Background: The history of SaaS traces back to the late 1990’s, when software entrepreneurs began to recognize the Internet’s potential to become a more efficient distribution platform for software than the traditional client-server model. These entrepreneurs understood the ability of SaaS to shift the business model of software from a purchase to a lease model, dramatically shifting the cost curve. They also understood the Internet’s potential to enable distribution of software updates in real-time, enhancing usability and customization.
One of those early pioneers was John Belizaire, CEO and Co-Founder of TheoryCenter (acquired by BEA for $153 million), and later CEO and Co-Founder of FirstBest Systems, acquired by Guidewire Software. In 1997, two years before Salesforce was founded and one year before Netsuite was created, Belizaire and his co-founders began building TheoryCenter, a leader in Java-based component software for enterprise applications. TheoryCenter was an early pioneer, providing downloadable software combined with an on-premise deployment model. TheoryCenter played an important role in the development of e-commerce software, which unleased the web’s potential as a retail channel.
We spoke with John Belizaire to learn about the early days of SaaS, which in fact began with the Application Service Provider model (ASP), which was a precursor to SaaS. We discussed how the industry has evolved over twenty years, and how TheoryCenter played a role in the evolution of e-commerce technology. Finally, we learn about the second wave of SaaS entrepreneurship over the last decade, and the role that Belizaire played via his founding and leadership of FirstBest Systems. Finally, we provide key learnings at the end of the article.
Interviewee: John Belizaire (JB), Founder of TheoryCenter and FirstBest Systems. Author of 10 Lessons for Insurtech CEOs.
Year Founded: 1997
Interview with John Belizaire (JB):
Q: Thank you for doing this interview today, John. Could we go back to where it all started for you? How did you get into technology business, and what led you to become a technology entrepreneur?
JB: I went to Cornell to study computer science. I got my Bachelors and Masters in Computer Science there. I was an Intel Scholar. I received a scholarship, which funded my undergraduate tuition. As an Intel Scholar, you go into a rotational program where you learn all of the functional areas of the company.
That was a great experience for me. Andy Grove, CEO of Intel, oversaw this program. I really admired him, and he became a role model for the CEO I’d like to be someday.
Q: That’s a wonderful story. So how did you go from Intel to starting a company? What was the path?
JB: Well, it started with my co-founders and I. There were three of us at Cornell — myself (Co-Founder and CEO), Joseph Pilkerton (Co-Founder and EVP), and Julian Pelenur (Co-Founder and CTO). We were a group that broke the mold. We eventually had five co-founders, but three of us had studied together. One of my co-founders (Mauricio Alvarez) was from Mexico, the other (Julian) was from Argentina. We would submit our assignments as a team in the engineering school. We were the first engineers who decided to take entrepreneurship classes at the Cornell Business School. We always wanted to start a company. People called us “The Posse” around campus, so when we decided to start our first company, we called it the “The Posse Corporation”.
We eventually named the company TheoryCenter after the supercomputing lab where we spent a lot of time at Cornell. We had a professor, David BenDaniel, who played an important role for us. He took a look at our original business concept and thought the business could be venture fundable. He recommended that we start a company and gave us that initial push.
Two of my co-founders were on H1-B visas, so we couldn’t start a real company right away. We each took real jobs. I went on to enter Intel’s Graduate Rotation Program. I chose Network Architecture as my chosen permanent role at Intel.
Q: So how did the business start to grow?
JB: After some time, we decided to do the business for real. Our business was originally an application server business. This was the early days of application servers, and the market was very competitive. We realized that we needed to “pivot” the business. So we decided to switch to building components that you could use to build an e-commerce store. The application server was the first piece, but there was a lot more that you needed. For example, the shopping cart, the search functionality, the customer profile, etc.
Q: So you guys were basically building the first version of the e-commerce software platforms we use today?
JB: That’s right. I would go and pitch investors and I would illustrate our business using a box of Legos. Each Lego piece would represent a required component of an e-commerce suite. I used the Legos to show visually how many elements there were to a suite.
Q: Could you describe how TheoryCenter grew in those early days?
