Apttus collects $41m to pursue enterprise 'megadeals'

Phil Wainewright Profile picture for user pwainewright February 3, 2015
Quote-to-cash vendor Apttus may become the first Salesforce-native ISV to start landing $10+ million enterprise contracts this year, believes CEO Kirk Krappe

Businessman hand carrying briefcase facing horizon with currency signs © Sergey Nivens - Fotolia.com
Quote-to-cash vendor Apttus yesterday announced a $41 million funding round that will help fuel its fast-growing sales in the enterprise market. Like Salesforce, on whose platform the software runs, Apttus has been moving upmarket into ever-larger enterprise accounts. That is driving annual contract values (ACV) to a point where the company expects to sign several $10 million-a-year deals this year, CEO Kirk Krappe told me yesterday in an exclusive diginomica interview:

In Q4 we signed a large number of one million-plus ACV and right now we have a number of deals in excess of ten million dollars at the table.

We're seeing individual organizations coming to us wanting quote, configure, e-commerce, billing, revenue management and deal management. These are in the tens of millions per year.

That Apttus is in the running for this scale of contract is specially notable because its software is built to run exclusively on the Salesforce platform. Salesforce itself has been targeting larger enterprise deals, under a sales drive led by company president Keith Block.

Nevertheless, for a partner running on the Salesforce platform to be able to land contracts of a similar size is a remarkable feat. Several Salesforce-native ISVs have total revenues in the tens and sometimes hundreds of millions, including FinancialForce.com, ServiceMax and NYSE-listed Veeva, but it is generally assumed that their deal sizes are smaller than Salesforce itself achieves.

Upgrade opportunity

Krappe attributed his company's performance to two factors: the scope of its solution set, which includes several weighty applications, and its ability to draft behind Salesforce's own sales efforts.

It's because we have a big footprint and because that is what Salesforce is doing too. That lends itself extremely well to what we do when we come in behind Salesforce.

It's also a tribute to enterprise acceptance of Salesforce, he added:

All of that is predicated on people deciding to standardize on Salesforce as an enterprise backbone.

Apttus competes with a variety of vendors, principally BigMachines and Oracle in quoting, or Zuora and Model N in revenue management, said Krappe.

Often the impetus to move to Apttus comes from an upgrade of an underlying application backbone, where its Salesforce-hosted products are an alternative to upgrading several ancillary applications that have been added over the years. SAP's current push for customers to implement HANA infrastructure is creating many such opportunities, he explained.

SAP are forcing their big upgrades now. In the next three to five years they are forcing these companies to upgrade.

What it's doing is, it's making all these other ancillary applications being put on the table.

Most customers have had a good experience of implementing Salesforce. We come in with an option to take [the functionality] off a much more difficult infrastructure to something simpler.

While the seven- and eight-figure "megadeals," as Krappe called them, typically span the complete Apttus product portfolio, a more common buying pattern sees an enterprise start out with one application and then add others later.

In our case, usually if they like our application, they end up wanting more. We have much more cross-sell opportunity than Salesforce does, as our product footprint is much bigger. Acquiring the customer in one of our buying opportunities is really important.

The more applications we have inside a customer, the less likely they are to buy another competing product as part of our footprint.

Burning the cash

Kirk Krappe, CEO Apttus
Kirk Krappe, Apttus

It is to capitalize on these opportunities that Apttus has raised its latest round, which brings its total venture funding to $78 million. The company has not always been venture-backed, having bootstrapped in its early years, and remained profitable until deciding last year to invest more heavily in expanding its sales. Krappe explained:

We know how to make a profit, it's a fundamental part of our genetics.

In Q2 last year, we decided we had an even more enormous opportunity than we had realized before. We felt that for the buying that we saw going on, we didn't have the coverage.

Having started 2014 with 225 employees, the company grew to 650 by the year end in order to continue doubling its sales.

That gives you an idea of the frenetic pace. We need to have that number of resource to be able to handle that growth.

The emphasis on larger contracts not only lengthens the amount of time it takes to close a deal, it also requires more intensive training of new recruits and increases the compensation the company must pay them. Engineers and other support staff are also needed to work with the salespeople.

It takes two quarters for a sales guy to become effective and these are expensive people.

For every one sales person there's one sales engineer, there's a business development rep on the phone, a percentage of marketing time, percentages of other [resources]. So one sales person equals the cost of another three or four.

If you recruit a hundred salespeople, that cascades into hiring five hundred very expensive people. Very quickly you go cost negative ... We will be burning the cash.

The funding round was led by Salesforce Ventures and supported by K1 Capital and Iconiq. All three also participated in the prior round in September 2013. Salesforce has a history going back more than a decade of investing in ISV partners and other startups. To date it has invested in more than a hundred companies and last September launched a dedicated $100 million fund to invest in companies developing innovative mobile and connected applications running on the Salesforce platform.

My take

The big story here is the size of deal that Apttus now believes it has within its sights. Just a year or two ago it seemed barely credible that a Salesforce-native ISV could not only surpass $100 million in annual revenues but also aspire to a stock market listing. Two years later, one of those vendors is already looking at signing eight-figure deals with individual customers.

There's a subsidiary message here about the penetration of Salesforce itself into large enterprise accounts. This is not merely a single vendor making this play, but an ecosystem of Salesforce accompanied by several substantial ISV partners that have made its platform their home. That ecosystem is not going to replace SAP or Oracle in any major accounts, but as Krappe hinted in this interview, it may well be able to make major inroads into the surrounding incumbent ecosystem.

I found especially intriguing Krappe's observation that SAP's eagerness to move its customers onto its HANA architecture is opening up opportunities for Salesforce and its partners to move into SAP accounts. No doubt today's launch of S4HANA will open up even more of those doors. Talk about unintended consequences!

Finally, for those who still have trouble getting their heads around SaaS economics, Apttus provides yet another fascinating case study of the necessity of posting losses when scaling a high-end enterprise SaaS business. Here is a company that bootstrapped from launch without posting a loss — that, in Krappe's testimony, has profitability etched into its corporate genetics. Yet when confronted with the market opportunity it perceives, it loads up venture funding so that it can sustain significant losses while it builds up these valuable (and ultimately it hopes lucrative) enterprise contracts.

Disclosure: FinancialForce.com, Oracle, Salesforce and SAP are diginomica premier partners.

Image credit: © Sergey Nivens - Fotolia.com.

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