by Adam Stone, Senior Writer, SoftwareCEO
Most software CEOs would be terrified of venturing onto turf controlled by the likes of Microsoft and CA.
But not Seattle-based software-as-a-service (SaaS) vendor, eProject.
The company's software helps planners manage projects, for example, to help make sure that big IT projects come in on-time and on-budget.
Since its inception in 1997, the company has signed up 700 customers representing more than 100,000 users. These include big names like Merck, Timberland, The Washington Post, and seven different divisions of aerospace giant Honeywell. The list goes on and on.
The only problem? This niche is already dominated by a traditional licensed product, Microsoft Project, not to mention competing offerings from CA.
Looks like nobody told eProject that.
In 2006, eProject's revenues grew 125 percent to about $16 million. In April 2006, eProject had 65 people on the payroll. A year later, the headcount stands at 110.
Beyond staking a claim in a territory dominated by some huge players, eProject has learned how to leverage VC, manage cash flow aggressively, and keep close tabs on the competition.
All this, while scoring kudos for its personnel policies, and being named one the best places in its area to work.
Heading up the business is president and CEO Jeffrey A. Pancottine, who came to eProject in April 2006 from a role as senior VP and general manager at publicly-held F5 Networks.
His pedigree includes jobs with technology firms like RealNetworks, Intel, Sequent (now IBM), and Cray.
Pancottine recently spoke to SoftwareCEO about what it takes to grow a thriving SaaS company at better than 100 percent a year — even when you're living in the shadow of giants.
Land of the giants tip #1: To stand toe-to-toe against the House of Gates, go at the same problem from a different angle.
eProject challenges Microsoft in project management, but the lessons company executives have learned apply to any software firm trying to stand up to a much larger competitor.
In this case, SaaS is the big differentiator, and Pancottine says his customers quickly grasp the difference between the products.
After all, the widely used Microsoft Project comes in a standard software box for a list price of $599. Meanwhile, eProject's app is served up anytime anywhere through the web for $45 per user per month.
Beyond the SaaS delivery model, and the pricing, Pancottine has also tried to differentiate his product with greater ease of use and more powerful features.
In all these ways, eProject manages to stand out in what was once a homogenous market.
Put more simply, Mr. Gate's product is typically the domain of a single user. eProject, on the other hand, was designed with collaboration in mind: Multiple users from different departments sharing data and ideas.
Doing something so different from the competition makes it easier for a smaller player to step outside the giant's shadow, and effectively redefine the terms of the comparison.
It doesn't always work, of course. The mere presence of Microsoft in any market can make for a tougher sell. But Pancottine says it doesn't happen that often for eProject.
"The only time it ever really poses a problem is when there is not a lot of commitment in the [customer's] organization. It's easy, if they already use Microsoft products, to try and use Microsoft Project," Pancottine says.
"But frankly, those are the ones that usually boomerang back to us a year later, because the implementation is so difficult."
A typical example centers on the issue of product adoption.
Pancottine recalls attending an industry show where "almost all these folks were enterprise-class software vendors. They charge you $500,000 and then you have to implement it over 10 months."
That's too long, he thinks. So at the next show, eProject sowed up with a new slogan, declaring "No More Shelfware."
"We had a marketing campaign built around it online, and by e-mail, in the booth, and in our presentations, and of course, on the shirts on our backs."
Pancottine can't say for sure what impact that particular campaign had on his actual sales — who can? — but it sure got him noticed.
Adoption is a sensitive topic in his space, and this kind of messaging was practically a direct assault on the bigger players.
The lesson: If you are going to go ape with your marketing, go ape all the way. Craft a bold message, and take it as loud as you can.
"The first thing anyone does is get online, and search for 'project management,' so we are very adept at online marketing."
The company pulls in about 4,000 online leads a month, primarily from its paid Google AdWords. But it takes some effort to score that kind of success rate.
