The Platform Journey is back! This week, show host Avanish Sahai sits down with Dave Yuan, Founder and Partner at Tidemark. Tidemark is a growth equity firm purpose-built to help companies win and scale.
This season will feature conversations with key decision-makers who have to support the journey to a platform or any ecosystem. We will talk to C-suite executives, board members, investors, and others who must be bought into the platform journey.
In this episode, Avanish and Dave discuss:
And much more!
Host: Avanish Sahai
Avanish Sahai is a Tidemark Fellow and has served as a Board Member of Hubspot since April 2018 and of Birdie.ai since April 2022. Previously, Avanish served as the vice president, ISV and Apps partner ecosystem of Google from 2019 until 2021. From 2016 to 2019, he served as the global vice president, ISV and Technology alliances at ServiceNow. From 2014 to 2015, he was the senior vice president and chief product officer at Demandbase. Prior to Demandbase, Avanish built and led the Appexchange platform ecosystem team at Salesforce, and was an executive at Oracle and McKinsey & Company, as well as various early-to-mid stage startups in Silicon Valley.
About Tidemark
Tidemark is a venture capital firm, foundation, and community built to serve category-leading technology companies as they scale. Tidemark was founded in 2021 by David Yuan, who has been investing, advising, and building technology companies for over 20 years. Learn more at www.tidemarkcap.com.
Links
Avanish: Awesome. Well, I am delighted to all of you who publicly and privately messaged me over the last few months, while I was taking a break, to bring back podcasts. So here we are, yet another season. And this season, we’re actually going to focus the conversations on something that’s been pretty key, but we haven’t covered it much before.
And this is really the perspective of some of the key decision-makers that have to support this journey to platform, or to any ecosystem. And these are C-level executives. These are board members. These are investors. This is really that group that ultimately needs to sign off, needs to be deeply involved. And so this season we’re pretty much going to have an amazing set of guests.
We’re going to focus on that particular topic and share with us some of their perspectives and lessons from that point of view. And with that, I’m delighted to start with someone who’s been a huge, huge, huge supporter of such a mission, Dave Yuan. Dave is the founder and general partner of Tidemark.
And I’d be remiss in not starting out with a huge, huge vote of gratitude to Dave, the Tidemark team. You guys have been just such an amazing partner in sponsoring this, and frankly the instigator of this from the get-go a few years ago. So I couldn’t be more appreciative of all that you’ve provided. And Dave, it’s an absolute delight to finally have you on The Platform Journey.
Dave: Well, Avanish, right back at you. For those of you who don’t know, Tidemark’s about three years old. And a big part of what’s allowed us to really grow and flourish in the first three years is the support of incredible executives like Avanish. And just really appreciate how generous you’ve been with all your time and your thoughts, both in this podcast to the general community, but then just the number of companies that we’ve either invested in or looked at. So I’m really excited to be a very, very small part of what you’re doing, Avanish. I guess, what is it? Long-time listener, first-time caller.
Avanish: [Laughs] Exactly.
Dave: Excited to be on the show.
Avanish: That’s awesome. So, Dave, let’s just kick it off with – I think a lot of people may know you. Because you’re a legend. But let’s start with a bit of your personal background. You’ve been an investor for some time. You’ve been extremely, extremely thoughtful and successful. So just talk a bit about your personal background as an investor.
Dave: Yeah, well, I appreciate that. It has been a while. And sometimes it’s kind of fun to look back on it. It sneaks up on you. I’ve been doing this for, I guess, a bit over 20 years. I first started investing at a biofirm, actually, in 2000. Right in time to catch a bunch of falling knives during the first dot-com implosion. So all of this chaos in the last three years, I was sort of born investing in that. So that was quite helpful.
I did that for some time and then joined a growth equity firm, TCV, where we initially met. I was a general partner at TCV for about 15 years. And then, about three years ago, we launched Tidemark.
I would say that, in general, we’re a private investor. So I typically invest when companies are doing high single digits of ARR and then help them scale upwards. And there are times where actually either companies will go public – and so I’ve been fortunate to invest in, I guess now it’s 13 companies that have gone public, and will sit on the board at times during their public life. So I have a little bit of experience on the public side, lots of experience on the private side. And just super grateful to be doing what I’m doing.
