Launching and Successfully Scaling a Vertical SaaS Company
Justin Effron , Co-Founder/CEO of ALICE
Background: Marc Andreessen famously said “Software is eating the world”, and nowhere is that more the case than in vertical SaaS. Vertical SaaS companies, defined as businesses that target specific sectors such as real estate, healthcare, life sciences, and energy, are transforming their industries and reaching large scale in the process. They are doing this by driving efficiency across legacy business processes, resulting in improved use of data, lower cost of service delivery, and enhanced customer experiences.
Many of the vertical SaaS “category kings” have become well-known success stories. These include OpenTable in restaurant reservations (acquired by Priceline for $2.6B), Veeva in life sciences cloud software ($5.5B market cap), Medidata in pharma and biotech clinical trial management ($4.6B market cap), and Costar in real estate data ($9B market cap). What is most interesting is that although they are frequently perceived to be pursuing niche markets in their early days, vertical SaaS companies often trade at a premium to horizontal SaaS companies in the public markets, due to lower cost of customer acquisition, lower churn, and greater upsell opportunity within customer.[1]
What are some of the unique challenges of building a SaaS company in a vertical industry? There are many. Penetrating vertical markets often requires transforming old industry business processes that have been ingrained for a long time. It requires navigating industry regulations, which often constrain technology innovation. It requires selling to industry gatekeepers who are resistant to change.
In addition, because vertical markets are generally smaller than horizontal markets, succeeding at scale can require capturing substantial market share. As an example, to reach $139m of 2016 revenues, MindBody needed to scale to 59,000 business customers and 362,000 health and wellness practitioners.[2]
So how do vertical SaaS companies reach success, and what are some of the key things that vertical SaaS entrepreneurs need to do well in the early days? To learn more, we interviewed an entrepreneur in a vertical that has historically been resistant to technology adoption: the hotel industry.
Justin Effron is co-Founder and CEO of ALICE, a SaaS provider of hotel operations management software.[3] ALICE’s software transforms how hotels manage their internal and guest-facing operations using technology. Since its founding in 2013, ALICE has scaled to thousands of customers. ALICE has recently been in the news due to its $26m funding round from Expedia, which established the company as as a major player in SaaS software for hotel operations.[4]
In the interview, Justin explains how he and his co-founders, who were recent graduates from UPenn, came up with the idea of building a technology company to help hotels run better. He describes how they navigated key early challenges, such as building a product, signing customers, and growing their technology and sales teams. He also describes the company’s innovative product development process, which integrated key customer learnings and input even before they wrote a single line of code.
The interview transcript is below, and we provide key learnings after the interview.
Summary: ALICE is a provider of software solutions that enable hotels to improve the guest experience. ALICE’s software enables hotels to track and optimize fulfillment of guest requests across every department, seamlessly dispatching guest requests in real time to appropriate employees, tracking the progress of each request, and providing custom reporting to enable hoteliers to understand and optimize their operations. ALICE’s software is used by thousands of hotels around the world, including Two Roads Hospitality, Dream Hotel Group, Grupo Posadas, SIXTY Hotels, NYLO Hotels, and Leading Hotels of the World.
Founders: Justin Effron (JE), Alex Shashou, Julie Ulrich, Dmitry Koltunov
Year Founded: 2013
Interview with Justin Effron, Co-Founder and CEO of ALICE:
Q: Can you take us back to the early days of ALICE? How did you, Alex, and your co-founders start the company? Why did you start it?
JE: We started our company right after several of us graduated from the University of Pennsylvania. My co-founder Alex and I were traveling in Southeast Asia, and we encountered numerous service-related issues at the hotels we visited. We couldn’t understand why in a time of convenient mobile services like Uber, the hotel guest experience was so outdated. We wanted to build a company that made hotels more responsive to their guests, using technology. [5]
We took the good advice we received from people close to us, which was to surround ourselves with influential people who could open doors for us in the industry. My co-founder Alex’s family spent 35 years in the hotel industry, operating 90 hotels in the UK. Alex’s connections helped us to get introduced to the right people in the industry as we started to build our business. Our goal was to apply technology to help hotels serve guests more effectively.
Q: Besides Alex, were there members of your organization in the early days who played a key role in the growth of the company?
JE: We built an advisory board comprised of 8 people with strong skillsets.[6] Several of those individuals had industry experience, and these individuals were able to open doors for us. We leveraged these networks to help raise our initial seed round.
