Running with Blinders On

All good Dads read to their kids.  I have a great Dad.  My Dad taught me to read The Daily Racing Form–the bible of horse racing.

If you are a nerd and/or like to bet, the Form is simply irresistible.  Think of it as the original “Moneyball” database or Fantasy Sports league. The Form provides prospective bettors with a wealth of information on the horses running in the day’s races, including:

  • Historical performance by stage of race, track condition, etc. for their last few races
  • The quality, weight carried, and jockey in those races
  • The genealogy and trainer of the horse
  • The horse’s latest workout times
  • A speed rating which benchmarks performance of the horse versus that track’s record for the same distance
  • Last, but not least, even whether the horse was wearing “blinders” or “blinkers” in those races!

Blinders are worn by horses thought to be poorer performers when they can see to the side or behind them.  Blinders really are designed to provide the proverbial “tunnel vision”.

What I’ve since learned about B2B software, and life in general, is that unlike horses, we are all running with blinders on.

When I was at Ariba looking for networks for us to buy, I was confident I had the most exhaustive list of B2B networks in the world.  I went to conferences, scoured the web, had inbounds from investment bankers, subscribed to analyst reports,  etc.  I’d test my list with folks and generally find my list to indicate a broader perspective.

However, when I left Ariba and started working with both horizontal and Industry Cloud networks, I discovered that I had had blinders on the whole time! Within a few months–just by looking at the market differently–I discovered a couple hundred more networks!  (I used to post a graphic of these companies, but have since given up based on the futility of that effort.)

In fact, every time I look at a new industry, I discover many more SaaS B2B players than I imagined could possibly exist.  A recent example is the real estate and construction industry.  This sector is very hot right now, perhaps because the 2008 meltdown killed real estate and it is only now recovering!  Here’s a great graphic of the companies (B2B and B2C) just involved in trying to improve various aspects of the residential real estate market:


Generally I have been more interested in the commercial construction market than the residential market. In the past week, I discovered three more companies in that space, all of whom are trying to build networks. A final example:  my recent work has been in the healthcare industry and that industry would fill at least three pages like this!

When I talk to entrepreneurs who are looking for advice, I always ask “Who else is doing the same thing you are?”.  I’m not trying to scare them or discourage them, I just want to see if they have studied the competition. More often than not, I find they are running with blinders on too!

IPO Filings: First Yodlee, then Yodle, what next, Yodl?

My last post noted that Yodlee, a data aggregation provider in financial services, had filed to go public.  This week a provider of cloud-based marketing automation, Yodle, also filed.

Marketing automation software is one of the great growth stories in B2B and B2B2C over the past 10 years.  The Internet and cloud have forever altered marketing departments just as they have IT.  Every small business, in particular, needs:

  • a web presence
  • to understand SEO and SEM
  • a mobile strategy
  • a social strategy and
  • e-mail marketing–just to name a few

Players in the space include Intuit, Google, GoDaddy, Angie’s List, Constant Contact and a host of others.  (Eloqua and Marketo, two giants in the space target larger companies.)

Yodle has a broad offering to help local businesses establish a basic web and social media presence.  Yodle also has tools to connect the marketing function to the back office. In addition, they have a very interesting offering (Centermark) designed specifically for franchise networks and other multi-location providers.  The basic diagram of their offering is as follows:


Yodle targets 7 million local businesses and now has about 50,000 customers.  As with every cloud-based marketing automation provider selling to small businesses, the most critical questions are:

  • Has Yodle figured out how to acquire clients at a reasonable cost?  (CAC for SaaS metrics aficionados) and
  • Does Yodle keep these customers long enough, at a high enough gross margin to make money?  (Lifetime Customer Value (LTV) in SaaS metrics terminology)

Yodle claims to have solved these issues:

Our competitive strengths result in what we believe is an attractive business model. Our low customer acquisition and onboarding costs minimize our initial investment to bring on new customers and allow us to achieve rapid payback. We define payback as occurring when the costs associated with acquiring and launching a cohort of new customers we acquired directly (i.e., not through resellers) in any given quarter is offset by the ongoing cash flow from those customers, less our ongoing costs. We are typically able to generate positive cash flows within the first year after acquiring and launching a cohort of new customers, including the impact from customers who do not renew their subscriptions or service during the first year and excluding overhead costs. As a result, we believe our business model benefits from rapid payback. We refer to customers who we acquired directly (i.e., not through resellers) and who remain as customers after their initial year as our tenured customers. Tenured customers represented approximately 41% and 44% of our direct customers as of December 31, 2013 and March 31, 2014, respectively. The percentage of our direct customers that are tenured customers generally has been increasing over the last year. For the 12 months ended March 31, 2014, we experienced a monthly average revenue retention rate of 97.5% for the media and platform revenues of our tenured customers. The monthly average revenue retention rate for our tenured customers generally has been improving over the last year, and we expect the monthly average revenue retention rate for our tenured customers to continue to improve as our mix of revenues shifts toward revenues from platform products, as revenue derived from customers who subscribe to our platform products generally exhibits a higher retention rate than revenue derived from customers who purchase our media product. We believe that our low customer acquisition and onboarding costs, rapid payback and high monthly revenue retention of our tenured customers results in a business model that generates attractive customer economics and high returns on our initial investment.


From Yodle’s prospectus, it is not possible to exactly calculate their CAC or LTV, but we can estimate both.  Yodle’s CAC bounces around a bit, but appears to be in the $5,000 to $6700 range based on total quarterly sales and marketing expenses and new customers added.

Using Yodle’s monthly average retention rate (97.5%) for customers more than a year old and those sold directly, we can determine that for these customers the average tenure is 40 months.  Yodle also tells us that their flagship product now sells for under $300 and has a gross margin of about 70%.  This makes Yodle’s LTV about $7500. This LTV is pretty tight relative to CAC but it does mean each new customer added contributes to Yodle’s fixed costs.

Before investing, I’d like to see clear numbers on CAC and LTV  from real cohorts. This is the kind of information that Angie’s List provides–much to their detriment!  The fact that Yodle states its retention rate in monthly terms (which always sounds better) and makes several exclusions from their calculations makes me a little nervous.  In annual terms, Yodle’s retention rate is about 74%, though they say it is improving.

Yodle is going to need to improve retention, while fighting off intense competition, if it wants to be a great call.

Golden Yodlee? (say that five times fast)

While the hit parade of small biotech IPOs continues, the number of cloud software IPOs has slowed to a trickle.  Perhaps everyone is just waiting for the mother of all B2B IPOs, Alibaba?

In the meantime Yodlee, a company whose name has been around since 1999,–and which nearly disappeared a couple of times–filed for a $75 million IPO.  If you know Yodlee at all, you probably know about their data aggregation capability.   This functionality allows consumers and small businesses to pull together in one place otherwise disparate accounts across many financial institutions–a la Mint.  With this product, Yodlee is the “plumbing” that underlies many personal/SMB financial applications like Learnvest, Xero, and tools that banks/brokers give you to manage your whole portfolio.

Yodlee wisely positions themselves as “the Financial Cloud”:



Or the slightly more detailed version:


It’s a nice story, with many of the elements necessary for a good business:

  • Blue-chip client base
  • Great position in the large, but presumably commoditized, data aggregation business
  • Silicon-valley based technology developer, with large workforce in India
  • API layer for platform-building and limiting competition with their customers
  • Possible network effects in the data analytics and security areas, as well as economies in building direct connections to financial institutions

The prospectus also highlights several possible concerns:

  • Yodlee is not the same growth story as many of the cloud software IPOs.  The CAGR for 2009-2013 is 20%.  (Though growth for the latest quarter is 28%.)
  • BofA accounts for 13% of revenue and the top three customers represent almost 25% of revenue for the latest three-month period
  • Big competitors:  Fiserv, Intuit, etc.
  • Privacy and regulatory concerns are always a possibility in financial services
  • Unclear as to whether the products are really different or just different positionings of the same product

What is intriguing about Yodlee is the apparently accelerating growth over the last 15 months.  This growth is not coming from the top three customers, but it is hard to tell where the growth is coming from.  I’d like to know more about the money movement, security, and data analytics products.  If those are real and growing, there could be something very interesting here.    I’m hoping many of our readers, who are experts in this space, will chime in for the better good!