Avanish: Amazing. And again, kudos to you for, while doing all that, you’re still one of the most humble people I know. So it’s awesome to find time to work together.
So, let’s take it to what you and the team have been doing at Tidemark. I think one of your core principles is really being very thoughtful and having a point of view and a perspective. And one of the things that I think has just taken off is your perspective on vertical SaaS. And now I’ve seen company pitches would reference the Tidemark framework. So talk a bit about the Tidemark vertical SaaS framework and a bit of how it came about and how you see it evolving.
Dave: Yeah, Avanish, thank you for that. It is fun to see companies present their product strategy in our framework. It’s a little less fun to see other investors ape our framework and either rip off with attribution or without… But I guess that’s the price of doing what we do.
But yeah. Do you want the three-minute version or the five-minute version?
Avanish: Take your time.
Dave: Okay. I think every firm, when you’re starting out, you have to have a vision for why the world needs another growth equity firm, right? What’s different? And I think what we’re trying to do at Tidemark is really lead with, in some ways, stewardship. So those are fancy words, but the general idea is, we want to build the firm on the energy of ideas and the power of community.
And if we do that right, we’ll build an ecosystem around us. And some portion of those companies will want a raise every year. And we may have the right to invest in a select few of those. And that’s a great way of building a portfolio and a firm.
And so, when we started Tidemark, as early as when we started fundraising, I remember these weeks where, Monday through Friday, 10 meetings a day of just going through the same pitch over and over again. So on Saturday, what I would do is, I’d take a respite from the sales job and put on my thinking hat. And from usually 6 a.m. to 11 a.m., because that was the time that was most available to me, I would start writing. And that’s what actually created – that was the birth of what we call the Vertical SaaS Knowledge Project.
And so, what we’ve tried to do is create a reasonable framework of how a vertical SaaS company might win their category, expand their offerings, and then, for the select few, extend through the value chain. Sell to your merchants’ customers, your merchants’ suppliers, your merchants’ employees, sometimes your merchants’ financiers and owners. And so, we’re trying to create a logical and prioritization framework for the next generation of SMB and vertical SaaS builders.
I’d say one of the core themes, or one of the core foundations, of the Vertical SaaS Knowledge Project is this notion of control points. Generally, there are certain systems, either in the front office or the back office, or both, that have what we describe as data gravity, workflow gravity, and account gravity, to be the control point. And really be the most important system to a merchant. And particularly a small merchant really only wants one system. They want to kick out all vendors and just have one vendor.
And so, we find these control points have the unfair right to sell multiple products. And that helps alleviate a lot of the TAM concerns and the economic concerns associated with SMB and vertical software.
So, at any rate, it’s a framework that we’ve really enjoyed writing over time, and bringing folks like yourself and other great executives to contribute to the frameworks, write their own chapters. And it’s been nice to see it travel really globally. We have some great companies across the world that have reached out and either contributed to the framework or just want to engage. So it’s been a lot of fun.
Avanish: I can definitely attest to that. I’ve seen companies from India and from Brazil who refer to it, and frankly use it as part of their strategic thinking. So again, huge kudos to the team for being very thoughtful and structured, and, to your point, sharing it. Right? It’s for the benefit of the community.
So that intro is a great segue into the deepening of our chat here. So you talked about ideas and community. And frankly, that also helps define the principle of an ecosystem and a platform. So we’ve talked broadly about horizontal platforms at a lot of the other interviews here. Let’s dive a little bit deeper. So with your insights into verticals, what’s the mindset that needs to be changed or different between a vertical SaaS offering and platform versus a more traditional horizontal platform?
Dave: Yeah. I’d say that the mindset historically has been diametrically opposed, right? I think most horizontal players, they understand that they can’t offer it all. No one software application – at least initially, while they’re private or early stages of small and midcap company formation – they really want to be an all-in-one. Versus the vertical SaaS and SMB mindset really is much more aligned to, we want to be the control point. Over time, we want to offer everything. There may even be all-in-one ambition.
