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The Rebundling Cycle Has Begun in B2B SaaS

“Gentlemen, there’s only two ways I know of to make money: bundling and unbundling.” – Jim Barksdale, Netscape

The background for this quote was the question of what Netscape would do if Microsoft bundled a browser (which they did) in the early days of the Internet era of the late 1990s and early 2000s. If you’re unfamiliar with this quote, it reflects the observation that some companies compete by building a bundle of products that work better together or are distributed together to take advantage of existing customer relationships. A few examples of bundling include Microsoft using its existing relationships with customers to distribute Teams as part of its offering when competing with Slack, and Google using Google Calendar and Chrome as ways to effectively bundle Google Meet with its existing products that have big footprints with both customers and consumers. In the case of unbundling, the idea is to focus on building a product that’s best of breed and can overcome the distribution advantages that the bundled alternative product has. If you think about how Slack and Zoom competed with Microsoft and Google, respectively, you can see how products that focus on being the best product in their respective categories can compete with bundled offerings, and in some cases win.

I heard this quote for the first time early in my venture career, and it really stuck with me. It has been true across multiple investing cycles. I think it continues to be relevant as bundling and unbundling is a cyclical dynamic, and individual markets move between periods where bundling is the dominant strategy, and periods where standalone products have a real advantage.

A few months ago, I read a tweet from Yoni at Slow Ventures about how sales doesn’t need more point solutions, it needs something more like what Rippling did for HR. I’ve also been talking to many startups about what they’re seeing regarding customer buying behavior. It feels like we are on the cusp of moving back toward a cycle where bundled offerings might be more attractive than point solutions.

This feels particularly important to me when I think about where the venture capital business is today. Venture capitalists used to invest in a wide variety of businesses and business models. In the last 10-15 years, investing in B2B software-as-a-service companies became the main event in our business. There used to be a balance between consumer, B2B SaaS, and other sectors, but it feels like venture capital has become a business almost completely focused on funding the next generation of B2B SaaS companies. This makes sense – the public markets have been very receptive to SaaS businesses given their margins, predictable revenue, and a macro environment that has been very friendly toward increased software spending as companies have transitioned to cloud-based software.

The focus on B2B SaaS companies makes sense when you consider the tailwinds for the last 10-15 years (or perhaps longer). Software budgets were growing because software was eating the world. We also had several functions, namely HR/People Ops, Sales, and Marketing, that had an explosion of new tools and technology developed specifically to meet their needs. Combining that with the commercial cloud’s maturity, many forces pushed companies toward spending more money on software across multiple departments and functions. This surge in software spend, particularly in new categories that had not previously purchased much software, created a lot of room for brand-new companies to emerge and build strong brands.

The net result of this was a very un-bundled software ecosystem. There were tons of best-of-breed products for almost every vertical and use case. Look at the market maps for sales technology, marketing technology, or HR tech. You will see an explosion of novel, interesting products that were able to find a foothold by doing one or two things very well. Buyers, for the most part, were willing to work with a wide variety of point products and get them to talk to each other in pursuit of having the best discrete products.

In speaking with many startups and people on the buy side of technology, it feels like things are changing. More customers seem to want fewer things – fewer vendors, less complexity, and better ROI for their software spend. I think internal cost-cutting initiatives are driving some of this desire to revisit the benefits of best-of-breed products versus bundles. In addition to the cost-cutting pressure, the complexity of managing multiple best-of-breed products is starting to create challenges for customers, many of whom have smaller teams due to layoffs or hiring freezes. In some cases, I’m seeing the pendulum swing back toward having a single system or vendor where everything works over assembling one’s own collection of individual tools.

I am curious to see how this transition plays out. As someone who invests primarily in companies that do not yet have product-market fit, the un-bundled software world has been a great place to invest. You can build an MVP for a product of limited scope with a modest budget. Buyers were very willing to purchase point solutions from new vendors if those products could address the buyer’s pain points. Moving back toward a world where buyers have a strong preference for do-it-all bundled products could upend all of this. Historically, larger, bundled offering cost more to build and scale and have much larger MVPs to build. Those companies typically require larger initial capital investments to get going, and that’s a different funding model than how we’ve built many software companies in the past decade.

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