One of the most talked-about trends in the enterprise software space recently is the notion of product-led growth. Numerous founders, investors, and F500 executives have appropriately claimed that the modern business user has catalyzed an era in which enterprise software companies now rely on their product itself as the primary driver of customer acquisition, conversion, and expansion. The direct result is a shift of purchasing power for software solutions from the CIO and other senior-level executives down to the end user, where employees are trialing, testing, iterating, and ultimately picking the software products they want to use on a daily basis. According to SaaS management provider, Productiv, only 45% of IT executives are confident they know how many SaaS applications are in use at their respective companies — indicating a shift to Lines of Business (LOB) buying and managing more of a company’s SaaS apps. This is a powerful trend that will change the way startups prioritize hiring needs, go-to-market strategy, and product roadmaps. If you don’t believe me, look at companies like Zoom, Slack, Shopify, DataDog, CrowdStrike, Smartsheet, etc. These product-led growth companies have created over $200B in market value in the past year and are continuing to grow at rates in the top-quartile of enterprise SaaS companies. The market has recognized this differentiated approach to distribution: the median EV / forward Revenue multiple for PLG companies is 16.7x, as compared to a 9.0x median EV / forward Revenue multiple for all public B2B SaaS companies.
So how does product-led growth tie into Intelligent Software startups and why do they stand to benefit?
First, it’s important to understand why this is happening and how the end user has become such an important piece of the GTM puzzle for these companies. Through the efforts of Amazon, Google, Facebook, and others, the underlying infrastructure that powers these solutions has become a commoditized resource. Developers are more competent than ever with significant resources at their disposal, allowing them to produce high-performing software applications in much quicker time than before. These gains are passed down to the end user, providing more options and products for customers to try at lower prices. With affordability and optionality increasing, the underlying value that the product brings to the end user, primarily in terms of usability and job augmentation, becomes the focal point for why some solutions sell and others don’t.
Augment the knowledge worker
With solutions becoming cheaper and more available for end users, the main criteria driving end user adoption when choosing one product over another is which will make his/her job easier or more productive. This mindset aligns well with Intelligent Software — solutions that leverage artificial intelligence and machine learning to allow digital knowledge workers to be 10x more productive and effective in their job. By automating labor-intensive tasks as well as combining machine intelligence (the ability to mine vast amounts of data at scale and detect patterns that humans alone can’t find) with human intelligence (the ability to bring context recognition, business judgment, creativity, and common sense into the equation), Intelligent Software solutions enable employees to be orders of magnitude more efficient, faster, and productive.
A great example of an intelligent software company in the product-led growth era is Dialpad, a series E startup backed by a16z, ICONIQ, GV, and others that provides a conversational intelligence platform for sales and customer support teams to garner relevant and subtle insights from calls and turn them into actionable revenue opportunities. Dialpad is able to collect and analyze massive troves of data and equip knowledge workers with the right information at the right time, making them more successful in their role.
Address the user pain point
In order for users to choose a product, it must effectively address a critical or common pain point. Many AI startups struggle with this because they get caught trying to build the most technologically advanced product and miss addressing a market need. An end user-focused approach when developing solutions allows companies to address critical customer pain points and demonstrate meaningful ROI in a short amount of time. This meaningful ROI in the context of intelligent software is usually in the form of step-function improvements in productivity and capability, leading to increased accuracy and time saved. This is most easily achievable by prioritizing industry relevance. By banking on depth rather than breadth, intelligent software startups can build highly specific AI applications for explicit market or industry use-cases, including medical diagnosis, mortgage lending, supply chain management, retail inventory optimization, and customer service.
Voice intelligence solution, Otter.ai, is a good example. Otter operates a real-time transcription and productivity platform that combines proprietary ASR and NLP technology with collaboration features, creating a viral solution that provides immediate ROI. Unlike Amazon, Nuance, IBM, and Google who all use a one-size-fits-all model for their transcription solutions, Otter develops use case-specific models and further refines customer-specific sub-models. This allows the solution to achieve higher accuracy levels, handle more complex use cases, and deliver more concentrated value.
Release early and performance will follow
A common term used when speaking about intelligent software is the idea of a feedback loop, the process by which an AI model’s predicted outputs are reused to train new versions, subsequently increasing its overall accuracy. In other words, the more a product is used, the more effective the solution will become. When thinking about how a product-led growth solution is sold, this concept of a feedback loop becomes a key factor in terms of increasing both user retention as well as distribution. As users begin adopting the product, usually free of charge, they will not only be incentivized to continue, but also promote it to additional members of their team in order to increase product performance gains at a faster rate. The combination of increased usage, as well as a growing user base, allows the product effectiveness to improve at a rapid pace and create relatively defensible switching costs. Additionally, as more users within an enterprise begin adopting the solution, pricing increases and new revenue opportunities arise. Assuming that the product’s base level performance fulfills the criteria of its potential customers, the nature of intelligent software mitigates the risks of operating in a space with plenty of optionality and low switching costs.
Take Grammarly, for example. While they didn’t necessarily start as product-led, the moment Grammarly switched to a freemium model, they were able to spark rapid product adoption by removing onboarding friction and introducing new product features such as tone detection, syntax error, and insights. As more users sign up, Grammarly’s ML models expand beyond the training set and learn from user-generated data, allowing the solution to become more effective. Additionally, more users allow for more human feedback, which is crucial in order to identify idiosyncratic mistakes or misinterpretations. As users experience this, they will be more incentivized to use the product themselves as well as promote to others. This has been a main driver in daily active usage to reaching ~20MM+ in the past year, a 20x increase since 2015.
As product-led growth companies become more common in the enterprise ecosystem, Intelligent Software will follow. Solutions leveraging artificial intelligence and machine learning to create productivity and capability gains provide the immediate ROI necessary to capture users’ attention, while the feedback loop and continuous improvement create switching costs and distribution channels that will accelerate time to scale. We are seeing this first-hand in numerous industries from early-stage startups to multi-billion dollar public companies and will continue as the next wave of value is created in the enterprise space.
Posted on Omega Venture Partners’ site here.