So Shopify, Kajabi in its own way. Now we can talk about how Shopify has evolved to be a great ecosystem. But initially, the value prop is, I want to offer everything. And that’s partly environmental. I think the conventional wisdom, which is always great to check, and has turned out to be incorrect, but the conventional wisdom, probably 10 years ago, around SMB and vertical SaaS is, hey, these are small customers. They can’t pay a lot. They have really bad retention, because a lot of them go out of business.
And really this idea of multiproduct, this control point to build a multiproduct platform, has been the offset to that thinking. It has helped software companies, like a Toast or a Clio or ServiceTitan, really build out quite a large business and a really strong economic base from small business customers.
And so there is the inherent mindset of, we want to offer everything. And so, we can talk about why or why not that’s appropriate at this point, but if you are going to build a strong ecosystem, that mindset has to change. You have to open up more of your product, more of your opportunity, even sometimes more of your sales channel, to third parties. And that is really uncomfortable for most vertical SaaS companies.
Avanish: Yeah, I think, again, I think you’re in the minds, or you’re in the heads, of a lot of the entrepreneurs who think about those things. But from your perspective as an investor who’s trying to obviously maximize opportunity and the TAM, do you think that has to change? And if so, will it change? And what are some elements of that change that might instigate that?
Dave: I think it’s situational. It depends on a founder’s ambition. If you want to be the industry platform, if you want to build out the full potential of what you’re doing, which is really serving your end merchant in all ways to run their business and thrive, engage with both the merchant and some of their suppliers and along the value chain, I do think you have to take much more of an ecosystem mindset.
And we can talk about why that’s challenging or what the requirements are, but I think the inputs to that thought process are that no one software company really can offer everything up front. Oftentimes, if you’re going to build a material product, it often takes one to three years to really build this thing and to deploy it through a salesforce in a material way. And, more importantly, even a great software company can really only focus on one or two big initiatives at any given time.
And that can include product. It can include geo. It can include segment. And so, again, if you want to be the industry platform, and you want to do it in a reasonable time frame, you do have to consider bringing on third parties.
Now, the two exceptions to that are, maybe you don’t want to be the industry platform. Maybe you just want to garner as much profit as you can, and as much revenue as you can in one end market. I think there still are arguments that, over the long term, you really should consider opening up your platform. Because I think opening up your platform to third parties not only can provide other revenue opportunities that you can serve, but also really contribute to your moat. They contribute to the workflow gravity, the data gravity, and the account ownership gravity. And that allows you to capture more of those revenues over time.
The one exception, though, is there are certain wedges that you ought to be mindful of. And we describe this control point pattern as the integrated surround. Which is, you get this pesky wedge that gets into your account base, integrates into your system for a big chunk of your customer base, and then all of a sudden they start surrounding your system of record, so they can engage it to become the system of engagement. That can be highly problematic.
Avanish: Yeah. So, without putting words in your mouth, I think part of this is clarity of purpose, right? Understanding what is the vision and what is the mission the company is trying to achieve. And again, that requires alignment across the C-suite, across the board, the investors, etc. And then, based on that, understanding what those control points are, what the surround points are going to be, and then being very thoughtful about the trade-offs. Which I think is spot on.
And often what I find is companies don’t spend the time thinking that through and defining the purpose.
Dave: Yeah. And maybe just one pattern I’ve seen a lot, even amongst the best businesses, is there’s just this embarrassment of abundance. If you really are the control point for your end market, you really can offer quite a few products. You can really build massive businesses on top of your core business. And as a result, it is harder, and it’s not intuitive, to be very, very crisp about what your sequencing of product and businesses are.
And, as you’ve written quite a bit about, and I think it’s very astute, you really do need to have your product and your business unit strategy be the underpinnings, ultimately, of your ecosystem strategy. Because you need to know what you’re willing to give to others and what you want to hold on to in the long term.
Avanish: Yeah. The ultimate build by partner. So let’s bring some color to it. I think the framing is spot on. I couldn’t agree more. What are some examples? I mean, you’re a student of this industry, broadly. What are some examples of both good and places maybe you’ve been involved with, where you see this as the evolution of this thinking has been thoughtful and well played out?
