the bigger well funded players or competition from open source.
Stackmob recently announced that API Calls were now free and that they were getting rid of the “Success Tax”. One reading of this move is the start of an MBaaS price war.
There’s a detailed conversation about this topic among top MBaaS vendors here. What does this mean reading between the lines? This kind of pricing doesn’t reap more revenue from hypergrowth apps, rather it grabs revenue from everyone else. Looking at it that way it reads as a serious pivot towards the Enterprise. This becomes clear especially when you go to https://www.stackmob.com/pricing/.
I’m not sure what their plan is for controlling cost, will all apps be free forever? When does a successful app become an “Enterprise” then have to be charged under a custom plan. They do seem to be able to derive *some* revenue from “free” apps by charging for things like “custom code”. Questions abound. Still it’s kind of an exciting, if mysterious move.
Some MBaaS Players Will Pivot to Enterprise
I think these companies will have to try to eke out survival through revenue, which means going after revenue share with hypergrowth apps becomes out of reach. You end up pivoting towards the enterprise for more short term, bigger chunks of revenue, but less hypergrowth opportunity. We are already seeing a pivot of a number of companies towards the Enterprise. Parse is featuring on its front page this image:
Stackmob has the phrase “Trusted by leading businesses” on their front page, again lending credence to the Enterprisey feeling about their approach.
Vendor Viability Will Become a Key Criteria For Evaluating MBaaS
What happens when your MBaaS provider goes out of business? What happens if it is acquired and substantially changed by the acquirer? These are serious considerations if you are building apps.
If the industry at large is reasonably self-regulating, savvy developers will realize these concerns and know to stay away from vendors who might not even last the next six months.
The smaller players may try to pivot to Enterprise revenue to try to stabilize their cash flow, but smart Enterprise buyers should exercise caution in selecting vendors who are so unstable. These vendor viability concerns will impact the revenue of the smaller players, leading to a shortened runway.
Still the Future is Bright
Still, this is a tremendous space. One research firm pegged the total market size of MBaaS to grow to 7.7B by 2017.
We are still in early innings in the MBaaS game and we will see a whole lot of shaking in 2013 before the game is through.