JB: We grew fast. One key element was that customers were bundling our product with BEA Weblogic, which was an enterprise application server. Many companies were adopting BEA Weblogic, and that growth drove adoption of our software.
Q: What led to the acquisition of TheoryCenter by BEA?
JB: That is an interesting story. We were in discussions with BEA about a formal partnership. At the time, BEA was putting a large amount of resources behind its own e-commerce business. So we were working on a partnership, and then we noticed that the conversations halted. We learned that Warburg Pincus, which had incubated BEA and made a large investment, had also come across TheoryCenter. They were interested in having BEA buy the business.
BEA then said to us, “We can make a partial investment in the company, or a total investment in the company”. We decided that it made the most sense to sell.
Q: How large was the acquisition?
JB: The acquisition price was $153 million, and it took place in 1999. We went from eating hot dogs to being millionaires. The deal also put us on a rocket ship. After the acquisition, our business grew to $100 million in revenues on a three-year period.
Q: That is an amazing accomplishment! What was the experience like working at BEA?
JB: Well, we liked being on the operational side for a period of time. But myself and my co-founders also started to invest our own capital. As angels, we could come across founders that had built technology, but didn’t have an understanding of how to build a real business.
We decided to do the opposite: we would find a “pain” first, then built a business around it.
At that time, there were a few trends happening in software. SaaS was taking off and open-source software was taking off. Business customers were moving from infrastructure to more vertical applications. So we started doing research on verticals that might have “pain”.
Q: Which verticals did you look at when you were conceiving your new company?
JB: We looked into government, but decided not to go after it because we didn’t have background there. We also decided that financial services didn’t make sense for us. We started looking to insurance, and found that companies were starting to purchase insurance online. At the time, there was a lot of pressure being but on insurance companies to be profitable. We originally though about becoming an online insurance business ourselves, then decided against that.
We started speaking with insurance companies and we asked them, “What is the hardest part of doing what you do? They said the underwriting was the hardest part. We decided to build software that could help in the insurance underwriting process.
Q: What was it like being an early vertical SaaS company in those days?
JB: This was a challenging process, due to the industry that we were entering. Insurance companies are very regulated, to begin with. They also didn’t know what SaaS meant, so we had to explain it to them. They were used to purchasing enterprise licenses. Our investors were telling us we had to be SaaS, because that was the future. So we needed to find a solution.
For our first customer, we came up with a solution called the “enterprise option”. We gave them two two options: they could buy on a traditional license-maintenance program, or they could sign up for a subscription. The cost of an annual subscription was close to the cost of the license, but a little cheaper. The customer decided to go with the annual subscription, and ended up being a customer with us for 10 years.
Q: One of the biggest issues at that time was safety of customer data. Companies weren’t used to having their data hosted and managed by a third party. How did you solve customers’ fears regarding data security?
JB: We separated the subscription revenue piece from the application hosting piece. Just because a customer paid on a subscription basis, didn’t mean that had they had to host their application and data with us. We gave them an option. Customers could still host their application in their own data centers, we would just manage the software and data on their behalf. We called this the “managed application services” model.
This brings up a key learning we had: when you’re building a company, you need to find ways to solve issues creatively. In this case, we decoupled the hosting from the delivery of the software itself. That was our creative solution.
Q: That is very interesting. Could you talk about the customer contracts you eventually signed at FirstBest? How did they grow?
JB: Deal sizes ranged from $300 to $400k at the low end, up to $1 million. The sales cycle was 6 to 9 months, once we matured. We invested in sales enablement tools to really get our sales process right.
Q: How did the opportunity to sell to Guidewire arise?
JB: We were doing a missionary selling in our early days. We realized that there was another piece to the puzzle that we needed: policy systems needed to be matched with the underwriting systems. We had the underwriting capability, but not the policy systems.
At the same time, Guidewire started to hear about us. They approached us and wanted to team up.
Q: How did you guys decide to sell to Guidewire?
