software 2017 - where are we now and where are we going?

Battery Ventures Company Confidential | 1

QUIET EXPERTISE THAT SPEAKS VOLUMES.

VENTURE + GROWTH | PRIVATE EQUITY

2017

Software 2017Where are we now and where are we going?

Neeraj AgrawalLogan Bartlett


2017

Disclaimers

This disclaimer applies to this document and the verbal or written comments of any person presenting it. This document, taken together with such verbal or written comments, is referred to herein as the “presentation.” This presentation is being provided for informational purposes only. Nothing herein is or should be construed as investment, legal or tax advice, a recommendation of any kind or an offer to sell or a solicitation of an offer to buy any security. This presentation does not purport to be complete on any topic addressed. The information in this presentation is provided to you as of May 17th unless otherwise noted and Battery Ventures does not intend to update the information after its distribution, even in the event the presentation becomes materially inaccurate. Certain information in this presentation has been obtained from third party sources and, although believed to be reliable, has not been independently verified and its accuracy or completeness cannot be guaranteed. Certain logos, tradenames, trademarks and copyrights included in the presentation are strictly for identification and informational purposes only. Such logos, trade names, trademarks and copyrights may be owned by companies or persons not affiliated with Battery Ventures and no claim is made that any such company or person has sponsored or endorsed the use of such logos, trade names, trademarks and copyrights in this presentation. This presentation includes various examples of companies in which Battery Ventures has invested. These examples are included as illustrations of various investment strategies. For a complete list of all companies in which Battery Ventures has invested, please visit here. Information regarding the specific performance of prior investment recommendations is available upon request. Past performance is not evidence of future results and there can be no assurance that a particular Battery Ventures Fund will achieve comparable results to any other Battery Ventures Fund. There can be no assurance that the investment objectives of a Battery Ventures Fund will be achieved or that the investment strategies utilized will be successful.

The information contained herein is based solely on the opinions of Neeraj Agrawal and Logan Bartlett and nothing should be construed as investment advice. The anecdotal examples throughout are intended for an audience of entrepreneurs in their attempt to build cloud-focused businesses and not recommendations or endorsements of any particular business.

http://www.battery.com/ourcompanies/list/


2017

CloudNY was started with our friends from FirstMark Capital. Our goal from the start was to provide a forum for CEOs of leading cloud software companies to collaborate and learn from one another in a private setting. We hope to foster a sense of giving back by those that have successfully navigated the journey before and an environment of shared learning by those that are on the journeycurrently.

New York was an obvious destination as it has personal affinity to both the teams from Battery and FirstMark and it allows us tohighlight the burgeoning ecosystem of software companies in the area – plus New York in May is tough to beat.

We are already in the preliminary stages of planning next year’s event, so if you would like to get your name on the list for potential attendance, please visit www.cloudny.com and request and invitation. We would love to see you there!

Best, Neeraj and Logan

http://www.cloudny.com/


WHY WE ARE LONG SOFTWARE


2017

Overall software spend continues to grow

Source: Gartner Market Databook, 4Q16 Update; Forrester; PwC

21.6%20.1%

18.7%17.0% 16.4%

2.3% 2.3% 2.2% 2.2% 2.2%

7.1% 6.8% 6.5% 6.3% 6.5%

(0.6%)

2.7% 2.6% 2.6% 2.9%

-5%

0%

5%

10%

15%

20%

25%

2016 2017 2018 2019 2020

SaaS CAGR: 18.3%

Software CAGR: 6.9%

US GDP CAGR: 2.2%

Total IT CAGR: 2.3%

vs.

vs.

vs.

18.3%

6.9%

2.3%

2.2%

2016-2020 CAGR SaaS spend

2016-2020 CAGR Software spend

2016-2020 CAGR Total IT spend

2016-2020 CAGR Total US GDP


2017

Software has consistently grown through different eras & delivery models

Source: Battery Ventures; Forrester; Gartner; the Yankee Group; BEA.gov; Input Research Note: Homegrown/Internal Software is estimate based on hours worked.