"There is a lot of trial-and-error over time. For instance, if you broaden out too far, or if you use matching words that are not specific enough, well, those are things you find out."
eProject also advertises on sites specific to the project-management community. The company's director of marketing and the VP of sales together allocate the ad dollars, in consultation with the sales manager.
Ad messaging is updated almost constantly, based on results.
"This is a true art form," Pancottine says. "There are always different ways that people think about these terms, different ways that they search and react to what they see."
Those who follow eProject ad links typically end up at pages that are more educational than sales-oriented.
"Most people, when they are looking online, their initial searches are about getting knowledgeable, so we build pages that give them that knowledge, with a process of links that lead them to eventually engage with us in a phone call."
And the price is right.
"I would classify the online marketing that we do to some degree as guerilla marketing, because it costs tremendously less that doing a formal advertising campaign, and we can turn around and modify the message within a day if we need to. Those to me are guerilla tactics."
As much as he may be focused on his own product, he's eager to stay one step ahead. The best way to do that, he says, is to get your hands on the other team's product, and put it through its paces.
Some of this happens naturally during any competitive sales process.
"A lot of it comes through competing in the marketplace, and seeing what they are offering. In the midst of the actual bidding, you will end up finding out what they are capable of offering to the customers," he says.
If someone else consistently wins in the bidding, or seems to be putting something of special value on the table, it's time to take that product for a test drive.
"When you feel a company has something unique and different, and you understand they're going to be a strong competitor, then you want to spend the time and effort to go deeper."
For a SaaS competitor, this could mean signing up for a one-month subscription. For a licensed competitor, this could mean buying a limited implementation.
At this level of snooping, the point is to go beyond the mere surface look-and-feel.
"What you're looking for is more of a feature-to-feature comparison. What does theirs do, what does ours do, and who does it better?" Pancottine says. "The other portion is to understand where they are focusing, find the weaknesses in that focus, and build around that if you can."
Pancottine subscribes to analyst firms Gartner et al, and he says their research gives him some help when it comes to inside intelligence.
But it's the hands-on exploration that gives him the best read.
"You can only go so deep, unless you have the product," he notes.
That all makes perfect sense. To compete in the SaaS market, allocate a budget to sign up with competing vendors in your space, and then see what they have to offer.
Despite the monthly fee structure, about 80 percent of clients sign on for a one-year contract — and best of all, Pancottine gets the whole year's payment upfront.
Otherwise, he says, the paperwork gets unwieldy. Pay-as-you-go just would not pay.
"It's tough to go to monthly billing, because there is just too much overhead, not just on our side, but on their side," Pancottine says.
"It would mean that every 30 days, there has to be some mechanism to pay, and inside most companies they typically just want to pay for it once, and forget about it for some period of time."
By this logic, a multi-year contract should be even more tempting: Pay for 24 or 36 months, and be done with it.
But Pancottine has found this doesn't work in the SaaS environment. Those who understand the on-demand model also value its inherent looseness, so they want at least some measure of flexibility.
"You can try to lock them in for longer, but one of the things about this model is that the people who like it don't want to be locked in," he says.
So for most clients, a month is too short, multi-year is too long, and an annual contract is just about right.
Land of the giants tip #6: Use the SaaS cash-flow model to strut your stuff in front of financiers.
There are pros and cons to the cash flow created by SaaS, especially when you bill for a year at a time.
On one hand, Pancottine is sitting on a pile of cash that he's free to spend as needed. After all, most of his clients have paid upfront for a year's worth of service.
On the other hand, that cash doesn't get recognized as revenue all at one time. Rather, the money becomes revenue for accounting purposes in 12 installments, one every 30 days.
That little accounting detail is actually quite significant.
Presented properly, this kind of setup appeals to the number-crunchers. Growth may look slow on paper, with payments just trickling in, but financial analysts and VCs love the arrangement because it means guaranteed revenue.
The traditional alternative is to take a big one-time payment on the licensed sale. But this can leave sizeable gaps on the books. If there is no big sale next month, for example, there is no revenue at all to record. Cash flow comes in fits and starts.