Q: After you started the business, how long did it take you to start signing up customers? What was that process like?
JE: We spent the first year without selling a product, primarily listening to customers. After we raised our friends and family round, we created a PowerPoint deck and started to sit down with hotels. We listened to what they had to say, with the aim of understanding what features they wanted in a product. We then signed unpaid pilots.
Q: Did you have an MVP when you started pitching your first pilot customer?
JE: We did not at the time. In fact, we received our first commitment from a hotel even before we built a product. That actually was an advantage because this customer provided insight as we built the product, so we could make sure we were designing it to fit their needs and solve their problem. They also felt emotionally connected to the product because their feedback helped us build it.
Q: What did your investment in product development look like in the early days?
JE: We outsourced most of our development work at the beginning. Once we raised our friends and family round, we met our Co-Founder and CTO Dmitry, and he joined us. We were burning $20k to $30k per month in cash in the early days.
Q: What did those initial deals look like?
JE: They were unpaid pilots. Two of the three initial unpaid pilots converted to paying customers. One of them wasn’t a good fit and did not convert.
Q: What was the profile of your early customers? How has that profile changed over time?
JE: They were tech-forward hotels that were comfortable trying new things. They were willing to experiment with us, and they saw our vision. We generally had a connection to them through our network.
Q: How did you build your sales team? Did you or your co-founders have sales experience? Who was your first sales hire?
JE: None of us founders had a background in sales, but Alex and I threw ourselves into it. We did all of the sales in the beginning. We really didn’t create a lot of operational process around sales until we raised our Series A.
Once we raised our Series A, we had to ramp up quickly. Our first sales hire was actually our VP of Sales. Looking back on it, I would do this differently and bring on sales experience earlier on. This would have made the learning curve less steep.
Q: What does your sales operation look like today?[7]
JE: We have a direct sales model, led by our VP of Sales. We also have a VP of Business Development. We have 2 sales VPs, 3 account executives, and 1 sales development rep. In terms of sales productivity metrics, we focus primarily on number of customers and average deal size.
Q: What were some of the key learnings you had as a team in finding product-market fit?
JE: We learned to track everything. For example, average deal size, number of clients, length of time to get a new feature to market. The most important metric we focused on as a company was cash burn, but we also looked closely at client data. We found that number of tickets tracked within the hotel was the most important KPI that showed client engagement with the product, so we track that metric very closely.
We also focused on number of clients signed as well as activated. In the early days we focused on adding one client per month, then that number grew quickly.
Q: Which software systems did you use to manage your business?
JE: We used Atlassian’s Jira product for issue and project tracking for development. We also use Quickbooks for financial operations.
Q: What were some of the drivers of growth? Also, has your recent growth been primarily due to increase in number of of customers, or increase in deal size?
JE: The investment from Expedia really helped to catalyze our revenue growth.[8] In terms of how we have grown, we’ve grown primarily due to increases in number of customers. We haven’t yet been able to really figure out how to grow revenue within customer, but we’re working on it.
Q: In your view, what were some of the most important characteristics that enabled you to raise your Series A round? How would you rank them from 1 (least important) to 5 (most important)?
JE: Team was very important. Having a complete team, especially a team with technology leadership, was a 5. The quality of our founding team was also important. Underlying customer characteristics were also important (a 4 out of 5). For example, churn was a key aspect of the lead investor’s analysis. Revenue and revenue growth were not as important for our business because we raised capital from a strategy investor (2 out of 5). Having a sales process was a 2 of 5.
Q: Thank you for taking time to speak with us, Justin. Congratulations on your success to-date.
Key Learnings from Justin Effron and ALICE:
· Building Strong Industry Connections in the Early Days is Vital for Success in Vertical SaaS: Success as a vertical SaaS company requires developing a deep understanding of the customer pain point in the early days, as well as finding ways to reduce friction in the buying process. The best way to do this is to develop a network that can direct you to the right decision-makers. In ALICE’s case, the company benefited from co-founder Alex Shashou’s industry experience and network. Dubbed the “Harry Potter of Hotel Stays”,[9] Alex grew up in the hotel business, building an understanding of hotel operations while working in the hotels of his parents’ boutique chain. After co-founding ALICE, Alex became the company’s product evangelist, pitching the business to 25 hotels per day. He leveraged his hotel network to get in the door with hotels, which reduced the friction of signing up ALICE’s first few customers.
