“ There are only two ways to make money in business: One is to bundle, the other is to unbundle ” - Jim Barksdale
The recent examples of unbundling are many. Newspapers unbundled to independent blogs (e.g. Substack). Banks unbundled into different Fintech services (e.g. Transferwise). ERP unbundled to tons of B2B SaaS tools (e.g. Shopify). Cable TV unbundled into on-demand services (e.g. Netflix). Craigslist unbundled to verticalized marketplaces (e.g. Airbnb).
In B2B SaaS we’ve seen even more specific categories of unbundling, companies I tend to call ‘feature-companies’. Examples will follow later in this blog post.
However, while the pendulum has been generally towards unbundling the last 10 years, I believe there’s currently clear over-tooling in some B2B SaaS areas and that trend will change. I’ll explain the drivers for this later, but first let’s start from 30,000 feet.
The pendulum swinging between bundling and unbundling has probably been the case as long as businesses have existed.
A common playbook, within B2B SaaS in the last 10+ years, has been to look for a large, slow & ‘evil’ incumbent in an established industry with a bundled product offering, and carve out market share with a specific feature-company - perhaps fueled by some new technology. This is seems to be a good way to grow revenue quickly to begin with and find product-market-fit. Venture capitalists have generally loved B2B SaaS feature-companies and invested as if they are predicable, low-risk businesses.
Another adjacent playbook in B2B SaaS has been to productize an Excel use-case.
Some of these new B2B SaaS players have developed into a broader offering after finding initial product-market-fit, however the majority have stayed within a niche - hence why the average number of B2B SaaS tools per company is now 100+. Ironically, you now have B2B SaaS tools to manage your B2B SaaS tools such as Cledara. Peak unbundling.
What will happen to these feature-companies during the next recession? I’ll get back to that.
I’m part of this movement myself too. When I worked in Pleo, we built a better corporate card for SMBs (unbundling their traditional monolith banking setup) with stuff like expense management and mileage built-in.
For our customers, this added another SaaS tool and banking relation to the mix, however with the value-add of our product, customers would accept the overhead cost.
However, I also believe that B2B SaaS customers generally underestimate the overhead cost of unbundled solutions. I have seen many of the problems first hand, such as data being out of sync between systems (in Pleo’s case we had to sync lots of data to/from accounting systems, bank accounts etc.), and re-doing boilerplate infrastructure (in Pleo’s case e.g. financial licensing, KYB & other regulatory duties or enterprise features such as an open API). In a world with abundance of cash and negative interest rates, this overhead cost is often accepted, however with an increased focus on profitable growth many companies & investors will evulate their costs with much more diligence.
I think these problems will appear more in the coming years, and I see them as drivers for multi-product strategies to get more wins. The four key drivers for this are explained below:
Driver #1 - The data layer is broken
In many B2B SaaS areas, there’s no clear system of record. For your 10+ HR/payroll/benefits systems, what’s the system of record for employee data and how do you reconcile this data across the stack?
Native integrations or tools like Zapier may solve parts of this problem, however this is a fragile setup and not a long-term solid data layer.
In Fintech, you also see tons of general ledger reconciliation needed as customers have gone from 2 to 10+ financial service providers. It’s also a pain from a regulatory standpoint, dealing with KYB data etc.
Lastly, the broken data is hurting the customer experience. A standalone HR benefits tool (feature-company) might have some great USPs at first, but how do you deal with the fact that it’s not the system of record for employee data? Sure, B2B SaaS tools integrate with each other, but at the end of the day it only works 50% of the time and significantly hurts the user experience.
Driver #2 - Costs are spinning out of control
Talk to any finance department in a company with 100+ B2B SaaS tools; costs are spinning out of control. Espciallly in commercial departments for some reason (probably because they are closest to the revenue generation and hence have larger budgets).
Clearbit, ZoomInfo, Gong, ChiliPiper, Outreach, Apollo - the list continues and probably costs $5k+ per sales rep yearly. And then add Salesforce on top.
And then add all the other departments and their B2B SaaS tools on top.
No wonder why companies need a B2B SaaS tool to manage their B2B SaaS tools.
Additionally, you have the organizational overhead, and you’d quickly find yourself in need of a “RevOps” team to makes sure the tooling works. Peak tech.
Driver #3 - Lack of core infrastructure synergies
Every B2B SaaS player seem to be building the same boilerplate on top of their product. Even with the likes of Okta for authentication or Drata for compliance, much effort has to be put into supporting workflow automation, ISO/SOC2 compliance, SAML SSO, analytics, permissions, open API, and policies.
It’s painful as a feature-company to build all this, especially as it brings minimal future synergy value - unless you adopt a true multi-product strategy.
Driver #4 - The upcoming recession
Last but not least, I want to briefly mention how the current macro economic environment will fuel the rebundling & consolidation of B2B SaaS. When the next recession hits, I think the category of previsouly mentioned feature-companies (VC-funded over-staffed $1-100M ARR B2B SaaS tools) will experience much slower growth due to companies being more cost-conscious, which is not great when your company is set up to hypergrowth-forever-mode.
This will most likely mean that we’ll see a lot of them eventually getting wiped out or consolidated by private equity funds.
