New Stack Brings New Opportunities

The New Software Layered Cake

Part 2: Uncovering Opportunities Underlying The Digital Economy

Sekhar Sarukkai

In this article, I will explore the implications of the new software stack and the startups that are mushrooming across the stack. If you are looking to decide whether a particular idea in the stack is worth pursuing or funding, I will use examples from some of my own angel investments and map them into this stack. Having started and exited multiple software companies and faced near-death experiences, I realize there are many variables that go into a successful outcome. What I have come to realize is that the founding team, the technology, the goto market motion, and market dynamics all contribute in equal part towards the trajectory a company takes. As an early-stage angel investor, you are backing a company based only on partial data on all of these dimensions, making your decisions that much more harder. So, in addition to identifying where the company may fit in the new software stack, it will be important to look for signals in market dynamics and technology moats that may support a sustainable business in the layer the company exists. Augmented with the founding team’s background and the goto market models (including consideration of varying buyer personas) being pursued, you will have a better sense of determining probability of success.

To start, a rule of thumb is that lower down the stack a company plays in, more critical that an open-source strategy and a bottom’s up go-to-market motion is adopted. The founding team must have experience or traction in the technology community and in general must be much more technically savvy than in higher layers. Higher in the stack, the founding team must have experience in the domain especially in vertical SaaS, marketplaces and business process automation. In these layers, the founding team needs to be technically competent but not necessarily deep since they will be leveraging software lower in the stack. With the right architecture, the SaaS services can leverage scaling, performance, availability and other non-functional characteristics from layers lower in the stack. Lower the startup is in the stack, greater the chance of its commoditization (or consolidation) due to competition for a platform control point. Higher the startup is in the stack, lesser the chance of rapid obsolescence or commoditization due to specialized value, but more likely that the startup’s market size will have a lower ceiling.

Startups in layer 4 and 5 can integrate other SaaS APIs and integrated data services that will help outsource important but peripheral functions required to address the business problem, to other layers or Services. Specific technologies such as AI, security, observability are not called out in the stack (except in the data infrastructure category) since these technologies are adopted across many layers in the stack, and typically are viewed as core infrastructure that belongs in Layer 2.

Layer 1

Layer 1 is hard for startups to crack and is the playground for the big boys like Microsoft, Amazon, Google, VMware, etc. in addition to major open source initiatives like CNCF, Linux, Apache, etc. Given that this is a high risk space, as an angel investor the risk-reward can be difficult to quantify and hence we have not invested in any startups in this layer.

Layer 2

Devspace and Enya are examples of two startups in Layer 2 that we found interesting to invest due to their strong technical foundations.

Devspace.sh (loft.sh) has a strong technical founding team who graduated from Berkeley Skydeck and have created a strong container technology for lightweight virtual clusters on top of Kubernetes. This has an open source component on top of which they have built proprietary software. Like most early stage startups, they have limited commercial customers, but have a large user base of their open source products. App infrastructure is a crowded area but the upside of successful differentiation could be immense. In Devspace’s case, the technology is differentiated since they have solved hard technical problems to enable customers to leverage a shared cluster, realizing cost savings and improved agility.

Enya.ai is a data privacy framework originating from Stanford. With proliferation of data, privacy regimes, and increased user sensitivity to their privacy, technologies that help keep data private will increasingly become a core aspect of confidential computing, and data sharing. Enya has some early traction in healthcare analytics and could become an important foundational aspect of trusted computing.

Layer 3

SaaS APIs, integrated data services are key categories in this layer that we continue to be bullish on. The key requirement in identifying angel investment targets are the repeatable nature of the API based SaaS opportunity or the data integration needs.

Pepperhq is an example of a UK based API startup that has a whitelabeled API SaaS that enables restaurants/pubs to offer mobile payment, ordering and loyalty applications in a touchless manner via an easy to deploy, whitelabeled web presence. The founding team has many years of experience in this space, and it has helped them tide through the challenging Covid times successfully as they expand their presence in the UK and USA.

Suggestic is an example of a data integration service that has created a huge database of nutrition related information that it collects from various sources. The founders originally built yet-another B2C nutrition app but soon realized that rather than compete with thousands of other applications, they would use the data as the key value they offer to arm others to incorporate this data into their own customer facing applications via a B2B2C model. Since they pivoted to this approach, they have done phenomenally well. Like Pepperhq, Suggestic has promising market traction in providing an API and whitelabeled Service for 3rd party health plans, nutrition, fitness, wellness and food companies to incorporate Suggestic information.

Layer 4

SaaS (B2C/Horizontal/Vertical) and marketplaces dominate this layer. Each of these categories have their own unique characteristics needed for success. However, all of them have a strong need for domain expertise and GTM challenges. Founders in this category are diverse but in general are passionate about a specific vertical or domain and are cost conscious in their early execution phase so as to not bite more than they can chew. Business SaaS companies (especially vertical SaaS) typically end up selling top-down and the founding team would be expected to have some relationships with executive level buyers in their target vertical.

Yogifi.fit, a winner of the CES 2020 innovation award, is an example of a B2C SaaS in the wellness space. They have developed a unique smart yoga mat that connects with their app to the Cloud that guides users in their routines. Much like Mirror or Peloton, they are a great solution for these stay-at-home times forcing social isolation. The founders (though first time entrepreneurs) had significant passion and momentum behind this differentiated solution timed for the times.

Tumeke.io, a vertical SaaS startup out of Stanford, is a vertical SaaS focused on using computer vision for ergonomic assessments -- typically for factory floors and blue collar workers. The focus on an “unsexy” problem with a fresh perspective is what attracted us to Tumeke. Alternatives are rife with legacy technologies, and as the technology matures, there are many other areas into which they can grow their business.

Toucan.events is a next generation social Zoom platform. This horizontal SaaS brings the natural and social interactions of real life to online events and gatherings. The pain of trying to leverage a 1-to-many platform like Zoom for social interactions has become very evident during the pandemic. Toucan’s solution enables a natural way for people to move around in a virtual crowd and form social interactions in a many-to-many manner.

Layer 5

This layer essentially is an aggregation and orchestration layer across Services, APIs and data that have been created in lower layers of the stack. Business process as a Service has multiple aspects including robotic process automation. The aspects of BPaaS that orchestrate modern applications in the new software stack or enable new business efficiencies or capabilities are particularly appealing. The founding team of companies in this layer should have a strong background in the business domain and should have established relationships that can give them a distinct go-to-market advantage that will help them meet business goals that will facilitate their next round of funding (typically series A). The two companies we have invested in this layer are still pre- series A but further along in their business traction.

CarAdvise is one such company that has both an interesting go-to-market advantage as a exclusive Uber partner to connect Uber drivers with > 20,000 car repair shops. In addition, CarAdvise solution for fleet management simplifies the maintenance, authorization and payment processes that previously were disjoint and ad-hoc. The ensuing streamlining of processes helps improve stickiness and enables newer business opportunities.

Recess.is is a Mark Cuban backed Indiana University late-stage startup that created an event sponsorship marketplace that connects virtual (& physical) event organizers with sponsors and product marketers. This is a company further along in the maturity cycle but was challenged to react to a tectonic shift in events due to Covid. They have thrived during the pandemic by extending the marketplace to apply to virtual events through their SaaS service.

Summary

A new crop of exciting opportunities are opening up for startups in different layers of the new software stack. In each layer you will find that some of these opportunities will be tactical while others will be highly strategic. I hope this framework can be of use in your own analysis of the different opportunities, or companies, that you are evaluating in this new software ecosystem.