The market will have to decide what value to give to a slightly slower grower than they are used to and one that is more of an infrastructure play than an end application/brand.  I’m going to watch this IPO carefully.  I’m a sentimental sucker for companies that have slogged through slow-moving industries for 15 years and finally started to see some success.

Most of the time patience is, indeed, a virtue.  But sometimes it is just prolonged obliviousness!

Simple, but Powerful, Business Model Changes

A  recent Planet Money podcast about CHEP, a pallet company, reminded me how simple business model changes can transform an industry.  (You can listen to the podcast here.  Or read a great article about the industry here.)



If you love business and you do not know the CHEP story, you need to.  CHEP made two simple design changes to the massive pallet industry and in the process became a near monopolist business in some countries:

1.  CHEP designed a better pallet–plain and simple.  They made the pallet “forklift-accessible” from all four sides, not just two sides.  In the process, they also made the pallet a little sturdier and a little more expensive.  This was not exactly rocket science.

2.  Because of the increase in cost/price, CHEP also decided to rent the pallets, rather than sell them to customers.  Today, we would call that PaaS–Pallets as a Service!– or part of the subscription economy!  (To keep track of them, CHEP also painted their pallets blue, added the phone number, and eventually paid rewards for returned pallets. This latter move unwittingly allied the ecosystem with them.)

There’s more to the CHEP story than that, but not a whole lot more.  Simple changes revolutionized an industry.

Another prominent example of simple business model decisions paying off in huge ways comes from James Stewart’s great book on the downfall of Michael Eisner at Disney. My takeaway from the book, was that Eisner did three really smart things during his tenure at Disney:

1.  He opened up the vault of old Disney movies (and re-released them every few years) to the VCR market.

2.  He raised ticket prices at the theme parks.

3.  He decided that the hotels that surrounded the theme parks should be owned by Disney, not by other folks who were essentially living off the attractions Disney had built.

My recollection is undoubtedly faulty, but for me the book was about how successful these moves were and how almost everything else Eisney tried ended up destroying shareholder value.  The ABC/ESPN purchase was enormously successful, but not during his reign and only the ESPN part worked out–albeit unimaginably well.  EuroDisney was a dud, as were other new theme parks, he had to pay Jeffrey Katzenberg $270 million to settle a lawsuit, and was a $1 billion disaster.  I think Disney channel also fared rather poorly. Again the simple stuff paid off.

There is real power in simplicity, building on one’s core, and in thinking through pricing very carefully.  Not all that insightful, and yet…

Travelport, Sabre and Finally Amadeus

An alert reader, Brett Owens, pointed out that I had compared Sabre and Travelport (two of the three major GDSs in the world) but failed to compare them to Amadeus, which is the largest of the three and is already public in the UK!

I’m rectifying the situation with this post.  Here’s a comparison on several of the key metrics:

Metric Sabre Travelport Amadeus
2012 Revenue $3 Billion $2 Billion $3.9 Billion
Travel Spend Processed $100 Billion $85 Billion Undisclosed
Gross Yield 3% 2.4% Not Avail
Billable Transactions 465 Million 347 Million 477 million
Spend/Transaction $215 $244 Not Avail
Rev/Transaction $6.45 $5.76 $5.33
Adj. EBITDA % 26.70% 24.70% 38.10%

Sabre and Travelport’s Revenue per Transaction are overstated relative to Amadeus’s, because I had to imput them, whereas Amadeus breaks this number out exactly. Amadeus also has an IT business for airlines that has 70% contribution margins which pumps up its EBITDA margin, but the others dabble in these businesses as well.

Bottom line: Amadeus is the big daddy of the three.  And I was really impressed with the clarity of their investor presentation and charts like this:


Amadeus makes the case that it is gaining share against the competition, investing more in R&D, paying off debt, and better positioned in emerging markets.  It all sounds pretty impressive.  I also love companies that understand their KPIs well and publish them fearlessly, which Amadeus does.