Not the best news for founders in these companies, in which the VCs have large liquidation preferences. Private equity funds will certianly make money in this environment, but will the founders?
There’s a good chance PE funds will substantially consolidate and streamline their B2B SaaS acqusitions, leveraging the product synergies and cross-selling across their portfolio. Essentially adopting a multi-product strategy.
To understand multi-product strategies better, I have found four B2B SaaS companies that fascinates me. They all have some system of record that they own (e.g. employee data) and leverage in their product portfolio.
Let’s dive in.
Rippling - unified employee data
Hands down, I love Rippling. Their strategy has always signaled great clarity to me. They knew their way to win the HR/IT software space is to be the system of record for employee data. Hence they started out with onboarding software, but built with a multi-product strategy in mind from the beginning, enabling them to launch tons of great product since, leveraging Rippling Unity i.e. the system of record.
Microsoft - unified distribution layer
This one is a bit different, but I had to mention Microsoft as they are crushing some B2B feature-companies these days.
If we start by looking at Slack, it’s the poster child of feature-companies, being one of the fastest B2B SaaS companies to grow from $1M to $100M ARR. Microsoft saw the trend and launched Teams in 2016.
In 2019, Teams had more users than Slack and have completely outgrown them during Covid.
In 2023, Microsoft will launch a Notion competitor, Loop, with the same playbook as they used for beating Slack.
And while it might be a somewhat copy, lower quality and many years late, Microsoft has an incredible superpower to rule them all: distribution through Office365.
Microsoft is great example of how a multi-product portfolio can be a killer strategy.
With most enterprises buying an Office365 license already, Microsoft has a big procurement advantange. Sure, Teams might not be as “nice” as Slack, but when offered at zero marginal cost through the Office stack, customers find themselves in need for great reasons to justify buying an alternative.
If you’re a traditional enterprise, going through procurement of new tools requires review of legals, security, pricing etc. and then why not just go with Office365, which we already have a license for? Who was ever fired for choosing Microsoft?
Lastly, Microsoft are in a great position to raise prices over time. With a chart like below, they will justify price hikes with the increased value they deliver and as a customer it would be much more expensive to churn with the hassle of (i) finding 10 new B2B SaaS vendors and (ii) training all staff in using them, than just sticking with Microsoft.
Salesforce - unified customer data
Salesforce has developed into much more than a sales tool in recent years. Sitting on the prospect, deal & customer data, they have the perfect data layer to adjecente B2B SaaS offerings for revenue teams.
In some areas they have been vulnerable to best-of-breed B2B SaaS products, however with their strategy to fully leverage the “Customer 360” as the main USP, I believe many enterprises will be looking to Salesforce both to reduce cost and complexity of their SaaS stack, but also improve their customer journey.
Revolut - unified finance data
The picture below speaks for itself; Revolut definitely has a multi-product strategy. This product overview below is from 2020 and since then they have laucnhed even more products e.g. card acquiring both in-store and online. Having the strong foundation of finance data and licenses, Revolut can spin up financial products like no other Fintech.
With consumers and SMBs having significantly increased their number of financial relationships from around 2 to 10 in the last 10 years, Revolut has come up with a compelling rebundling of the finance stack for this category of customers, which could get a lot of traction in the coming years.
So, what's the risk for the multi-product players?
While I’m a fan of ambitious multi-product strategies and there are drivers in the coming years for consolidation in the B2B SaaS landscape, there will always be best-in-breed players ready to capture market share from bundled incumbents.
I’d like to present a few arguements against bundling and how it can fail.
First, the lack of razor-sharp focus might lower the product quality of the bundled offering to a point where customers have to look for alternatives. This could be e.g. if the product is full of bugs, not well integrated or lacking new features.
Secondly, we could see a shift in some core technology. The Internet enabled massive unbundling of many services, and maybe something like GPT-3 can do the same?
Lastly, and perhaps most importantly, multi-product companies tend to move increasingly slow on product innovation, as they get big and successful. In some ways, the pendulum of bundling and unbundling, is also partly the nature of capitalism. In 5-10 years, Rippling will have had huge success, IPO’ed and mostly likely both the employee and shareholder composition will be completely turned around. Institutional investors will own most of the company and want to see quarterly results, dividends and share buybacks - all fueling short term thinking. And with this, the top talent and builders are shortly gone (read more in my other blog post about the spiral of bullshit), innovation will halt and eventually the company will get unbundled by fresh fast-paced startups.
This phenomena is something that has fasinated me for a long time - why is it that big companies become so slow? Just to name a few ideas of things that could play out in successful & IPO’ed Rippling in 5-10 years: politics, bureaucracy, this quarter’s metrics, last quarter’s metrics, Wall Street analysts, turf-building, program managers, engineering groups, corporate marketing & comms, status games, strategy consultants, finance reviews, cross-functional agile, domains, international business development, good press, bad press, glassdoor reviews, unions, lost sales, prospects, competition, the corporate bond rating, promotions, demotions, bonus programs, performance management, dinner parties, stock 10% up, stock 10% down, who’s sleeping with whom, investor relations, scaled agile framework, product operations, OKRs, CEO strategy office, building based on consensus, stock buy-backs, short-term wins, stakeholder management.
… a dream for a fast-moving best-of-breed startup to challenge and disrupt. And the cycle starts over.