$0

$100

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1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018

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ons

Homegrown/Internal Software On-Prem + Mainframe SaaS

Global Software Industry Revenue


2017

$406

$771

$1,174

$2,450

$1,558

$2,817

$1,337

$948 $950

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

2009 2010 2011 2012 2013 2014 2015 2016 2017

Cloud/Software IPOs since 2009

Cloud/Software IPOs since 2009To

tal A

mou

nt R

aise

d in

IPO

s (M

illio

ns)

Source: Battery Ventures and Capital IQ. Includes all new cloud/software public offerings listed on major US exchanges.

* Denotes a current or former Battery portfolio company

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2017

Priv

ate

Com

pani

es

2009 2010 2011 2012 2013 2014 2015 2016 2017 YTD

$525 $1,200 $1,650 $2,325 $700 $1,100 $3,700*

$689 $1,341 $1,100 $675 $900 $614 $660 $850 $1,000 $675 $800* $610 (PND) $600* $930 $594 $800 $600

$752 (PND) $750(PND) $650

$6001 4 4 6 5 7 4

$525 $2,549 $4,441 $6,107 $2,644 $5,600 $5,524

Publ

ic C

ompa

nies

$1,676* $1,033 $3,764 $4,608 $2,640* $8,300 $4,500 $29,000

$721 $1,763 $1,921 $1,608 $2,613 $4,000 $9,300$1,640 $1,050 $514 $2,505 $4,300$1,397 $2,800$958 $2,400$625 $1,800

$1,790*

$1,650$1,100$850$663$625$544$532$509

1 2 2 6 3 3 3 15$1,676 $1,754 $5,527 $11,149 $5,298 $11,427 $11,005 $57,863

Tota

l 1 3 2 10 7 9 8 22 4$1,676 $2,279 $5,527 $13,698 $9,739 $17,534 $13,649 $63,463 $5,524

Cloud M&A Analysis since 2009

Data is as-of 5/15/2017 and prices are in millions. “PND” denotes price not disclosed; price for Digital Insight represents acquisition by NCR in December 2013.


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2017

Software and IT have had a strong impact on productivity

Source: OECD.org; “The U.S. Software Industry: An Engine for Economic Growth and Employment”, SIIA, 2014Note: Constant currency for 2010 USD

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Productivity - GDP Per Hour Worked in the US

52% 49% 46%

17%7%

24%

31%44%

30%

1974-1995 1995-2004 2004-2012IT Increased Workforce Skills Other

IT's Contribution to Productivity Growth


2017

Software has had a demonstrable impact on employment

Source: “The $1 Trillion Economic Impact of Software”, BSA | The Software Alliance, June 2016

The US software industry supports nearly 10 million jobs

2.5M directly employed in the software industry

7.2M software-supported indirect and induced jobs

$$The average annual wage for software developers is > 2x the average annual

wage for all US jobs

http://softwareimpact.bsa.org/pdf/Economic_Impact_of_Software_Report.pdf


2017We believe that software’s impact on the US economy will reach $2 trillion and 10% of GDP by 2020

$1.4 $2.0

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

2015 2020

Trill

ions

Software as a Percentage of 2015 GDP8%

Software Industry Value-Add to US GDP

6.9%2016-2020 CAGR(1)

10% Software as a Percentage of 2020 GDP

Source: Battery Ventures analysis using 2015 US GDP data; “The $1 Trillion Economic Impact of Software”, BSA | The Software Alliance, June 2016(1)US Software Spend CAGR: Gartner Market Databook, 4Q16 Update; Forrester; PwCNote: includes direct, indirect and induced impacts on GDP.

http://softwareimpact.bsa.org/pdf/Economic_Impact_of_Software_Report.pdf


BUT WE FEEL THIS IS JUST THE BEGINNING


2017

The Five Forces of Software’s Accelerating Growth

Software is infiltrating what were once niche markets

Every company is becoming a software company

Software is displacing hardware

Software is displacing services & labor

Existing software markets are growing over time1

2

3

4

5


The Five Forces of Software’s Accelerating Growth2017

Existing software markets are growing over time

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ILLU

STR

ATIV

E EX

AMPL

ES

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Source: Morgan Stanley; IDC; Gartner; Accel 2016 State of the Union Report

Mainframe Era Client Server Era Desktop SaaS Era Cloud-First Era

Golden Years 1970 -1985 1985 - 2000 2000 - 2015 2015 -

Potential Users 1M 10M-100M 1B+ 10B+

Buyer IT IT Business Units Business Users

Customers Gov’t, Manufacturing, Financial Large Businesses Most Businesses All Businesses