Not all companies start with Alex’s level of industry knowledge and connections. However, all startups can aim to replicate this network and access by building an advisory board of industry experts. In ALICE’s case, their advisory board included individuals who managed hotels, who were the exact type of buyer they were aiming to sell to.
· Immerse Yourself in the Business Process before Building a Product: Justin and his team immersed themselves in understanding the customer pain point before writing one line of code. The ALICE co-founders spent a full year sitting down with hotels to understand how their service operations worked, shadowing and interviewing 500 hotel managers and supervisors, and working closely with hotel staff to understand their daily activities. Only after they deeply understood hotel operations did they start building a product.
This approach is consistent with the product development process articulated by Mike Maples of Floodgate Capital.[10] In this paradigm, the product development process is a dance between the product and the market. Before launching a product, the startup developers an intimate understanding of the market need through constant iteration, with the aim of achieving “product power”. In achieving product power, a startup integrates what it learns from a customer to deliver “WTF” features that delight the customer, and rise to the level of changing the customer’s view of what is possible. This is the process that ALICE adopted, with strong success.
· Strategic Investors Can Play an Important Role: Raising capital from strategic investors can be risky, and there are many stories of startups who never reached their potential after raising from large strategics. However, strategic investors can also bring to bear substantial resources. In ALICE’s case, Expedia brought both financial capital as well as a customer base of over 500,000 properties. Partnering with ALICE is consistent with Expedia’s focus on helping to provide additional tools and services to improve hotel operations. This partnership is a good example of a win-win relationship between startup and strategic.
· Vertical SaaS Companies Can Achieve Structural Competitive Advantages that are Superior to those of Horizontal Players: Norwest Venture Partners completed a study of vertical SaaS companies that shows how the structural competitive advantages of vertical SaaS companies are reflected in their business performance. Their analysis shows that publicly traded SaaS companies with vertical focus are on average 20 to 25% more profitable than horizontal peers, primarily due to lower sales and marketing spend.[11] This is primarily due to a) the fact that vertical SaaS companies have deeper, more complete products that lead to quicker market adoption; b) the fact that vertical SaaS companies can benefit from strong word-of-mouth once they have initial adoption; and c) that vertical SaaS companies have greater opportunity to grow revenue size within customer.[12]
The Norwest study is consistent with other studies on vertical SaaS players, which show that these companies trade at greater multiples of revenue than horizontal SaaS companies. In essence, the same barriers that make it difficult for a new vertical SaaS to break into an industry vertical, can eventually become structural competitive advantages that help create a moat.
Epilogue: ALICE continues to grow rapidly. The business now processes 50,000 requests per week across its hotel properties, and now has more than 60 employees. Its recent $26m investment round led by Expedia positions the company to become the leader in SaaS hotel operations management software.
[1] See “Vertical SaaS is Getting Substantially Higher Valuations”, Sammy Abdullah, Blossom Street Ventures, at http://blossomstreetventures.com/blog_details.php?bcat_id=126. As of March 2017, vertical SaaS comps in a relevant screen were trading at 6.8x revenue, compared to 3.8x revenue for horizontal SaaS comps.
[2] Mindbody Investor Overview Q2 2017.
[3] 645 Ventures was an investor in ALICE’s seed and Series A rounds.
[4] See “Expedia Leads $26 Million ALICE Investment in Hotel Tech Push,” Skift, August 30th, 2017.
[5] Read more about ALICE’s founding story at Idea Mensch, where you can find a profile on Justin.
[6] Early ALICE advisors included Atef Mankaris, CEO Trevi Luxury Hospitality Group; Angela Lee, founder of 37 Angels, and Clive Hillier, CEO of Vision Hospitality Asset Management. ALICE built a strong advisory board that helped reduce friction with hotels, who are typically slow to adopt technology.
[7] Note: This interview was conducted in July 2016. The company has grown its team substantially since then.
[8] Expedia led the company’s $9.5m Series A round in December of 2015. See article at Skift on the investment.
[9] See Alex’s profile at “Alex Shashou, the Harry Potter of Hotel Stays”.
[10] See “Dare to Make Your Startup Legendary”, Mike Maples.
[11] “The Rise of Vertical-Specific SaaS Vendors”, Norwest Venture Partners.
[12] Ibid.
