Tag Archives: acquisition

Series A Crunch Will Wash Out Small MBaaS Mobile Backend-as-a-Service Providers

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 SystemsSenchaXamarin. 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.

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SoftBank Sprint and the Future of Telco

What is Softbank’s strategy with its 20 billion dollar acquisition of Sprint?

As I mentioned in a previous post, there are clearly significant macroeconomic leverage points with respect to Softbank’s strategy

TREMENDOUS LEVERAGE:

  • Yen to dollar exchange rate is shockingly close to a 10-year low
  • Corporate tax rate in Japan is quite high
  • Bank of Japan prime lending rate is between 0.0 and 0.1 percent
  • Japan networks and mobile user behavior is very advanced

But clearly this is not just a financial deal. So what does Sprint represent to Softbank?

Sprint is the Financial Platform.

If you look at the consolidated revenue chart, below, Sprint catapults the combined entity to almost double Softbank’s previous revenue to $80 Billion USD. This is an absolute revenue engine. The scale synergies are mostly illusory as we are talking about cross border operations, but the combined entity will have a high degree of free cash flow and produce significant leverage in the most important mobile markets in the world, Japan and USA. These two markets have the highest ARPU (Average Revenue Per User) by far of any country. China activates more IOS and Android devices per day than the US, but the installed base of these platforms is still bigger in the US.

So SoftBank gets customer growth in a region with similar ARPU to Japan–but since Japan is saturated, the growth has to come from elsewhere.

 

 

So Sprint is part of the financial platform, but for what?

The key slide is shown below… despite being one of the biggest telecommunications companies in Japan, almost 2/3 of the value of SoftBank comes from Internet company holdings. Interestingly, some of the operational synergies are unclear, for example the Alibaba Group assets can’t have much impact in either the Japan or US markets operationally.

This provides quite a deep insight into the mind of Masayoshi Son, SoftBank’s dynamic founder.

As such, the balance sheet of Softbank provides a:

Financial platform for an Internet investment portfolio.

 

 

An even further clue is the slide below where the SoftBank chairman shows the ecosystem that SoftBank represent… This is the Internet platform that sits atop the “classic telco platform”.

He does not see SoftBank as a “phone company”. He is reinventing the phone company by layers…

  1. Telecommunications Company layer -> legacy business, provides cash flow
  2. Internet company layer -> leverages the cash flow while providing an ecosystem for driving Data ARPU

So where does this go?

MBaaS: The Mobile App Development Layer

The third layer beyond this is the mobile app development layer. For years, the Internet has been building out a set of services that can all be integrated through simple interfaces like REST. This kind of integration provides a “snap together” model of the Internet that creates a true ecosystem from an apparently disparate “primodial soup” of companies as shown above.

However, all of the Internet services in the world don’t translate into success in the era of the App Store.

There’s a missing ingredient that brings the value of these layers –mobile application developer ecosystems. So where are the mobile developers today?

Mobile developers today are aggregating around a new form of platform known as Mobile Backend-as-a-Service (MBaaS). MBaaS is defined by Michael Facemire of Forrester and essentially it provides a natively pluggable SDK into popular mobile OS client platforms such as Android or IOS that enables mobile developers to instantly inject cloud services into their apps.

SoftBank itself is partnered with Kii Corporation. Kii is the world’s biggest provider of Mobile Backend-as-a-Service MBaaS with 25 million end users served. Developers can connect with Kii Developer Portal and easily add cloud services to their apps.

We are already seeing significant partnerships between independent mobile data cloud providers and major telcos, for example the recent announcement by Twilio to work with AT&T, and the partnership of Kii with NTT DoCoMo.

The telco of the future leverages the financial base of its legacy business to generate an internet ecosystem and ultimately a cloud platform for mobile app development.

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Software AG signs intent agreement to acquire IDS Scheer

Creating a new one billion Euro superpower, Software AG agrees to acquire IDS Scheer, makers of the popular ARIS suite of Business Process and Business Analysis tools.

IDS Scheer represents 390M Euro of annual revenue. Combined this will result in about 1.1B Euro

After the acquisition of webMethods for $546M in April of 2007, many have speculated on the next steps in the growth aspirations of Software AG CEO Karl-Heinz Streibich–who is currently executing his aggressive 10 year plan to transform the company into a one billion Euro software superpower.

Well, that day has arrived.

Today, Mr. Streibich signed an agreement to acquire IDS Scheer, a global leader in Business Process Management (BPM) through the ARIS product family.

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Sun Oracle Snorkel CEO Email makes me sick

Jeremy Geelan posted Jonathan Schwartz’s email to all Sun employees announcing the acquisition of Sun Microsystems by Oracle.

Frankly this email makes me very angry.

Please consider that analysts are responding to Oracle’s profitability plan:

Oracle expects the Sun deal to contribute $1.5 billion toward its earnings next year and $2 billion in the second year of the acquisition, making it “more profitable in per-share contribution in the first year than we had planned for the acquisitions of BEA, PeopleSoft and Siebel combined,” Oracle President Safra Catz

This level of profitability is achievable with layoffs of up to 10,000 people.

Now lets read the words Sun CEO Jonathan Schwartz wrote in his email

Having spent a considerable amount of time talking to Oracle, let me assure you they are single minded in their focus on the one asset that doesn’t appear in our financial statements: our people.

This is the part that makes me angry. I have a lot of friends at Sun and I don’t welcome the prospect of 10,000 people out there in the worst job market in recent memory. People with families. Hardworking people.

Here’s the problem with that statement: the people DO APPEAR ON THE FINANCIAL STATEMENTS. They appear as COST. How a company CEO can not know this suggests either large scale incompetence or a cavalier attitude about the power of words.

I absolutely agree with one thing: Oracle WILL be single minded in their focus on the people. Just analyze their statements about their profit expectations.

My 2 cents,
Miko

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