Market Size $ $$ $$$ $$$$$

CRM

ERP

HR/Accounting

Expense Mgmt

Procurement

Systems Mgmt

Content Mgmt

Contact Center

Identity

BI



Software is infiltrating what were once niche markets

*


SUBSCRIPTION COMPUTE

CapEx OpEx

LIMITED DISTRIBUTION COSTS

Plumbing, HVAC and Electrical

Construction Real Estate Asset

Managers and Brokers

Law EnforcementHome-health

Ticketing + Visitation

Illustrative Vertical Market Examples

Sales Tax

SOX/Audit/ SEC Compliance

Cap Table Management Document Signing

Visitor ManagementSales BI

*

Illustrative Hyper-Focused Business Processes Examples

Marketing Automation

Email

Customer Service

CRM

Accounting + Budgeting

E-Commerce

Illustrative SMB Market Examples

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Hardware Software As-a-Service

Software is displacing hardware

of organizations plan to increase spending

on data center infrastructure

10%of organizations plan

to increase spending on cloud applications

60%Hardware Software

Car Console

Watch

Source: IDC Worldwide Quarterly Cloud IT Infrastructure Tracker, Q4 2015



Software is displacing services & labor



Every company is becoming a software company

*

Source: 451 Research. Includes all announced software acquisitions by historically non-technology buyers with transaction value over $250M since 11/2014.

Date Acquirer Target Total Deal Amount

12/09/2014 $710

05/19/2015 $687

10/08/2015 $675

10/31/2016 $632

04/27/2015 $600

03/11/2016 $581

08/03/2015 $500

05/05/2015 $448

11/05/2014 $427

11/03/2014 $400

11/11/2014 $325

10/26/2015 $262


Date Acquirer Target Total Deal Amount

06/15/2015 $4,000

12/06/2016 $2,800

08/03/2015 $2,738

08/01/2016 $2,400

07/01/2016 $1,500

04/20/2015 $1,300

01/25/2017 $1,100

01/25/2016 $970

11/14/2016 $915

06/21/2016 $900

02/22/2016 $800


2017

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We’re still in the early innings of the software revolution

Source: Battery Ventures; Forrester; Gartner; the Yankee Group; BEA.gov; Input Research


2017

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2017

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TODAY

Assumed 2017-2050 CAGRGlobal Software Revenue

~5%Global Software Industry Revenue



$1 TRILLION


SO WHAT DOES THIS MEAN FOR YOU?

Considerations for the Modern Software CEO


2017Considerations for the Modern Software CEO


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Sample Company Examples from Disparate Geographies

Software innovation is now global Are you fully cognizant of your international competitors?Are you building your product and go-to-market for global scale?

Note: Map not to scale


2017

There are competitors in all segments of the software market

Enterprise Mid-market SMB

CRM

E-Commerce

B2C Marketing

Marketing Automation

HCM/Accounting

Applicant Tracking

Customer Service

Telephony

Procurement

Expense Management

System Management

How aware are you of competitors that may be upstream or downstream?What are your soft spots that your competitors could exploit?

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ILLU

STRA

TIVE

EXA

MPL

ES



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2017

Product now drives software sales

1970-2000 2000-2015 2015-

Era Sales-driven software purchases

Marketing-driven software purchases

Product-driven software purchases

Sample Companies to Emerge

Sample Enablers

Does your product require detailed voice-over or speak for itself?Do you know what features drive adoption, loyalty and high NPS?

Best-in-Class Good Average

Net Promoter Score 50+ 30-50 10-30

*

* *

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PENDO* NPS BOARD SLIDE


2017

Network effects and ecosystems build moats and drive stickinessDoes each incremental customer and user make your product more valuable?What are data or network moats that can keep competitors at bay?

ILLU

STR

ATI

VE E

XAM

PLES


*

The largest open source community

in the world

*



2017

Internet Mobile AI/Machine LearningTime 1995-2005 2005-2015 2015-

Enabler .com Smartphones Big DataConsumer

Lighthouses

Platform SaaS Mobile Apps Voice?

