The Great Deflation

This post originally appeared on Ian Sigalow’s blog.

Back in 2011, my friend Geoff Judge introduced me to a start-up called Longtail Video. At the time Longtail had a popular video player with 500K free users, and a smaller number of customers who had paid a one-time license fee. It took a year of discussion before we finally invested behind a plan to turn Longtail into a SaaS company. Longtail’s website got a lot of free traffic, so we thought we could convert those free users into paid users, reduce our sales and marketing expenses, and pass those savings on to customers in the form of lower prices.

Fast forward to today, and JW Player (as the company is now called) streams about 5% of all the video on the Internet. They continue to provide a free product too, and that version is now used by over 2.5 million publishers.

I mention this because JW Player is a microcosm of what is happening across the venture landscape. In the past few years the entire software stack has been automated – marketing, sales, support, billing, implementation, customer service, etc. Automation tools, and there are hundreds of them, allow companies to acquire new customers faster than ever before and at a fraction of the cost. This has driven down pricing in some categories to as little as 1/10th what you would have paid just a few years ago for a similar software product. It is one more example of technology’s “Great Deflation.”

As you would expect, the Great Deflation is hugely disruptive. For starters, new entrants regularly undercut incumbents on price, making it harder than ever to build a lasting business. Price competition not only hurts customer acquisition but it also hurts renewals – it is impossible to maintain pricing if an identical product is 90% less. The Great Deflation is also creating downward pressure on sales salaries. The direct-sales model with highly paid salesmen flying around the country for face-to-face meetings is dying out. The new breed of salesman (or saleswoman) makes $40K per year in base salary and never leaves the office.

On the flip side we have seen fast growth in the small-to-midsize customer segment, as well as in the international software markets. These markets are enormous with millions of potential customers, and many of them are adopting cloud software for the first time. The best part is that you can set up shop in NYC and sell products around the world using multi-currency checkout and automated, multi-lingual support.

What I find most interesting is that we have begun to see software companies using their scale to create first party data, with the long term goal of pivoting entirely away from selling software and into selling syndicated data and insights. I think this is the ultimate end-point for many software companies. It is much more defensible to have a unique dataset than a unique UI or feature set. If a company plays this right they can develop network effects in a business that previously had none.

With that background, I have a feeling that the next five or ten years will be remembered as the golden age for US-based software companies. This may sound grandiose, but here are some facts. On an inflation-adjusted basis, it took Oracle ten years to reach its first $50MM in revenue. It took Microsoft eight years. It took Buddy Media five. It took Zenefits three. How long will it be before we see a software company launch and end its first year at a $50MM run rate?

Ian Sigalow

Co-Founder & Partner • New York, NY

Ian is a Partner and Co-Founder of Greycroft LLC. Over the past ten years Ian has led numerous investments for Greycroft, including the firm’s investments in Buddy Media (acquired by Salesforce.com), Braintree (acquired by eBay), Venmo (acquired by Braintree), and Vizu (acquired by Nielsen).

Prior to joining Greycroft, Ian founded StrongData Corporation, a pioneer in payment encryption, and spent several years as a venture capitalist with Boston Millennia Partners, where he focused on the software, wireless, and Internet sectors.

Ian’s past experience also includes investment banking in the technology group at Donaldson, Lufkin, and Jenrette and strategy consulting with the Arnold Business Strategy Group.

Ian holds a BS in Economics from the Massachusetts Institute of Technology and an MBA from Columbia University Graduate School of Business. He lives in New York City with his wife Jessica and daughter.

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