Dave: Yeah. I think most great vertical SaaS companies are both thinking about this and also, in some degree, struggling with it. Because optionality is quite difficult to give up. Where I’ve seen it play out most effectively is where a category leader is quite comfortable in their position in the end market. And they may actually be more of a mid-office control point, where they touch both the front and back office. And they may realize that there are a multitude of tools that they just can’t provide to their customers.
It may be a step function change, in terms of maybe new AI automations that are really impactful, that are really strong point solutions that can enrich their platform. And so, a great example of this is Clio. And I know you’ve spoken to Jack over the years, and they’ve done a really nice job of saying, hey, we are the leader in practice management. And practice management is the operating system for legal firms. And we want to help our law firm customers be the most innovative and the most impactful that they can be. And that includes our product, but also third-party products.
I think there are other companies, like SiteMinder, that see a real industry need. So SiteMinder is channel management and property management for hotels. And the industry need in that context is that, to have a good piece of software in the hotel industry, you have to integrate into a property management system. These PMSs, in terms of market share, are incredibly fragmented. A lot of them were built in the ’90s. And there’s usually like one or two players per country, and then a whole long tail of other players.
And so there’s a general need for the software industry to be able to integrate to the PMS. Well SiteMinder, as a function of their channel manager, essentially integrates and surrounds the PMS and provides one API for all third parties to engage with it. So they, early on – and I give Mike Ford, the founding CEO, credit there, and also Sankar to continue this – early on, they did realize, hey, there’s a real industry need. And if we allow all these third-party tools to integrate into our channel manager, which then integrates into the PMS, we can essentially become the ecosystem, the integration layer, for this industry. And it’s going to add to our gravity. It’s going to add to our importance.
And so, those are the types of examples. In other situations, you’ll see a really strong mindset around, hey, this is the profit pool we care about. This is the moat. This is the data piece. And a lot of times you’ll see vertical SaaS companies view payments as that. Just because payments is such a part of the overall gross profit pool of a vertical SaaS company. It provides a lot of signal in terms of what the transaction types are, how healthy the business is. And so, a vertical SaaS platform at times can say, all right, well, we’re willing to let third parties integrate into our core control point as long as they use our payment rails.
And so, that type of clarity of thought really does create an ability to engage with third parties, at least in the short to mid term, and really sort out who’s playing where.
Avanish: Yeah. I think that certainly lends clarity to your point about product strategy. You have to have clarity. It doesn’t mean it won’t change over time, but having at least clarity, both internally to your customers particularly and then to the broader market, is pretty critical.
So, great context-setting, Dave. Let’s talk a bit about the role of an investor, a board member. What are some of the signals that you or your peers should be looking at or would be looking at to say, hey, it’s maybe time to think about this from a platform perspective, from an opening-it-up perspective? Are there particular indicators or ideas that you’ve identified?
Dave: Yeah. I haven’t thought about this topic nearly as deeply or as long as you have, but if you think about our framework, it’s go win the control points, win the category, and expand offerings. And expanding offerings both improve your moat and your retention but also dramatically scale your RPU. And a lot of these expansions really are fintech related, and you can leverage embedded solutions. So things like payments, lending, insurance, payroll, etc.
I think those all probably belong in the sphere of a control point. They ought to either provide them themselves or through embedded partners. Now when you get into a system’s more significant build, where the functionality is quite different than your core offering, I think then you have to start thinking about the build versus buy versus partner roadmap. And I think oftentimes what you see is, you start to see, at the board level, lots of really interesting plans on the product roadmap, and probably too many plans.
And so I think that’s a time to really have a great conversation around, there’s a bunch of different frameworks, horizon one, horizon two, horizon three, whatever it is. To really try and tighten up the product roadmap, independent of ecosystem efforts. That is just great foundational strategy work that has to happen on a board.
But that moment in time, that’s when you can have a real productive conversation around partnerships and ecosystems. Because before then you end up wanting to do both. And that gets a little uncomfortable. And it oftentimes isn’t as productive. Because you have very mixed incentives.