Better, Pancottine says, to have the smaller but steadier stream presented by the SaaS model.
It's the difference between a huge geyser that blows its stack once in a while, and a bubbling spring that feeds a stream all day long. In any case, the stream need not stay small forever.
"My revenue may not grow as fast in the beginning as someone who has perpetual licenses," he says.
"But in the end, it will snowball, because I've signed you up as a customer, I have all these other people signed up, and soon I have all these payments coming in, and at the same time, I have all this money sitting in the bank."
The key is to spin it this way when presenting to potential investors.
Land of the giants tip #7: Examine each exit opportunity, but remember there will be another one soon enough.
This question is in the back of every software CEO's mind: When and how can I get out of this thing with the maximum profit? What's the exit strategy that will make it all pay off?
Pancottine doesn't sweat the timing. After all, he says, opportunities for getting out present themselves all the time. That's a striking notion, the idea that you don't have to push too hard to create an exit moment, since these moments roll around often.
That said, a savvy CEO can't afford to miss any of those moments. As often as one arises, you have to examine it.
"Companies will always come around and talk to you [about exit plans], and you have to engage in those conversations no matter what, because that's part of your job. Maybe they will offer enough money that the investors will be very, very happy," he says.
Knowing that another moment is just around the corner, Pancottine can afford to be patient. More to the point, he can turn more of his attention toward the exit in the smartest possible way: By doing good work.
After all, everyone wants to maximize their return.
"And the only way I know to do this is to run the company as a profitable growth company over time. In that way, you optimize all your choices," he says.
"Then you have the choice of going public if you want, or if someone wants to buy your company, they're going to have to pay top dollar to get it."
Land of the giants tip #8: Before you sell, know the true value of your company in the software landscape.
It makes no sense to sell a company, or take it public, without a good grasp of its true worth.
That means understanding not just where it stands today in terms of capital, product, and customer base, but also its potential in the long and short term.
While there is no sure measuring tape for what a company "could" be worth, Pancottine pins it to growth projections.
"You have to understand, where do you really think this company can go? Can it be five times bigger than it is now, given the right funding? Do we have to entertain a low offer, or would it be better to wait two years until we've optimized our growth?"
While that growth projection can be devised in a number of ways, Pancottine says one key element is a judgment call that only a software CEO can make. That is, where does this product stand in the bigger market?
If company growth is the result of overall market growth, for instance, how long is that going to last?
By the same token, the growth potential must be based on the fundamental value of your software. Look in the mirror and ask yourself: Is my product just a supporting player on someone else's stage, or would it have value as a stand-alone?
"A lot of software companies today are just features within someone else's broader capabilities, and those companies are eventually going to be bought," Pancottine says.
"For us, we are a platform, we provide real value to users, and I think that means we have a lot of opportunity for growth."
Land of the giants tip #9: Venture funding sets a high bar, but it's worth it — if you know how to work it.
We've heard from any number of software CEOs who avoid VC, concerned that it would dilute their ownership stake, or impose unreasonable demands for breakneck growth.
Pancottine, on the other hand, is cheerfully swimming in the stuff.
In June 2005, the company was re-capitalized with an $8 million Series A round from Kennet Partners and Genevest in Switzerland. That brought the total invested in the company since its founding to more than $16 million.
A year later, the same investors put in another $2.5 million. And eProject expects to take in another round soon.
The money has gone toward marketing, sales talent, and advancing the development of the platform.
Is it sleeping with the devil? Hardly, says this software CEO.
"Venture funding isn't bad. In fact, it is very, very good, as long as you are continuing to grow as a company," he says.
"Typically the founders don't like VC because they don't want to give away their equity. But the flip side is that if you use that capital wisely, you can grow the company much faster and further."
In other words, you do get a smaller slice of the pie, but that pie is a whole lot bigger.