Sample B2B Leaders

AI and machine learning are enabling applicationsAre you leveraging AI and machine learning where appropriate in your product?Are you prepared for what a potential platform shift might entail for your market?


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Google Trends: Interest in “Internet”

Peak popularity:Jan ‘04

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Google Trends: Interest in “Mobile”

Peak popularity:Jan ‘12

Google Trends: Interest in “Machine Learning”

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2017

Microservices architecture and rapid product delivery are now must-havesHow quickly can you deliver production code with no customer impact?How dependent are you on your infrastructure provider?

Sample Tools

Infrastructure Orchestration / Runtime

Provisioning / Deployment

Visibility / Monitoring

Security / Governance Best-in-Class Good Average

Many times a day

Many times a week Every week

Mainframe

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Client Server Multi-Tenancy Cloud-Native

How quickly can you deliver production code?



SALESFORCE

AWS O365

*

**

Three Tier


2017

Culture is paramount and employee feedback is publicAre you keeping the talent bar high as you scale? Are culture and diversity top CEO priorities?

BEST-IN-CLASS GOOD AVERAGE

Company Rating 4.5+ 4.0-4.5 3.3-4.0

CEO Approval 94%+ 80-94% 67-80%

Business Outlook 88%+ 75-88% 45-75%

*



AVERAGE COMPANY RATING COMPARISON

AVERAGE CEO APPROVAL RATING COMPARISON

AVERAGE BUSINESS OUTLOOK COMPARISON


2017

Source: Wall Street Journal

Culture is paramount and employee feedback is public (cont.)Considerations for the Modern Software CEO

http://online.wsj.com/public/resources/documents/SALESFORCE.pdf


2017

Find a Product WedgeIllustrative Legacy Examples Illustrative Modern Examples

Okta leveraged the proliferation of cloud apps as its wedge intoWindows’ leadership in identity

management with Active Directory

Box used the ability to sync cross-device, particularly on mobile

as its wedge into customers that were already using Microsoft Sharepoint

Contentful decoupled the back-end of the CMS from the front-end of the

website, which allowed it an entry point into Adobe’s entrenched position in the CMS space

Appboy leveraged mobile app marketing as a wedge into

ExactTarget’s customer base beforebroadening its suite of services to include email marketing

Procurement

Enterprise HR/Accounting

Workplace Communication

*

*SMB HR and Benefits

Find a wedge and change the market dynamicIs there a product gap in an incumbent solution that you can exploit?Is there a weakness in an incumbent’s business model that you can use to your advantage?

Enterprise File and Document Management

Identity

Digital Content Management

B2C Marketing



* *

Find a Business Model WedgeIllustrative Legacy Examples Illustrative Modern Examples

Workday moved to subscription sales, decreasing the upfront switching

cost for PeopleSoft customers

Coupa provided the supplier network for free, decreasing the friction

for suppliers to join its marketplace

Slack leveraged bottoms up selling and “fair pricing”, enabling end-users to try

the product themselves and IT administrators to only pay for users utilizing the service

Zenefits and Bob monetize the insurance broker subscription instead of simply

monetizing through traditional software sales


2017

Grow fast or die slowAre you strategically using capital to capture your market?Are you moving to where the market will be in 24 months, not just where it is today?

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2017

In software, being first seldom decides a marketConsiderations for the Modern Software CEO

(1) Disclosed acquisition price according to 451 Research(2) Enterprise value as of 5/2/2017(3) Most recent private company financing valuation

Sample VendorsMarket Core Competitive Time Early to Market Valuation Market Leader Valuation

Relational Database 1980 – 1986 N/A $185.4B(2)

Spreadsheets 1982 – 1987 N/A N/A

Expense Management 1996 – 2001 $160M(1) $8.3B(1)

Web Conference 1999 – 2002 $200M(1) $3.2B(1)

CRM 2000 – 2003 $5.9B(1) $61.9B(2)

Applicant Tracking 2000 – 2004 $115M(1) $1.9B(1)

Learning Management 2007 – 2010 $400M(1) $2.2B(2)

Pharma CRM 2008 – 2012 $415M(1) $7.5B(2)

SMB E-Commerce 2008 – 2013 N/A $7.5B(2)

Enterprise E-Commerce 2008 – 2013 $1.0B(1) $2.9B(1)

Online Payments 2012 – 2016 $800M(1) $9.1B(3)


2017

Category leadership is all that matters

71% 79% 72%

29% 21% 28%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2000-2003 2004-2008 2009-2013Category King Everyone Else

Equity Value by Category Leader

Category king Everyone else

70%market share in their respective markets

Category kings consistently capturedmore than

(1)


(1) Period slightly skewed by FacebookSource: “Time to Market Cap: The New Metric That Matters”, Play Bigger Advisors


2017

Are you fully cognizant of your international competitors?Are you building your product and go-to-market for global scale?