Avanish: Yeah. And then, I guess, also the problem of getting mile wide, inch deep, like you said, in a number of different areas. And then the customers will see through that, right? It’s like, well, I need depth here, and I’m not getting that, but I’m getting a lot of little capabilities here and there. So I think that clarity, again, is absolutely, absolutely critical.
So that’s at the board, core strategy level. One thing you and I have talked about over the years is also the team. At the end of the day, this is a team that’s going to be asked to align and execute. Whichever of those paths you take. What are some of those attributes? What do you think are some of the areas that you’d say, hey, before you embark down this path, what’s the readiness level of the team to go there?
Dave: I think most times it starts with the CEO. She or he has to… They have to have a strong view of both the desire to be an industry platform, the need to bring in third-party IP, and this crisp view and confidence around the three- to five-year product roadmap. If you don’t have that, it’s very hard to really pursue this efficiently. So it starts out with the CEO.
I think then, if you think about the two big functions of a company, it’s the product and the go-to-market team. So on the product side, you also have to have the chief product officer, she needs to buy into that strategy. And she also needs to be open to competing. Because you may say these are the three sacred pillars of our core offering, and everything else goes to third parties. Well, you do have other teams within your organization that might want to build everything else.
And at times, in your customer accounts – these are customers that you’ve spent a lot of money, time, care, and feeding to become successful customers for your business – you now have a third-party competitor. And so, the clarity of the vision oftentimes is created by the product organization and also, obviously, heavily directed by the CEO. But that lock is fundamental.
You also need to… As part of the product strategy, there’s a pretty strong TAM analysis that needs to be done, and profit-pool analysis, which feeds into this product strategy, as well as a technological bed. So the TAM analysis oftentimes will come through your rev-ops team, your organization. And the technical analysis, and I’m particularly thinking about AI, which I think is particularly interesting in both promising and threatening cross-attach, you need to understand the movements of these big infrastructure players that may allow you to offer some of these functions over time, and what the ambitions of the third party native AI players are on your platform.
This idea of, be careful about the integrate and surround, particularly the offerings that drive revenue. Because those are particularly impactful. So that’s on the product side.
On the go-to-market side, you have a fair amount of complexity you need to think through. What are the channel conflicts? How do you resolve them? What are the incentives? Do you want any incentives in your core go-to-market team on third-party products? So I think it starts with the CEO, and then it’s a fairly holistic, organizational examination.
Avanish: Yeah. And again, not like I ever encountered the issues with CPOs and so on… [Laughs] Just kidding. But that is one of the real issues, which is, there’s often a mindset, hey, one, we know the customer better. We can build it to better specifications, better requirements. We can’t always trust if our partner is going to be a partner or a competitor. So I think all of those issues are absolutely key.
But I think the point that you raised about it being data driven and understanding the TAM, I often find that is one of the areas where a lot of product organizations misaligned with partner organizations don’t always sync up. And that data-driven conversation, I think, is one of the most key points. Where can we earn the right to capture that TAM or not? So, completely agree with that.
So with that, again, assume we’ve made this decision. One of the things that I think is challenging in this journey – one of the many things – is this is a longer time horizon. So, again, as an investor, board member, someone who’s got to think about both the returns but also the strategic outlook, what are some of the success metrics, or the milestones, that you and your peers should be on the lookout for? To say, hey, is this working, is this not working, was this the right decision to go down, control it all and build ourselves versus maybe think about more of an open platform strategy. Any thoughts on guiding principles around that?
Dave: To be honest, Avanish, I don’t have a set of, here are the three key metrics. I do think it really needs to be driven by the soundness of the underlying product strategy. And so, getting that right, obviously you can measure it in a variety of different ways. But assuming that’s correct, assuming you’ve decided these pieces are the high ground, and then now we’re going to look at bringing in third parties, I think bringing in third parties – to your point – is not really a short-term revenue dashboard. I think that’s maybe what you’re getting to.
Which is, I would not judge the ecosystem efforts initially upon revenue. I would think a lot about engagement. And so, what is the actual engagement of your customers with third-party IP or applications? Do qualitative NPS scores go up? Do retention rates go up? What’s the impact on sales and onboarding? Over time, you do want to see some inbound motion from the partners to your go-to-market itself. And then, over time, you want to see, potentially, if monetization is one of the motivations – and oftentimes it is – you do want to see revenues.
