Even amid a questionable economy, John Roberts (pictured) sounds upbeat. As CEO of SugarCRM, Roberts leads one of Silicon Valley’s fastest-growing open source software providers. But that’s not all. SugarCRM also offers its software as a service (SaaS).
Smart move. As this site has pointed out before, the worlds of open source, managed services and SaaS are converging. And for good reason: Customers and their solutions providers increasingly want open options with predictable pricing and low acquisition costs. “The new rules of the industry are no proprietary code and no lock-in techniques,” said Roberts during a phone chat with me on January 16. Those trends and SugarCRM’s market opportunities should allow the company to launch an initial public offering within two years, he added.
Our conversation focused mostly on Sun Microsystems’ $1 billion acquisition of MySQL — the leading open source database provider. MySQL was widely expected to launch an initial public offering (IPO) later this year.
But with Sun now guiding MySQL’s future, most pundits think SugarCRM will be the first open source application provider to launch an IPO. Roberts doesn’t argue that point. He expects SugarCRM to launch an IPO within two years.
According to our sister site, TheVARGuy.com, SugarCRM’s annual revenue was about $15 million in 2007, cash flow was positive and company insiders have written blueprints that will march SugarCRM as quickly as possible to $25 million.
The MSP Opportunity
For managed service providers, the SaaS and open source markets represent multiple opportunities. Start-ups line Untangle are promoting open source security solutions into the MSP space. And MSP platform providers have developed new ways to help MSPs manage SaaS environments, notes Level Platforms CEO Peter Sandiford.
Even venture capitalists are getting into the act. The latest example: eVapt Inc., which provides management software for SaaS environments, has attracted seed round funding from Applied Reasoning, LLC.
SaaS providers can use eVapt’s software to create pricing packages and contracts, correlate customer usage and automate back office operations.
At some point in the next two years, SugarCRM hopes to attract Wall Street’s attention by launching its IPO. In the meantime, plenty of MSPs are pumping their own money into SaaS and open source solutions of their own.
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I came across SugarCRM while browsing VMWare appliances. I can’t say that I am the earliest adopter, but I try to keep an open eye to trends in the industry and SugarCRM is awesome. I like how it is available for developers like me to try it out and host it locally. It is also a slam dunk by offering paid support on such a great product. I’m not so sure IPO is the way to go with this one. Why not be happy with an awesome product? Throwing more money into it won’t necessarily make it better, but I guess the lure of millions of dollars is too strong.
Paul: Don’t forget … venture capitalists pumped money into SugarCRM to get that business started and to help it grow. Surely, those same venture capitalists deserve to profit from their work at some point. So yes, SugarCRM is absolutely on the path to an IPO … assuming another company doesn’t come along and try to buy them.
Joe, you are absolutely right. The VC’s took the risk and deserve the reward. I just got carried away with the open source mantra. I picked up the book Wikinomics, but haven’t had time to get past the first chapter. I miscategorized SugarCRM into the Open Source arena. I’d really like a crystal ball to see where software development will be in 10 years. VMware is awesome and free. Linux is awesome and free and open source. Why did Sun buy mySQL? Is SAAS just a phase? or is it VHS to ASP’s Betamax, which was then overcome by BlueRay and HDDVD where BlueRay won…it is all so confusing.
Paul: Where will software dev be in 10 years? It’s hard for me to actually see beyond 10 months. Some quick thoughts, though:
1. Prices: I am not suggesting that open source truly is free. True commercial open source (Red Hat, Novell, SugarCRM, etc.) ultimately comes with some sort of price tag. Yes, open source can save you money. But more importantly, it gives you economies of scale. Community programmers continually add value to open source. Microsoft, Oracle and others need to continually hire more programmers to drive innovation. And they also need marketers to promote that software. Costs rise, and the bulk of expenses go to sales and marketing — rather than R&D. In stark contrast, open source projects that gain critical mass (some won’t…) inspire ongoing innovation and bug fixes without those huge built-in personnel costs. Costs are lower, and most of the effort is focused on R&D.
2. Localization: Each time a traditional software company wants to enter a new market (Europe, Middle East, Asia, etc.), they need to localize their product, build new marketing programs, etc. Open source projects seemingly “go global” much more rapidly because interested developers hope in and refine the code for their own markets.
3. Why did Sun By MySQL?: Proprietary hardware (SPARC chips) and applications (Oracle, SAP) can still generate profits and are still critical to organizations. They aren’t going away. But look at all the Web 2.0 sites out there (Craigslist.org, etc.) … they’re increasingly running on open, scalable architectures and often have MySQL at the foundation. Assuming Sun doesn’t screw up MySQL, this was a brilliant, bold acquisition.
