Introducing UnicornSWOT

Welcome to the first post of my monthly (for now) blog about Unicorns. But first to all my colleagues who are not in the Tech space, a Unicorn is not a mythical magic horse with a single horn. In Silicon Valley where I live, Unicorns can only mean one thing: a startup that has achieved a valuation of $1 billion or more. They are called Unicorns because a $1 billion valuation for a startup was once so rare and unattainable, they were thought to exist in myth only.  Yet today, the technology industry is filled with billion-dollar startups.

The use of the word Unicorn, to describe a type of startup, began in November 2013, when Cowboy Ventures founder Aileen Lee wrote a TechCrunch blog post to discuss the phenomenon.  At that time there were 39 such companies from the past decade. Now according to research firm CB Insights there are more than 140 startups that have been valued at $1 billion or more by venture capitalists. Many wonder if this rapid increase in the number of Unicorns means we are again in a “dotcom bubble”. Others point out that unlike the highly speculative, high-risk of the companies from the “dotcom era”, many of the new Unicorns are revenue generating, high growth opportunities.

Bubble or not, the billion dollar valuation seems to be here to stay as long we have break out public companies like Facebook. After the dotcom crash, Silicon Valley venture capitalists became extremely conservative. Investors kept valuations low and tried not to overcapitalize their companies. That strategy lasted until Facebook came along. All of the cautious investors who passed on investing in the company early, because it was too expensive at $250 million or $500 million, were left scarred and paranoid when it went public in May 2012 with a market cap of $104 billion. So venture capitalists now reason that if a startup is going to be worth billions of dollars in a few years, why not just give the company a $1 billion valuation now?

It also doesn’t hurt that American corporations have massive stockpiles of cash on their balance sheets. Facebook set a precedent when it paid $19 billion for instant-messaging startup WhatsApp in March of 2014, then followed it up a month later by spending $2 billion for virtual reality headset maker Oculus VR. Also in 2014, Google paid $3.2 billion for smart thermostat maker Nest and Apple acquired headphone maker Beats for $3 billion.

I am not the only analyst who thinks Unicorns are to stay. TechCrunch, Fortune and the Wall Street Journal are all maintaining Unicorn lists. But what they are lacking is some analysis about whether these Unicorns are really worth it. Enter the SWOT analysis. By assessing the Strengths, Weaknesses, Opportunities, and Threats of these Unicorns, this blog should provide you, the reader, with some clarity. At a minimum, I hope this blog helps you think about how to make SWOT assessments for internal, competitive, or strategic purposes.

Zuora

What is Zuora?

Founded in 2007, Foster City-CA based Zuora provides subscription billing as well as recurring revenue, payments, and billing solutions. The company’s solutions cover subscription packaging catalog, subscription lifecycle management, hosted B2C commerce pages, automated invoicing, electronic payment collections, taxation, and numerous other features. It provides its solutions to industries such as cloud services, communications, media, and healthcare industries worldwide.

How much are they worth and why?

$1.12 billion as of March, 2015.  Zuora is a lesser-known unicorns, but it powers the subscription sales of a lot of big businesses like Dell, Box, and Qualcomm. Zuora is rumored to be getting ready for an IPO and in preparation the company has already raised a total of $243 Million.  In a Wall Street Journal article dated March of 2015, Zuora CEO Tien Tzuo said the company was closing in on a $100 million revenue run rate. The implied Sales multiple is approximately 10. As a benchmark, average revenue multiples in Software for System and Applications is around 5.

Strengths

Ease of Use and Integrations:  Zuora provides everything customers need to set up subscriptions for their products, whether they be tangible items or online services. Zuora easily handles billing, collections, accounting and metrics on subscriptions that customers can track. The software is already integrated with Salesforce and other most major Accounting Cloud products.

Team:  Zuora was founded by Tien Tzuo , the 11th employee at Salesforce.com and helped build that company, a major innovator in the Cloud software industry.  Mr. Tzuo believed correctly that the shift to Cloud change would also force a shift in the way people paid for things, from discrete one-off payments to online subscriptions.

Weaknesses

Dependencies:  Zuora is dependent on both the Cloud trend (its business is Cloud based) and the trend towards Subscriptions. If either of those shifts, the company may not have time to adapt.

