Why the future of SAAS isn’t SAAS, it’s network effects.
There’s a pattern that we’ve seen played out in the consumer internet space over the last 8 years and the template plays out as follows:
1. Offer tools to facilitate a new form of communication between two parties.
2. Allow the two to communicate without formation of an explicit network
3. Gather data about the two parties based on their exchanges
4. Build out a graph at the backend using this data to identify affinity between two users
5. Use the graph to enable explicit connections among users
Myspace and Friendster never did this. They stopped at Step 1.
Facebook did most of this but required users to connect before they could exchange. It added friction to step 2.
Twitter made these connections slightly easier by allowing single-sided following, but it still required an explicit connection to enable movement of content between two parties.
But most social systems that have emerged over the last five years have had connection take a backseat in favor of exchange. Instagram followed the playbook above and enabled exchange (of content and attention) before requiring connection. Whatsapp and Snapchat did the same. We explore this new playbook in greater detail in this article here.
One common theme that tied all of these startups leveraging the new playbook was the fact that all of them piggybacked on an existing network: Instagram on Facebook, Whatsapp on the phone’s address book. We’ve explored that in detail here in the past.
So what’s the new new thing?
I’m seeing the same pattern play out in the enterprise now.
Most SAAS companies have used the Myspace or Friendster playbook so far. Invoicing, supplier management and payments SAAS companies focus on step 1 above and stop.
Increasingly, we will see the best SAAS companies moving all the way down the chain mentioned above. The ones that get to step 4 will be the ones that will dominate an entire industry to the extent that they could even enjoy a winner-takes-all advantage.
These companies will use their SAAS tools as inroads towards building out the “commercial graph”, much like Facebook used its social tools to build out the social graph. The commercial graph will connect companies with each other, show their affinities and also add a reputation layer. Reputation will be derived not from expert ratings and reviews but from data captured during the exchanges that happen between companies using these tools. The reputation will form the basis for creating an entirely new marketplace for buyers and suppliers.
SAAS products that allow companies to interact with each other will be at a disadvantage if they ignore steps 3 to 5 in the playbook above. The ones that realize the importance of moving down this path will have a greater shot at owning and retaining customers across an entire industry vertical.
Most venture investors who understand network effects focus overtly on the consumer space. The same embodiment of network effects, in the form of commercial graphs, is an insufficiently tapped opportunity, thus far, in the enterprise space.
In a recent Harvard Business Review article, I break down this evolution in greater detail.
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