4. Is SaaS just a phase?: Nope. A decade ago, when it was called Application Service Provider (ASP), we were in the hype stage. ASPs collapsed because many were trying to host Client-Server apps over the Internet. Broadband connections weren’t widespread, applications were fat, and performance was lame. Today, Web 2.0 applications are designed to run really thin, and broadband pipes make SaaS very appealing. Plus companies like Salesforce.com are profitable and growing.
The real question is the blurring of the lines between traditional ISVs (Microsoft, Oracle, etc.), pure SaaS companies (Salesforce.com) and VARs that want to offer SaaS. This has yet to play out. People thought eBusiness would destroy Microsoft, Oracle, etc. Instead, many of the traditional software companies adjusted and GOT STRONGER.
People have to stop predicting SaaS and open source will destroy Microsoft. Similar to how the microwave complemented traditional stoves, I expect open source and Microsoft both to do well over time. Look at all the MSPs and SaaS companies announcing hosted Microsoft Exchange, SharePoint and Dynamics efforts.
5. Innovation: This is an exciting time to be in the software business — and it’s also exciting to be a company that needs to leverage online software. Look at the situation right here at MSPmentor.
We built this site using third-party code that’s available all over the Internet. Our developers snapped these free, open source components together — like Legos — but we also added some of our own branding to the mix, and MSPmentor was born! If we don’t like a piece of code, we can drop it and try a different Lego block.
Sites like this weren’t possible in the Web 1.0 world, where proprietary content management systems cost a fortune and mere writers like me didn’t have access to any of the code. I’m not a programmer, yet I can make informed recommendations to our developers about how this site should work … based on my own experiments with free, online code. This eliminates a ton of testing/troubleshooting on the back-end, and accelerates our site deployments. (Watch for our next site, Works With U to launch soon.
Bottom Line: We are at the beginning — not the end — of the SaaS cycle. Open source, managed services and SaaS will continue to blend. Some SaaS companies will fail because of flawed marketing, sales, technical or product execution. But some will succeed because they are leveraging open architectures and the lessons of Web 1.0/the ASP age.
Think of it this way: Some gas stations still go out of business, despite the rising demand for energy and the rising profits associated with gasoline. Why is that? Something related to the business strategy (choosing a bad location, paying too much for real estate, etc.) can destroy a company — even in a healthy market. So, as some SaaS providers tank in the months ahead, I suspect the issues will be related to poor planning, execution or funding … rather than bigger problems in the SaaS market.
Nice points you make, Joe. I agree that we are at the beginning of the SaaS cycle and I, too, would not short Microsoft. I think they are a company that can transform themselves like IBM has done. I think that a big problem for the tech industry is there are a lot of one trick ponies out there. Look at Dell’s troubles and what about the Yahoo! fiasco.
I’m still not sold on a SugarCRM IPO. They have a great product on their hands. Do they really need to get public funding? Does management want to have to start worrying about meeting quarterly numbers or else get hammered by Wall Street? And a 10 month forecast isn’t going to cut it for SugarCRM if they go public. 10 months is probably how far out a manager thinks ahead; 10 years is how far a CFO thinks ahead; and 15 years is how far out a CEO thinks ahead.
P.S. I believe most gas stations go out of business because they don’t set their own prices and margins are still razor thin. There’s little trickle down in this industry…talk to any long haul trucker.
Paul: My gas station metaphor may have been a stretch. I suspect Microsoft will — as you said — transform itself in similar fashion to IBM.
I will tell our own company CEO that she needs to start thinking 15 years ahead. (Got that, Amy?) As more of the CTO type myself, I hope to only look about a year or two out over the horizon.
Kidding aside, I think market forces — within SugarCRM and the VC community — will force some sort of financial transaction within two years. I hear vendors are already looking at SugarCRM as a possible takeover target, but CEO would prefer IPO path.
Good idea, but I’m sure she’s already thinking that far ahead. People who get to CEO usually don’t get there without good reason and you can’t get there without a vision. Back your CEO with all your weight and you’ll be rewarded. The VCs should do the same.
You know the Yahoo fiasco brings up another point. I think Jerry’s term as CEO is over, though they should give him more time to try to come up with a Yahoo 2.0. The reason CEOs need to think so far out and have vision is because it takes that kind of vision, passion, drive, etc. to drive a billion dollar company. That person gets paid millions because the board doesn’t want the job. They want someone else to assume the job.
What will Yahoo be without Jerry? Simply a takeover target. What was Dell without Michael? An underperforming company.
What is MSFT without Bill? A small country on autopilot.
What is any startup without the drive of its founders? Bad odds.