Opportunities

Analytics:  The company has only made one acquisition so far (Frontleaf) but could do many more to achieve the goal of helping customers not just manage but also fully understand and optimize their Subscriptions an Sales.

 Threats

ERP players:  companies like Oracle and SAP have deep pockets and the customers in place to offer subscription management services. If they entered the market, it would pose an immediate threat to Zuora.

Startups: After Zuora started,  a wide range of startups entered the market to challenge Zuora. These include Aria, Recurly, Chargify, and Spreedly.

Note for our customers in Japan:  Zuora already has an office in Japan and is actively targeting Japanese customers.

Okta

What is Okta?

Founded in 2009, San Francisco-CA based Okta is a security company specializing in securing and consolidating the log-in process (aka SSO). Okta’s cloud-based software is designed to allow people to access applications on any device at any time, while still enforcing strong security protections. It integrates directly with an organization’s existing directories and identity systems, as well as 4,000+ applications.  Okta says that because it runs on an integrated platform, organizations can implement the service quickly at large scale and low total cost. The company has raised $230 million in venture funding from VCs such as Andreessen Horowitz, Greylock Partners, and Sequoia Capital.

How much are they worth and why?

$1.2 billion as of September, 2015.  Okta’s popularity has risen right alongside the growth of Cloud-based Services because of the service’s SSO capability across the most popular enterprise apps used by the Fortune 500.  Okta provides both the convenience and security of SSO with all the integration work done up front. The company claims to have thousands of customers, including Adobe, Allergan, Chiquita, LinkedIn, and Western Union. As of June, 2015 the company claims to have 3.4 million “identities” under management.  In a CIO article dated June of 2015, Okta said it was on track to make $100M in Revenue for 2015. The implied Sales multiple is approximately 12. As a benchmark, average revenue multiples in Internet for public companies is around 7.

Strengths

Integrations:  for most popular apps like Salesforce, Zendesk, ServiceNow, and Google Apps, they have worked the application API into their configuration to allow provisioning and de-provisioning directly to the application. New integrations are also extremely easy. For most configurations, it is as simple as selecting a configuration from their catalog, entering the SSO URLs and a couple configuration steps on the application side.

Team:  Okta was founded by Todd McKinnon, the former VP of Engineering of Salesforce. Investor Ben Horowitz (a former Cloud Services vendor himself) calls McKinnon “the ultimate domain expert on building cloud applications” and says that he “may also be the most astute engineering manager that [he’s] ever worked with.”

Weaknesses

Cloud Security Questions:  some say Cloud based services are more Secure while others maintain that the Cloud is inherently problematic. The debate between Cloud and on-premise software continues and Okta will always be reliant on how the discussion fares.

Opportunities

International Expansion:  Okta is domestically focused at the moment. By expanding into Europe and Asia the company could see Sales grow significantly.

Threats

Microsoft :  Okta has tried to counter the dominance of Microsoft by partnering with Microsoft’s most popular apps. Still many companies continue to rely on Microsoft for their Cloud User and Access Management.

Many other competitors:  Okta is a challenger along with many other startups including Centrify, Ping Indentity, OneLogin,  Symplified, iWelcome, SecureAuth and Telekom.

Note for our customers in Japan:  Okta has an office in Australia to service the APAC region but it doesn’t yet have an office in Japan.

CloudFlare

CloudFlare

What is Cloudflare?

Founded in 2009, San Francisco-CA based Cloudflare provides a content delivery network and distributed domain name server service, sitting between the visitor and the CloudFlare user’s hosting provider, acting as a reverse proxy for websites. Its network protects,  speeds up, and improves availability for a website or mobile application with a change in DNS. The company has raised $182 million in venture funding from VCs such as Venrock, New Enterprise Associates, Pelion Venture Partners, Union Square Ventures,  Fidelity Investments and Google Capital .

How much are they worth and why?

$1.05 billion as of September, 2015.  CloudFlare has rapidly become popular because of the way they improve and guard websites by using a DNS change. However, CloudFlare is not your typical CDN or DDoS Mitigation company. They’re like the Amazon of the CDN industry delivering content for more than 2 million web properties under management. The company stated in July of 2015 that it was a $100M revenue run rate for 2015. The implied Sales multiple is approximately 10. As a benchmark, average revenue multiples in Internet for public companies is around 7.