The doubters will say that online and offline travel agencies are being disintermediated by Google and direct bookings by consumers on every travel provider’s website.  As an avid Google Flight user, who does not use online or offline agencies, I certainly understand this trend. Still this stock pays a 2% dividend (40-50% payout ratio) and there is good growth left in international travel.  Finally, their competition has been PE-backed and debt-laden. I’m guessing the competition will have scrimped on R&D.  Besides maybe Amazon or Google tries to buy them!

I might have dabble in this one.  It’s usually good to own the biggest network/platform in a huge market–VISA, Verizon, Google, Facebook, Alibaba, etc.  Their demise is often predicted prematurely.  I may need to add Amadeus to the list–even though I hate the underlying airline industry.  Amadeus understands this sentiment among potential investors and includes this chart in their investor presentation to differentiate their results from those of the airline industry:


Thanks Brett for the tip.  It’s good to take the US-based company blinders off now and again!

Travelport Follows Sabre’s IPO Route

In April, I wrote about the “grand-daddy of B2B platforms”, Sabre, and their then-pending IPO.  See here and here.  Recently one of their competitors, Travelport, followed suit and also filed for an IPO.  It’s one of the few recent B2B software IPOs to file.

Rather than delve back into a detailed explanation of what travel GDS is, and how Sabre and Travelport differ, I thought it might be interesting to use this occasion to share a brief comparison of these two companies on some key metrics useful for comparing transactional software platforms–within an industry or across industries.  These metrics are as follows:

Metric Sabre Travelport Sabre/Travelport Ratio
2012 Revenue $3 Billion $2 Billion 1.5
Travel Spend Processed $100 Billion $85 Billion 1.2
Gross Yield 3% 2.4% 1.25
Billable Transactions 465 Million 347 Million 1.34
Spend/Transaction $215 $244 0.88
Rev/Transaction $6.45 $5.76 1.12
Adj. EBITDA % 26.70% 24.70% 1.08

I highlighted a) the “gross yield” which is what the platform providers are extracting in fees from buyers and suppliers relative to the value of the underlying transactions processed and b)  the revenue per transaction.

Many platforms I work with wonder what they can extract in value per transaction and per dollar processed.  They tend to forget how many public examples there are to guide them (literally dozens)! The key for any platform is to compare their value proposition(s) to the public comparables to get a sense of how their value proposition compares and therefore what they might be able to charge.

(In this case, Sabre seems to handle more, albeit smaller, transactions than Travelport, but Sabre has a better yield on each transaction.  Perhaps Sabre has a mix or price advantage over Travelport?) I’m sure it is more complicated than this, but my main point was to share key metrics by which industry platforms can be evaluated, rather than to compare boring GDS businesses!


Fintech: The Company, not the Category!

I love the B2B e-invoicing and payments space for reasons I have enumerated previously. I especially love companies that work with nasty, complex invoices and then make the resulting payments.  I love them even more if the payments are then made to cash-strapped suppliers.  Companies that fill this bill are found in numerous industries:

  • Freight
  • Healthcare
  • Telecom/Energy
  • Facility services
  • Clinical Trials
  • Temp labor
  • Consumer packaged goods
  • Media
  • Legal services
  • Construction
  • And many more arcane categories

Fintech, the company, falls squarely into the “many more arcane categories” category. Despite its comically generic name, Fintech specializes in data and payments related to alcohol purchases.  That’s right, alcohol purchases.  Fintech proves once again that if there is a complex service that is highly regulated, or heavily taxed, there is money to be made processing the invoices and making the payments.

According to the Fintech website,

Fintech provides data and payment services to over 275,000 relationships between retailers and distributors nationwide. With over 2,200 distributors sending invoices daily, Fintech processes over 17.2 million invoices and $14.4 billion annually for the grocery, hotel, convenience store, drug store, restaurant and hospitality industries. 


I don’t know anything else about the business, but I’m betting with clients like Walmart, Walgreen’s, Chipotle to name just a few–and $14 billion in annual payments processed–they have a nice business going there.  And something tells me the booze business and its state-regulated invoicing process is here to stay.  Perhaps they can even diversify into marijuana!  Talk about taking a business to new highs!

If you know of an even more arcane B2B payments provider, especially one not in the industries listed above, please comment below.  They never cease to amaze me–and their investors.