What’s Your Wedge?
Later this month, the team at Scout will be holding their 2nd Annual Spark Customer Conference. It’s a great accomplishment to be at the stage where you have enough customers who want to learn from their peers, exchange best practices, see what’s coming next, and swap stories. I’ve had the unique opportunity to advise the Scout team at their very early stage, so I’ve watched as they have become the category leader in the Sourcing space. Scout started in 2014, but let’s be clear that the Sourcing space is much older than that. I was around dozens of companies building negotiation products back in the 1990’s. So how did Scout go from a newbie to a category leader in a crowded field in a relatively short time? In my mind, it comes down to finding and exploiting a “wedge”. When you carve out and own something that’s unique you have a chance in a crowded space. But this isn’t just a story of Scout. It’s a story of three companies who all found a wedge and became category leaders.
This tale starts back in 2006. My friend and I had started this little eProcurement company. There were plenty of big fish swimming in that space…companies like Ariba, SAP, CommerceOne, Ketera, Oracle, PurchasePro, Sciquest, Basware, and I’m forgetting probably 20 others. We knew that we couldn’t build a product with more features, one with just a prettier UI, we couldn’t simply hire better sales people, focus only a specific vertical, or even charge less. We needed a “wedge” that made our offering special. It had to be as clear as day. It would be the most critical part of our value proposition that would enable clear differentiation in the market over a lasting period.
Prior to actually building the product, we talked to lots of procurement people to understand their pain. We identified a common theme that lead us to our wedge. We would build a procurement solution for the everyday person in the organization that helps them do their job, NOT the procurement department. We would make it so super simple for anyone to buy whatever they needed as simply and quickly as possible. But wait you say? The procurement department is the economic buyer or the guy/gal who writes the check (along with their boss, the CFO). I remember talking to a number of Procurement VPs in the early days, and they didn’t know what to make of me saying “We’re not building software for you and your people, but we will make your life so much better.” With that premise and our wedge, we set off on our way. It was an uphill battle. Gartner and other analysts at the time would write that eProcurement systems had to save you money, force contract compliance, had to control and reject spend, communicate electronically to the supplier, and other cares of the procurement department. They didn’t understand that wasn’t the core pain. With lots of good execution through the years, that little startup, Coupa, now has a ~$5B market cap and has become the dominant player in the category. In Gartner’s latest report on the space (have to put in an email address to access it), they finally have caught onto the wedge that we identified back in 2006. The #1 most important issue for customers is what they call “Guided Buying,” or helping requisitioners buy stuff. Coupa is the first company in this tale.
In late 2006, Coupa signed its first set of customers. During those implementations, our Customer Success group (2 people) realized that we needed a way for our customers to log and track issues. It had to be self-service of course. Lots of big and small companies existed in that customer service software space. Our first stab by the CS team was some semi-popular, semi-affordable web-based customer service solution. I can’t remember the name, but I do remember that we all hated it. The customers were confused, the CS team hated it, and my product and engineering team despised it. Unfortunately, it seemed like all the customer service software companies were pretty similar. This was going to be a problem for Coupa as our 2007 customer list was growing quickly. Seggy, one of our engineers, threatened to build an issue tracking solution over the weekend (a common developer refrain when they are super pissed), but instead he went off scoured the Internet. On Monday, he came in and said, “I found this cool tiny company in Europe. They have this SaaS solution, and it looks pretty simple. Let’s try it out.” By that evening we had implemented their free trial. The next day, we ran a series of test flows simulating a set of customer issues through it. By Wednesday, we told a few customers to start using it. And by Friday, we paid for our first set of users. 12 years later, Coupa is still a Zendesk customer. Yes, that little company was Zendesk, now a $7B leader in customer service software and the second company in this tale. Coupa was actually mentioned in their seed funding announcement in 2008 :)
Zendesk also launched into a crowded category. They weren’t going to win the feature-function fight. Their competitors had deeper pockets. Their competitors had complex solutions that could do just about anything given some dollars to customize. According to Gartner at the time, “It’s too complex an issue the way a business achieves customer service excellence. We’re not seeing any one vendor or any one vendor type able to create a full suite”. I don’t even know what that means, but it isn’t right. Zendesk founders looked at the space and found their wedge. They understood what companies needed. Companies wanted their CS agents to deliver an awesome experience for their customers that could be simply set up and configured for the flows of internal agents. I’m sure the Zendesk team would describe their wedge more elegantly, but no one could dispute that Zendesk had a clear differentiation in the space.
Over the years, I got to know Mikkel Svane, CEO of Zendesk, as they moved the company from Copenhagen to San Francisco. I’m particularly enamored by the culture they have created. In 2014, Mikkel sent me an email wanting to connect me to 2 young entrepreneurs, Stan and Alex, who had approached him for advice. Mikkel knew that I had more domain expertise in the specific area, so that’s how I became involved.
Stan, Alex, and I grabbed coffee the next week in Palo Alto. They were pumped to create Scout so that companies could issue RFPs (Request for Proposals) to their suppliers and other prospective vendors. I had heard this story before. Just like Coupa and Zendesk, the RFP/Sourcing market was crowded. In many ways, it was worse than that. It hadn’t even emerged as its own category if your metric is customer adoption. Frankly, only a handful of large companies had implemented and were successfully using the existing solutions in the market. The Sourcing world is littered with gravestones of startups or ones who were swallowed up by IBM or other consulting companies for pennies on the dollar. How would these guys be any different?
In my first conversations with Stan and Alex, I could tell their ideas were different. They were not focusing on the complex negotiations that other software providers were. They were not focusing on features that delivered value to only 5% of the market. Their clear goal was an easy-to-use, easy-to-implement, RFP solution that sourcing folks at most companies could use to negotiate most contracts. Let’s be honest, most companies are not running Dutch auctions. Most companies aren’t airlines hedging fuel contracts. Most companies don’t have the sourcing requirements that Tesla may have with its direct parts suppliers. So, Scout ignored those problems which others touted as reasons to buy their software. Scout stayed simple. If a capability wasn’t needed in the majority of negotiations, they didn’t build it. They carved their wedge by staying so simple that customers could run negotiations within the first week. Like Coupa and Zendesk, some would say they were too simple at the start. Well, of course they were. Remember that even Amazon started with books. But all three companies focused on delivering value to where the pain was the greatest and where the users needed it most.
So what’s your wedge? Is it clear to your prospects, users, customers, and investors? As always, I welcome startups to sign up for a free exploratory conversation where we can chat about your wedge in San Francisco or Menlo Park.