Strengths

Innovation:  Their proprietary methods have earned them praised from around the industry. CloudFlare was named the “Most Innovative Network & Internet Technology Company” for two years running by the Wall Street Journal. The company was ranked among the world’s 10 most innovative companies by Fast Company.

Team:  In addition to experience gained by the founding teams’ work with Project Honeypot (a web-based honeypot network, which uses software embedded in web sites to collect information about IP addresses used when harvesting e-mail addresses for spam or other similar purposes such as bulk mailing and e-mail fraud.), the company has continued to expand by acquisition. June 2014, CloudFlare acquired CryptoSeal a specialist in web user security services.  In February 2014 it acquired StopTheHacker, which offers malware detection, automatic malware removal, and reputation and blacklist monitoring

Weaknesses

Controversy:  CloudFlare was ranked in the 7th rank among the top 50 Bad Hosts by Host Exploit. The service has been used by Rescator, a website that sells payment card data. Meanwhile,  an October 2015 report found that CloudFlare provisioned 40% of SSL certificates used by phishing sites with deceptive domain names resembling those of banks and payment processors.

Opportunities

International Expansion:  Cloudflare is domestically focused at the moment. By expanding into Europe and Asia the company could see Sales grow significantly.

Threats

Akamai :  Cloudflare is taking on the traditional CDN leader Akamai. However Akamai has more servers, bandwidth, and more features etc. but may lose customers to CloudFlare based on price.

Many other competitors: at the lower end of the market, Cloudlfare competes with Incapsula, Torbit, Amazon CloudFront, and Yottaa to name a few.

Note for our customers in Japan:  Cloudflare already has data centers in Japan and is thus capable of providing local support.

Simplivity

What is Simplivity?

Founded in 2009, Westborough-MA based Simplivity makes products for the “hyperconverged” data center- specifically, servers and storage to host virtual machines.  SimpliVity’s OmniCube platform provides enterprise computing, storage services and network functionality all at a fraction of the acquisition cost of standard infrastructure but with an increase in simplicity. The company has raised $267 million in venture funding from VCs such as Accel Partners, Charles River Ventures,  Kleiner Perkins Caufield & Byers, Waypoint Capital, DFJ Growth, CRV, and Meritech Capital Partners.

How much are they worth and why?

$1 billion as of March, 2015. Simplivity says it is well positioned to address the hyperconverged infrastructure market segment, one of the fastest growing in the $107B IT infrastructure market. Since launching its first product in April 2013, the company has grown rapidly thanks to a global network of resellers and distributors. Company founder Doron Kempel said in March of 2015 that the company is currently seeing an annual revenue run rate of $100 million. The implied Sales multiple is approximately 10. As a benchmark, average revenue multiples in Computers/Peripherals for public companies is around 1.6.

Strengths

Management:  Simplivity was founded Doron Kempel, the former Founder and CEO of Diligent Technologies, a specialist in Enterprise Data Deduplication. Diligent was acquired by IBM in April 2008 for $178 Million. Prior to Diligent, Mr. Kempel served as Vice President and General Manager at EMC.

Innovation:  Simplivity says its OmniCube platform is based on “10 patent-pending innovations that power a new assimilated, IT infrastructure platform.”

Corporate culture:  Domo ranked #6 on Business Insider’s list of best Unicorn places to work. The ranking is based on employee reviews on Glassdoor.

Weaknesses

Work in Progress:  SimpliVity has become the fastest growing infrastructure company in recent memory by setting a record of hitting a $1B valuation in just 23 months of shipping product. As with any new product, the company will have to work with customers to convince them of the products reliability and move quickly when new product issues arise.

Opportunities

International Expansion:  Simplivity is mostly domestic at the moment. By expanding into Europe and Asia the company could see Sales grow significantly.

Threats

Amazon:  SimpliVity is challenging the widely held industry notion that running workloads on the Amazon Web Services public cloud is cheaper than running them in on-premise private clouds. Simplivity has commissioned studies which prove this out. Amazon has yet to respond but then they do, Simplivity may find the cost advantage is no longer as great.

Nutanix: offers a platform similar to Simplivity but was first to the market and is still the leader. To succeed, Simplivity will have to come out from under Nutanix’s shadow.

