Salesforce buys Vlocity for $1.3bn in industry cloud takeover

Somewhat overshadowed by the end of Keith Block's reign as co-CEO, the news that Salesforce is acquiring Vlocity nevertheless marks an important step for the CRM vendor, and one with serious implications for its ecosystem partners. Vlocity is one of the largest and fastest-growing Salesforce-native ISVs, and being swallowed up by its platform partner was not its gameplan when it launched less than six years ago.

When you subtract the undisclosed value of Salesforce's own contribution from Vlocity's $163 million in venture funding, the $1.3 billion that Salesforce plans to pay the remaining shareholders is nonetheless a very decent return for a company heading for $70-80 million in revenue this year (based on Salesforce's projection of a $50 million revenue contribution once the deal closes in the second quarter).

But Vlocity's founders had mapped a far more ambitious trajectory. They were inspired by the success of Veeva, the first — and so far only — Salesforce-native ISV to secure a stock market listing with its IPO in 2013, when it achieved a near $5 billion valuation (today, Veeva has a market cap of $22.3bn). Veeva's early founders, joined by CEO David Schmaier and others with a background in industry solutions at CRM pioneer Siebel, formed Vlocity in January 2014 with the goal of replicating Veeva's success on a far grander scale.

Whereas Veeva had targeted just the pharmaceuticals and life sciences industry, Vlocity would develop solutions for multiple industries, enabling growth across all these verticals at a much faster velocity (sic). As Schmaier explained to me back in 2015:

If Veeva was the first industry cloud company, we're the first multi-industry cloud company.

Within two years, Vlocity had solutions in four industries, from communications and media to insurance and public sector, industries that it saw as an addressable market ten times larger than the life sciences vertical where Veeva operates. Vlocity quickly landed early customers in telecoms and media, such as Telus and Sky Italia. demonstrating an appetitite for large-scale replacements of longstanding legacy systems. The roll call of industries now stands at six — communications, media and entertainment, energy & utilities, insurance, healthcare, and government.

So why hasn't Vlocity accelerated to overtake Veeva? And what are the takeaways for other Salesforce-native ISV partners?

Keeping technology in close lock-step

One important difference in Vlocity's strategy from Veeva's was a very deliberate decision by its founders to keep its technology in close lock-step with Salesforce's platform. There are two different ways of building custom solutions that run on Salesforce. One approach is to use a template model, where the customization must be tested — and may need modifications — each time Salesforce issues its twice-yearly releases.

The more sophisticated approach is to build a packaged native application that remains continuously upgradeable on the Salesforce platform as new versions come out. Vlocity took this to the extreme, vowing to refactor its own custom objects each time Salesforce created native objects that replace existing Vlocity functionality. To achieve such a close shadowing of Salesforce's own product development, Vlocity went as far as locating its product teams in the same downtown San Francisco office tower as Salesforce's own, and today occupies several floors in the eponymous Salesforce Tower. There will not even be any need to move offices once the acquisition closes.

This is the ultimate pureplay approach, guaranteeing Vlocity's customers fully native compatibility with the underlying platform throughout the product lifecycle — an important consideration when buying cloud products. But it gave Vlocity much less freedom of movement than Veeva, which has built out significant content management and regulatory workflow functionality outside of the Salesforce platform.

Industry cloud is a misnomer

Vlocity also faced keener competition than had been the case when Veeva got started seven years earlier. By 2015, Salesforce was already promoting its own vision of industry clouds, beginning with the launch of Financial Services Cloud, rapidly followed by Health Cloud and more recently Manufacturing Cloud and Consumer Products Cloud. Building vertical industry penetration was a big part of Keith Block's mission after he joined the company in 2013, and while Vlocity has always been seen as an ally in that strategy, Salesforce must also keep its eye on the bigger picture of its own growth prospects.

In retrospect, industry cloud is almost certainly a misnomer. Vlocity sought to portray itself as one of a kind, with no other major ecosystem partners targeting industry cloud in the same way. Well, that depends on how you count it. For one thing, there are other players with a vertical industry focus. Accenture developed a Salesforce-native vertical cloud solution for trade promotions in consumer goods, at the same time as taking a stake in Vlocity to partner with it on its offerings for telecoms and media. The retail banking edition of Salesforce Financial Services Cloud relies heavily on nCino's Salesforce-native industry solution.

More importantly, the entire segment often called 'middle office' is also playing in the industry cloud. Middle office is the generic term that covers all the processes that fall in between getting in front of the customer (front office aka CRM) and being able to go ahead with fulfilling an order (back office aka ERP). While some — most notably Salesforce-native ISV Apttus — have sought to portray middle office as a horizontal play, in fact middle office processes vary by industry. Apttus itself is evidence of this, having specific verticals where it has done well, many of them overlapping with Vlocity's target markets.

Other long-established Salesforce-native ISVs have built market share by similarly going after specific verticals — Rootstock in manufacturing, FinancialForce in professional services. And Salesforce's own acquisitions to bring middle-office functionality such as CPQ, ecommerce and B2B commerce into its Sales Cloud have underpinned its own ability to pursue enterprise deals across various industries.

No escape for Salesforce ISVs

Bringing Vlocity into that mix further expands the footprint of Salesforce's industry cloud offerings and adds new fuel to keep its continued growth on track. As part of Salesforce, there's greater potential to grow the Vlocity footprint than the startup would have had by staying independent. Perhaps there's also an acquihire element to the deal — at a time when Keith Block is stepping back, Marc Benioff declared himself "especially excited that David Schmaier is coming into Salesforce" on last night's earnings call.

Other factors were hinted at on the earnings call, with Marc Benioff apparently suggesting that Vlocity was in play and that therefore it was now or never for Salesforce:

In our relationship with Vlocity and the way that we originally invested in the company, it created a situation for acquisition that we needed to take advantage of and which is why we have acquired it at a very attractive price, because we have been partners with them from the very beginning.

Certainly Salesforce will want to keep close partners like Vlocity within its ambit rather than seeing them go to potential competitors — analyst Ray Wang speculated to Techcrunch that the motive was "it keeps Google from buying them."

But if this is how Vlocity's IPO dream has ended, it suggests the outlook for other Salesforce-native ISVs is that none of them will ever now achieve escape velocity. Look at ServiceMax, which exited in an acquisition by GE back in 2016, only to find itself spun out to private equity buyer Silver Lake two years later. Yesterday Salesforce once again became an investor in the company and its eventual acquisition seems almost inevitable. Are Salesforce-native ISVs waking up to the reality of an ecosystem that, like Hotel California, however much you may want to check out, you can never leave?