But I initially would really think about engagement, specifically customer engagement and customer success. And that may lead you down a very different path. It may lead you to much more of a tighter group of initial partners with much more of a product-management approach, where you think about these partnerships like you think about your products, and you think about how you create a great onboarding and customer experience. Versus, hey, we want to get X number of partners by year two. That would be how I’d answer the question. I’d be curious how you would answer the question, Avanish, given that you’ve done this many times.
Avanish: I mean, look, it is… Again, I think we’re usually very aligned on these things. I think monetization often becomes the center point. But out of the gate, my guidance has been to – and this is from personal lessons learned, perhaps – is not to make that the front and center in the beginning. First is really that adoption, stickiness. Are these the right set of complementary capabilities? And if customers are adopting those, then that validates the strategy.
And then you can come up with mechanisms to monetize where there’s a fair exchange of value. If it’s monetization for the sake of monetization, that usually does not end very well. That, I think, is definitely a key point I’d agree with 100%.
The other, which I frankly have learned over the years, I think – and you implied it, but I’ll call it out – is quality versus quantity. I think just opening up and having thousands of partners and apps and so on, if that’s the case, actually creates more confusion. And customers – to a point you made in the beginning of the conversation – they’re looking for hey, I want maybe a single throat to choke. I want a single control point around which I can build the rest of my systems and infrastructure. And if you give them too many choices, it actually can be somewhat counterproductive.
So I think identifying exactly, with that roadmap mindset and a product strategy mindset, where are those gaps and who are the best complements, and then tracking their execution, I think those are certainly my ways of monitoring that.
And the third point is – and I say this often, but I don’t think I can repeat it often enough – it is a long game. So if someone jumps into this and expects a six-month time horizon, I think that’s short-sighted. You have to have a bit of a multiyear view, again, both from roadmap and recruiting/onboarding/engaging with partners. There are a lot of mindsets that have to change.
So, Dave, as always, huge insights. As we wrap, any final words of guidance to other investors, board members? You had amazing insights throughout, but if you were to synthesize a bit of your lessons from going down this path with a few or your portfolios and just watching, any key lessons, or any words or wisdom?
Dave: I think this applies to both ecosystem and applies to capital allocation. It also applies as a foundation for M&A. Really pushing ourselves, as companies and boards, to be very crisp around what we view the control points to be, what we view the profit goals to be, what we view the functional TAM to be. Not just the vanity TAM numbers, like there are X number of salons in the US, but really think about the turnover and the at-bats and the annual flow. I think this feeds a really strong strategic foundation to make a lot of these decisions, particularly on the ecosystem side.
I think the ecosystem side is sort of the superlative choice. These are longer-term product choices that require a lot of thinking. So start early. Start early. You may not get it right, but start early, start iterating. Have this be part of certainly your annual conversation, if not more frequent than that, at the board level. I would put some of these foundational pieces in place, in terms of three- to five-year strategy, that you refresh perhaps every year.
I would also try and at least start making headway and experiments on the ecosystem side well before you’re public. We talk about having a long-term mindset. Well, what is the worst environment for that? [Laughs] It’s being a public company. Your whole notion of short-term versus long-term feedback and pain and joy totally goes upside down. For the first year or two, it’s all short term, I think. And then, over time, you start getting into rhythm again.
But I would encourage people to put a lot of these frameworks in place early, as early as you can, and really start to experiment. And I love your comment around quality over quantity. An ecosystem doesn’t have to be a full-blown ecosystem to start with. It can be a really thoughtful set of partnerships with strong API foundations. And so, I think that’s a great way to start.
Avanish: Awesome. Well, folks, you’ve heard it from one of the best in the industry. And thank you for very candidly sharing your thoughts. And again, Dave, I can’t appreciate enough all that you and Tidemark have been for this podcast. And for me personally. So thank you, thank you, thank you.
Dave: Likewise. It’s been awesome working with you, Avanish. Thanks for the time.
Avanish: Appreciate it. All right, that’s a wrap for this edition of The Platform Journey.