Note for our customers in Japan:  Simplivity does not yet have an office in Japan.

Domo

What is Domo?

Founded in 2010, Utah-based Domo is business intelligence (BI) software that focuses on overall business management. The software is delivered as a service (SaaS) and designed to provide direct, simplified, real time access to business data without any IT involvement. Domo says it solves the problem information in the company living in an ever-increasing mess of disconnected spreadsheets, systems, databases and applications. Domo’s platform serves as the master portal to all that information. The company has raised $459million in venture funding from large institutions such as Blackrock, T. Rowe Price, Fidelity Investments, and Morgan Stanley in addition to VCs such as GGV Capital, Greylock Partners, and IVP.

How much are they worth and why?

$2 billion as of July, 2015. The company says that over 1,000 customers from SMB to enterprise are using Domo to dramatically improve the way their business is managed. Example customers are eBay, Air Canada, Goodwill, National Geographic, Xerox, Toys R Us, Nissan, H & R Block, American Kiosk Management, and SAB Miller among others.  Company founder Josh James said recently that Domo doubled its annual revenue run rate in 2014 and expects to do it again in 2015, booking $100 million in annual recurring revenue by December 2015. The implied Sales multiple is approximately 20. As a benchmark, average revenue multiples in Business Software for public companies is around 4.9.

Strengths

Management:  Domo was founded by Josh James who also co-founded the web analytics software company Omniture in 1996, which he took public in 2006. In 2009, three years after taking the company public, James sold Omniture to Adobe Systems Inc. for $1.8 billion.

Catalog:  Domo has established proprietary integrations with hundreds of the most common enterprise software systems making for simple dashboard setup. These “connectors” range from simple storage apps like Box to ERP systems like Salesforce.

Corporate culture:  Domo ranked #17 on Business Insider’s list of best Unicorn places to work. The ranking is based on employee reviews on Glassdoor.

Weaknesses

Cloud-centric: Domo works well for companies who already have most relevant systems in the Cloud. But for businesses where most software is on-premise, adding a Cloud based BI system like Domo doesn’t make sense.

Work in Progress:  while many users praise the software for its beautiful dashboards and ease of integration, there has also been criticism of areas that are lacking such as ad-hoc reporting and data extraction. Others have complained the software is expensive relative to functionality and competitive offerings.

Opportunities

International Expansion:  Domo is mostly domestic at the moment. By expanding into Europe and Asia the company could see Sales grow significantly.

Industry Expansion:  Domo is mainly a horizontal solution applicable to all industries. The company mentions 10 specific industries it has worked with on its website and shows examples. But by adding more industry specific features the companies could always attract more customers.

Threats

Competitors:  From business intelligence startups like GoodData and Tableau to legacy systems from the likes of IBM, Microsoft, and Oracle there are dozens of options for business users seeking to understand and analyze their operations. Critics of Domo say less expensive rivals may offer just as much value.

Note for our customers in Japan:  Domo has an office in Japan

Credit Karma

What is Credit Karma?

Founded in 2007, San Francisco-based Credit Karma provides free weekly updated credit scores and credit reports from national credit bureaus such as TransUnion and Equifax. The company also offers daily credit monitoring services from TransUnion and credit tools which simulate the effect of potential financial actions on a user’s credit score. The company further helps its members identify various financial services like loans, credit cards and insurance. The company has raised $368 million in venture funding from Ribbit Capital, Google Capital, Tiger Global Management and Susquehanna Growth Equity among others.

How much are they worth and why?

$3.5 billion as of June, 2015. As of April 2015, Credit Karma has over 35 million members. All of Credit Karma’s services are free to consumers. The company makes its money from targeted advertisements for financial products. Exact revenue figures are not published but in a 2014 interview, founder Kenneth Lin said Sales were over $200 Million. The implied Sale multiple is approximately 17. As a benchmark, average revenue multiples in Financial Services for public companies is around 2.5.