JB: The industry was beginning to consolidate. We realized that if we weren’t part of a larger insurance suite, we would be out of luck. Also, companies want to have a single strategic partner for all their operating platform needs. In addition, we had raised a lot of capital, and we wanted to generate a return for our shareholders.
Q: Excellent. Could you provide key learnings for new SaaS founders, as you look back on your career?
JB: There are a few key lessons that I think are really important. The first is that as a founder, you need to live and die by the following mantra: “Love your customer”. You need to spend as much time as you can with your customers — you should be interacting with them as least 3 to 5 days per week. I mentioned earlier that founders need to identify customer “pain”. It is in these conversations that you get the real connection to customer pain. And these customer relationships will stand the test of time. When I finally left Guidewire (post the acquisition of FirstBest), I sent personal goodbye notes to our customers.
The second lesson is “never give up”. Patience and persistence are very important. You can’t control everything as a founder, but what you can control is not throwing in the towel, and staying the course.
The third lesson is “don’t be afraid to innovate”. Innovation will differentiate you in the long term. At TheoryCenter and FirstBest, we innovated around everything, including our go-to-market and the construction of our team.
The last lesson is “spend a great deal of time ensuring that you have the best people in each role”. Your process here is critical. At FirstBest, we created a model for how we conducted interviews, the questions we asked, and how we evaluated whether a candidate was a good fit for our company. One of the reasons we were acquired was based on the quality of our team — Guidewire was very impressed by the quality of our team.
Q: Thank you John for spending time with me today.
Key Learnings from John Belizaire:
· When selling a technology product in a new market, sometimes you need to be creative to overcome resistance to adoption. John describes initial customer resistance to adopting the FirstBest SaaS offering, based on customers’ fear of losing control of their data. FirstBest needed to find a way to ease customers into the adoption of a SaaS solution, addressing their data fears while also ensuring that they would sign up for a subscription solution.
He did this by creating their “managed application service” model. In this model, customers switched over to a subscription revenue model, but had the option to continue to host their data in their own data centers. This was in effect an intermediate solution, where FirstBest was able to gradually convert hesitant customers to SaaS over time, but the initial model enabled them to continue to control their own data.
FirstBest was also creative in terms of its pricing for SaaS. By making the subscription price lower than the cost of a traditional enterprise license, FirstBest used cost savings as the driver for initial adoption of the new revenue model.
· Love your customer: While it is cliché in the technology world to say that companies should love their customers, the reality is that many companies don’t make the effort to actualize this in the form of their business process. In the case of both TheoryCenter and FirstBest, loving the customer was reflected in constant conversations, up to 5 times per week in the early days, to identify customer “pain”. Both companies evolved out of an iterative process that focused on identifying customer pain. In the case of FirstBest, the choice of an industry vertical to focus on (insurance) and a specific application within that vertical (insurance underwriting), evolved from these exhaustive conversations focused on customer pain. Even the eventual decision to sell the business to Guidewire was driven by customer demand, in that case the conclusion that customers were seeking to purchase a combined solution that combined policy making with underwriting.
· Acquisitions in the first wave of a new industry’s growth are often technology bets: TheoryCenter was acquired by BEA because it had built software that could play a critical role in the growth of e-commerce. In this case, TheoryCenter’s platform became the building blocks of BEA’s e-commerce suite. At the time, an industry analyst said that via its purchase of TheoryCenter, BEA was the “first application server maker to buy a software firm that builds pre-built software code, called components, for e-commerce.” Although TheoryCenter was not generating substantial revenue at the time, the founders capitalized on the market’s potential, and wisely chose to sell to a large company that was willing to pay a premium in order to capture leadership share in a growing market.
Founders in new markets should focus on building great products and creating great technology teams, even if monetization is slow in coming. As a market becomes more established and large companies seek to enter, the startups with the best technologies are often best positioned for exit.
 BEA continued to expand until 2008, when it was acquired by Oracle for $8.5 billion.
 “BEA Systems Buys Java Startup-for $100 milion”, CNET.com, January 2nd, 2002, at https://www.cnet.com/news/bea-systems-buys-java-start-up-for-100-million/.