How aware are you of competitors that may be upstream or downstream?What are your soft spots that your competitors could exploit?

How quickly can you deliver production code with no customer impact?How dependent are you on your infrastructure provider?

Is there a product gap in an incumbent solution that you can exploit?Is there a weakness in an incumbent’s business model that you can use to your advantage?

Software innovation is now global

There are competitors in all segments of the market

Does your product require detailed voice-over or speak for itself?Do you know what features drive adoption, loyalty and high NPS?

Product now drives software sales

Are you keeping the talent bar high as you scale? Are culture and diversity top CEO priorities?

Culture is paramount and employee feedback is public

Does each incremental customer and user make your product more valuable?What are data or network moats that can keep competitors at bay?

Network effects and ecosystems build moats and drive stickiness

Are you leveraging AI and ML where appropriate in your product?Are you prepared for what a platform shift might entail for your market?

AI and machine learning are enabling applications

Microservices architecture and rapid product delivery are now must haves

Find a wedge and change the market dynamic

Are you strategically using capital to capture your market?Are you moving to where the market will be, not just where it is today?

Grow fast or die slow

Summary: Tactical considerations to help the modern software CEO become a category king



2017

Top 5 execution missteps and tactical advice

Equating early product-market fit with long-term company success Look for the operational issues when things are going well1

Being reluctant to let your team drive key deals The sooner the sales team does the selling the better you are2

Waiting too long to embrace team-building as a key priority Executive recruiting should consume 50% of your time3

Focusing only on 1st level management vs. 2nd level management 2nd level management is the true leverage point in scaling4

Viewing the board in isolation Hire and recruit board members just like your executive team5


WE FEEL THAT THIS IS JUST THE BEGINNING


2017

Nasdaq Composite Index

0

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Source: Capital IQ


2017

Disruptive software companies will be started in all markets

Nasdaq Composite Index

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Includes public cloud companies with TEV >$500M as of 5/3/17 according to Capital IQ, cloud companies acquired for over $500M since 2009 according to Pitchbook, and private cloud companies valued at over $1.5B as of 5/3/2017 according to Crunchbase. Excludes companies based in Asia.


2017

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We’re just getting startedB

illio

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Your Logo Here?



2017

Biographies

Logan is a vice president in Battery’s Boston office, focused on growth investments for business-to-business software companies. He is currently involved in Battery’s investments in Amplitude, Appboy, Narvar, Pendo, and TrendKite. In 2017, Logan was named to Forbes’ “30 Under 30” list of leading young entrepreneurs, innovators and game changers. Logan graduated with a BS from Washington and Lee University, where he played men’s lacrosse.

Neeraj joined Battery in 2000 and invests in SaaS and internet companies across all stages. He was a founding investor in BladeLogic and has invested in several other companies that have gone on to stage IPOs, including Bazaarvoice, Coupa, Guidewire Software, Marketo, Nutanix, Omniture, RealPage and Wayfair. He also invested in several Battery portfolio companies that have experienced M&A events. Neeraj’s current private investments include Amplitude, Appboy, BloomReach, Catchpoint, Chef, Cohesity, Glassdoor.com, OpsGenie, Optimizely, Outlyer, Pendo, SmarterHQ, Sprinklr, StellaService, Tealium, TrendKite and Yesware. He has been recognized as a top-100 global venture capitalist on the Forbes Midas List for the past seven consecutive years.

Twitter: @neerajvcEmail: [email protected]

Twitter: @jloganbartlettEmail: [email protected]

Neeraj Agrawal

Logan Bartlett

Special thanks to Galit Krifcher for her tireless work on this with us

software 2017 - where are we now and where are we going?

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