Strengths

• Transparency: Credit Karma operates on the principle that a consumer’s credit data and score is theirs and should be readily available to them for free. The service’s rapid rise in popularity shows that many Americans agree. Credit Karma is demystifying credit scores and making consumers knowledgeable about one of the most important aspects of their financial future.
• Algorithm: For Credit Karma’s business model to work, the targeted advertising needs to be spot- on. The company’s algorithms and methods have clearly been effective at generating new credit card and loan leads for advertisers.
• Corporate culture: Credit Karma ranked #11 on Business Insider’s list of best Unicorn places to work. The ranking is based on employee reviews on Glassdoor.

Weaknesses

• CyberSecurity: the company’s security must be above reproach because financial data is being handled. In August 2014, the Federal Trade Commission approved a final order settling an earlier complaint against Credit Karma for allegedly misrepresenting to the public the security of their mobile apps and for failing to protect the transmission of their customers’ sensitive personal information. The FTC alleged in its complaint that Credit Karma’s mobile apps were launched with code that disabled Secure Sockets Layer (“SSL”) validation. The main allegations from the FTC included: that Credit Karma overrode the default SSL certificate validation settings without adding back in other security measures to compensate for the override, that it failed to appropriately test, audit, and assess its application, and failed to appropriately supervise service providers’ security practices.
• US focus: credit scores are unique to the each country. Credit Karma’s current algorithms and methods will not automatically translate into other markets.

Opportunities

• Business Line Expansion: Credit Karma says it wants to become the “Kayak for the financial services industry” by being able to offer to the consumers a one stop search engine best suited for their financial analysis needs. The company can continue to expand by offering other financial products.
• Expanding Market: A recent IBISWorld research report saw the revenues of US consumer credit scoring agencies grow 5% annually over the period 2009 through 2014. The total market is said to be worth $11 billion.

Threats

• Competitors: consumers can already access their credit reports for free from annualcreditreport.com, the website jointly operated by the three major U.S. credit reporting agencies, Equifax, Experian, and TransUnion. The site was created in order to comply with their obligations under the Fair and Accurate Credit Transactions Act (FACTA) to provide a mechanism for American consumers to receive up to three free credit reports per year. Credit Karma also competes with a space crowded with financial advisory companies such as Mint and Credit Sesame.

Note for our customers in Japan: Credit Karma is a strictly domestic company at this time.

Kabbage

What is Kabbage?

Founded in 2009, Atlanta-based Kabbage is an online provider of small business loans, mainly unsecured lines of credit up to $100,000. The company’s lending process is 100% online and automated. Businesses submit an application online and receive an immediate decision and access to funds. Kabbage makes loans based on data such as revenue, accounting data, business transactions, shipping data, social media and other sources. The company has raised $240 million in venture funding from Reverence Capital Partners, Holland’s ING, Spain’s Banco Santander, and Canada’s Scotiabank to name a few.

How much are they worth and why?

$1 billion as of October, 2015 . The company claims it has made loans to over 100,000 small business owners, amounting to $1 billion in lines of credit. The company was named a “Top 100 Most Promising Companies 2014 & 2015” by Forbes Magazine. In 2014, Revenue was $41 Million according to Forbes. Forbes further reported the company’s growth averaged 100% over the past three years. So assuming the same growth in 2015, revenue was likely at $82 Million this past year meaning the company is valued at 12X Sales. As a benchmark, average revenue multiples in Financial Services for public companies is around 2.5.

Strengths

• 100% online: Kabbage has developed software that allows an applicant to fully complete and submit their loan application online. Key to the system is Kabbage’s integration with cloud ecommerce services such as Amazon, PayPal and Quickbooks. The fully automated approach means the company has relatively low headcount in comparison with traditional lenders. In addition, the automation makes the process instantaneous, a feature highly attractive to busy merchants.
• Algorithm: Kabbage has developed a proprietary algorithm that quickly assesses the application and returns a decision within minutes. The algorithm is so effective other financial players have begun licensing Kabbage’s platform for loan application assessments in their own lending businesses.
• Corporate culture: Kabbage ranked #18 on Business Insider’s list of best Unicorn places to work. The ranking is based on employee reviews on Glassdoor.

Weaknesses

• Technology: this is both a Strength and a Weakness. Kabbage’s algorithm must be continually tweaked or it could wind up making loans based on criteria that have changed. The lack of human involvement also opens up the company to fraudulent applications.

