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What's 🔥 in Enterprise IT/VC #277
➕/➖ of backing founders creating new categories 📈 vs. those who reimagine existing markets, it's not the TAM you start with but the TAM you exit with
👏🏼 💪🏼Huge congrats to portfolio company Kustomer on the the long awaited official closing of the acquisition by Meta/Facebook.
With that, it got me thinking about two types of founders we like to partner with @boldstart, category creators which represent the bulk of what we do and ones who reimagine existing markets like Kustomer. Here’s a quick summary of the pluses and minuses of each type and how we think about day one investing in those.
Market timing risk
Market size unknown - need to imagine what it can be
Customer education on market required
Less competition, usually replacing home-grown solutions
Easier to get initial product out the door since your startup is creating the base features required
When market clicks, it can scale rapidly
Reimagining Existing Markets
Market already exits
Market size known and usually huge
Customer education on why your specific product required
Tons of competition - need to differentiate, characterized by RFPs and competitive bake offs
Feature parity required before adding extra bells and whistles - costs 💰
New category creation is what we usually prefer because joining founders imagining the future is quite exciting and can result in asymmetric payoffs if viewed through the right lens.
Harry Stebbings tweeted earlier this week about some lessons he learned in overthinking market size.
Of course, I agree…
But here’s the catch
Case in point - most folks dismissed Snyk as going after too narrow a market with scanning + fixing vulnerabilities in open source packages for Node. What it has become is an $8.6B company in 6 years and along those lines it announced acquisition #5 this week. It’s not the TAM you start with, but the TAM you exit with. It started with OSS for Node, expanded its language coverage, added containers, cloud configuration, source code, and now cloud security…all with a developer friendly approach to security.
Going back to Kustomer, here are some of the initial slides and reasons why we funded Brad Birnbaum and Jeremy Suriel to go after incumbents like Zendesk and Salesforce (more on our journey with Kustomer and what we saw on day 1).
While a subtle detail, the unique insight that Brad and Jeremy had was to build a data architecture where the Kustomer is the atomic unit versus the ticket. With that change, customer support reps could better understand their customer no matter where the ticket was created from email to chat to Facebook to voice. Data was no longer siloed based on how a customer communicated with the company. In addition, by starting with an integration with purchasing data, Kustomer would come out of the gate with a holistic view of the customer and wedge to further expand into customer analytics and automation (read more on The Race to Own Customer Data).
I must admit that like most startups, it wasn’t always a smooth ride. Unlike new category creation, going after existing incumbents in a huge market requires founders to build to feature parity before even having the opportunity to sell a bigger and unique vision. What we underestimated was how long it would take us to get there but once we did, the customers responded quite well. (read more here). And yes, if one can take out the incumbents the size of opportunity and outcome is well known but it requires more hand to hand combat to get there.
As always, 🙏🏼 for reading and please share with your friends and colleagues.
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📈 Datadog continues to crush with best in class metrics and numbers (earnings transcript here)
“Let's start with a quick summary of Q4. Revenue was $326 million, an increase of 84% year over year and above the high end of our guidance range. We had about 18,800 customers, up from about 14,200 at the end of last year. We ended the quarter with about 2,010 customers with ARR of $100,000 or more, up from 1,228 at the end of last year.
These customers generated about 83% of our ARR. We had 216 customers with ARR of $1 million or more, which is more than double the 101 we had at the end of last year. The leverage and efficiency of our business model is coming through with free cash flow of $107 million. And our dollar-based net retention rate continued to be over 130% as customers increase their usage and adopted our newer product.”
Along with incredible product attach rate:
“33% of customers were using four or more products, up from 22% a year ago. And as a sign of further adoption of our platform, we saw that 10% of our customers were using six or more product, which is up from 3% last year.”