Land of the giants tip #10: Always set expectations carefully, by under-promising and over-delivering.
As for concerns about unrealistic expectations from VCs, Pancottine says it's a matter of communication.
And it's not just the software CEO who has to keep the VCs informed. Investors are also obliged to inform themselves and get to a reasonable level of comfort with any company they invest in.
"They have to understand your business, and what it takes to make it grow, so that everybody can be working together," Pancottine says. "Then it's not a confrontational relationship."
Ultimately, the CEO needs to take the lead in setting these expectations.
"If you're saying you can do something you're not comfortable with, you are making a mistake as a CEO," Pancottine says. "You have to under-promise and over-deliver. Otherwise one of two things is going to happen: You are going to lose your investors, or you are going to lose your job."
Let's rewind that bit, shall we?
Here's a successful software CEO who says that setting expectations properly can make the difference between retiring as a millionaire, and being thrown out on the street.
You don't just manage and strategize: You sell. In a very real way, you are the company, and many potential customers want to know you before they buy.
"When you are doing a $200,000 deal, the people on the other side want to know that the folks at the top are serious about it," Pancottine says.
In practical terms, this begins with high-level pitch work, making the rounds in your target industry to talk up the company. This lays the groundwork for your sales force, who in turn lay the groundwork for... you.
This is not to say that the CEO has to play a role at every step of every sale. Pancottine says he usually sits on the sidelines until the potential customer has narrowed the field down to a few potential vendors.
At the point, he's not likely to talk to the CEO, at least not in the case of a very large buyer: Pancottine doesn't expect to sit down with the CEO of Honeywell. With a client that big, he's more apt to meet with someone at the level of divisional VP.
At this level the conversation won't be about forms and functions, but about the long-term understanding between buyer and seller.
"One of the big things they want to know is your vision for the company. Where are we taking this thing, and do they agree with that? Because they are buying in over a period of time," Pancottine says.
These discussions will also delve into your flexibility as a vendor. The potential buyer already knows that you can provide competent support; you wouldn't have gotten this far otherwise. But can you provide it in a way that will meet their idiosyncratic needs?
To be reassured on questions like that, some customers need to hear it from the top.
He tells us it's like growing up in a family restaurant. You learn a certain kind of gregariousness, he says, a certain ease with people that every CEO either has — or needs to learn.
That ease is a vital element in the CEO's ability to market his company and position it effectively.
"You really have to get out there and network, you need to be able to get onstage and make a presentation," Pancottine says.
And if you can't do that today, take a class. Get a tutor. Learn that smoothness that makes it all look easy.
Despite his graduate degree in computer science from Cornell, Pancottine says his people skills form the better part of his role as a salesman for the company.
Tech know-how often matters, of course. But there will be plenty of times when those IT smarts matter less than the ability to reach out to a non-technical crowd, such as executives who sign off on the buy.
"You need that ability to speak to all different types of groups," says Pancottine.
Pancottine can tell you how, and he's got the outside recognition to prove it. eProject made the 2006 list from Puget Sound's Best Workplaces for Commuters Coalition. The firm also hit #12 on Washington CEO magazine's 2005 list of best small companies to work for.
So, how do you do it?
Pancottine's approach is to make the love tangible. He pays all benefits, hands out mass transit passes (about one-third of all employees use them), and even bought an office Segway (self-propelled scooter) when the team met its 2006 numbers. Office ping-pong tournaments are held regularly.
Pancottine says the niceties make people feel good about going to work. The numbers bear him out: a seven percent turnover rate, less than half that of a typical Silicon Valley firm.
Plus, there's the bonding.
At the monthly company meeting, the new guy has to get up and describe his most embarrassing moment. A nightmare? Sure, agrees Pancottine, "but it gets everybody knowing everybody!"
An event team plans activities, while a culture committee nurtures company culture.
The net result, Pancottine says, is a company where people feel good. And when everyone feels good, "then everyone is very engaged in making the company successful."