Opportunities

• Business Line Expansion: In September 2014, Kabbage launch its second brand, Karrot personal loans. Kabbage introduced the Kabbage Card in May of 2015, allowing businesses to pay for items at the point of sale with a purchasing card tied to their Kabbage account. The company has ample room to expand into a wide range of consumer financial services.
• International Expansion: the company’s current focus is the United States and the UK. In March 2015, Kabbage launched its first platform lending partnership with Australia-based Kikka Capital to bring a white labeled version of Kabbage to Asia Pacific. The company will likely continue with the international expansion.
  Expanding Market: Loans issued through online lenders have increased rapidly over the past few years. According to Morgan Stanley, online lenders issued $14 billion worth of loans in 2014.

Threats

• Regulation: Banking is a highly regulated industry. Online lenders have until now, been somewhat free of government scrutiny. But this will change over time. In December of 2015, Kabbage was one of 14 online lenders that were asked by The California Department of Business Oversight, a state agency which regulates securities and lending in the state, for more information about their investors, lending policies, and business models. The inquiry followed reports that Prosper facilitated a $28,500 loan to Syed Farook, just weeks before he and his wife Tashfeen Malik killed 14 people during an ISIS-inspired shooting spree in San Bernadino, CA. In July of 2015, the U.S. Treasury Department similarly announced it would be opening an investigation into the growing online industry.
• Competitors: is already very thick in the online lending space and Kabbage is the underdog. Kabbage competes mainly with publicly traded OnDeck Capital, deep-pocketed PayPal, and incumbent banks that offer working capital to their merchants.

Note for our customers in Japan: Kabbage has not yet announced plans for Japan. However, Softbank Capital is a Series D investor in the company.

AppDirect, app marketplace and #unicorn

What is AppDirect?
Founded in 2009, San Francisco-based AppDirect runs white-labeled cloud SaaS marketplaces for customers like Comcast, Staples and Deutsche Telekom. The business model is similar that of “app stores” like iTunes: they make money from apps listing on the marketplace and from subscriptions from end users. AppDirect’s value-add is their handling of all the billing and distribution. The company has raised $245 million in venture funding from Stingray Digital, iNovia Capital , the Foundry Group and Peter Thiel’s investment arm Mithril Capital Management.

How much are they worth and why?
$1.04 billion as of October, 2015. The company claims to have sold subscriptions used by 20 million users in 150+ countries. In 2014, Revenue was $18 Million. But company CEO Daniel Saks said in an October 2015 interview that revenue has been growing recently at 300% YOY. So assuming revenue was $54 Million in 2015, the company is valued at 19.25X Sales. As a benchmark, average revenue multiples in Internet software for public companies are around 7.

Strengths

• Robust Catalog: not just Box, Microsoft, and Google but 250 other key apps. The larger the catalog grows, the harder it is to replicate.
• Peter Thiel: his deep pockets and connections can only help.
• Corporate culture: AppDirect ranked #10 on Business Insider’s list of best Unicorn places to work. The ranking is based on employee reviews on Glassdoor.

Weaknesses

• Inexperienced Management: Founders are both Millenials with no prior startup experience. Only time will tell if they have the Management chops to take the company to $1 B in Revenue, not valuation.
• Technology not necessarily Proprietary: they have a Patent Pending but Marketplace technology is so common that it may not be that hard to get around their IP.

Opportunities

• International: half of AppDirect’s revenue is already international and it is clear that International Telcos and big B2B players are a sweet spot. The company plans to use its latest funding to further expand its international footprint.
• Vertical Apps: the company could expand by adding support for vertical and industry-specific software applications and services. Some of the industry specific Partners like Deutsche Telekom would welcome that initiative.
• Acquisitions: AppDirect has already made three buys to enhance its services. They include data visualization provider Leftronic, billing service provider jBilling, and app management startup Standing Cloud. Other acquisitions could help AppDirect further differentiate itself.

Threats

• Salesforce: and other SaaS ERPs could easily enter the business albeit with a clear bias towards affiliated companies.
• Competitors: trying to eat App Direct’s lunch include Jamcracker and Parallels both of which have been around a decade longer than App Direct. Other companies that broker software to the enterprise are also threats. These include Accenture, HP, NEC, and CapGemini.

Note for our customers in Japan: App Direct recently established an office in Japan but no local partners have been announced.