After all, with over 666 solution providers out there, I should be in solution utopia, right?

In Part I, we said there are three big big reasons for this, they are people-centric, and they all start with F!

1. Founders
2. Financiers
3. Fashionistas

Then we went into detail as to why Founders are one of the three big reasons that the majority of ProcureTech firms don’t solve your problems. There were a host of reasons, but the major ones were lack of knowledge about the space, ego, and a reluctance to let either go.

However, founders are only the first part of the problem. The second part are the financiers. Right now, venture capital (VC) and private equity (PE) controls more of the space than they ever did, and while it could be a good thing, as there are many PE firms that know how to run a company responsibly and profitably for growth, some of them are only interested in a quick return (via growth and public exit or quick profit growth at any cost for a quick flip to a bigger PE firm), and most of them over invested in the firms they took a stake in during the last market frenzy. They often invested in valuations over 10X in bidding wars for companies that, frankly, weren’t all that differentiated from a dozen of their peers because they wanted into FinTech during COVID when everyone realized you had to be able to do business, and pay, online, and/or saw FinTech ProcureTech as the next big growth arena. While both are true, it’s almost impossible to grow a company more than 7X in their maximum investment time window, and that is ultimately one of the major reasons they are a major problem in the ProcureTech space right now.

The reality is that, even in SaaS (and B2B SaaS especially), you can’t responsibly sustain growth rates of more than 40% year-over-year. No SaaS is “flick-of-the-switch” no matter how much integration the provider claims to have out of the box, how easy they claim the initial data load will be, or how intuitive the User Interface is supposed to be.

Even the simplest module will likely take a few days to a few weeks to get integrated, populated, and configured, and then you will still have to provide training and support. And even if you have “one codebase”, you’re still not going to have “one instance”, and will have to roll those outdates out sequentially so that you can identify unexpected problems (due to unique configurations your developers didn’t expect) and fix them before you have a CrowdStrike scenario. Which means that for every X clients you add (where 1 < X < 10, typically, depending on how simple your implementation, integration, and support requirements really are), you’re going to have to add another FTE (in development, support, account management/client success, etc.), and guess what, training them and getting them up to speed not only takes precious resources, but takes time.

As a result, for most companies, the rate at which they can sustain growth and maintain the high customer service levels (which are critical for SaaS renewals, especially in tough economic times), is usually 30% to 50%, with most topping out around 40%. This says that, for a typical investment, after 3 years, if the company keeps prices steady, revenue will only be 2.75X, and after 5 years, 5.4X. For a top performer, we’re looking at 3.4X after 3 years and 7.6X after 5 years. Considering that there are very few PE funds that are happy to wait more than 5 years to make their investment back, it’s impossible for them to make more than a 7X return unless something changes in the equation.

There’s only four things that can change to affect the equation to the PE firm’s liking:

1. more/enhanced offerings (more modules, deeper functionality) that increases the price
2. (decreased) support levels (“do more with less”)
3. increase sales as-fast-as-possible to get (as close) to 2X growth year-over-year
4. increased pricing (charge more for the same functionality)

However, (a) requires more investment in development and product, and increases overhead, which decreases profit, and can take one to three years before you see a revenue increase. You can’t do (b) too fast, because as soon as support drops, customer satisfaction drops, and eventually customers get fed up, renewals drop, and revenue drops. So, you can really only do this in the year you plan to flip or go public. This means that most PE firms who over-invest will focus on (c) and/or (d).

Some PE firms will jack up the pre-sales and sales force to sell, sell, sell pursuing (c) and sometimes it will work. However, that will require their investments to quickly add support personnel for implementation, integration, and/or partner support, and if these new hires can’t be brought up to speed quick enough, we have the situation described in (b), which is undesirable. This just leaves (d) for the majority of PE firms that invest too much in their acquisitions.

Now, no one is going to suddenly pay twice as much as the last customer with no real increase in functionality or value, so for this to happen, they have to ramp up the hype, excitement, and marketing … to the max. And ensure that you are hit with a constant onslaught across all channels and that their investment is also hyped up by the big analyst firms and echoed by the Platinum/Diamond/Rhodium consulting and implementation partners. The goal: to make you think that it’s so much better than all its peers and worth that inflated price tag so you buy it and not a competitor’s product. When this marketing barrage works, it’s because you get an exaggerated view of the product, and believe it will solve a lot more of your problems, and return a lot more value, than it can actually be expected to. And this is another big reason why so many ProcureTechs don’t solve your problems.

However, it’s not the last reason!

Preamble: When the doctor started his influencer series on LinkedIn (with Top 10 Ways To Be A Procurement Influencer), one of the first comments he received was that it won’t get many likes. This was his expectation, especially considering he posted a partial summary of his final installment, One Final Piece of Advice, where he basically told wanna be influencers to find their next job sooner than later. However, that series was tame compared to this one, which definitely won’t get any likes. In fact, it is almost guaranteed to get the doctor a few more haters, but some things need to be explained. (And there’s no need to point out the obvious to him!)

Just Why Are There So Many Undifferentiated ProcureTech Startups That Still Don’t Solve My Problems?

After all, with over 666 solution providers out there, I should be in solution utopia, right?

There are three big reasons for this, they are people-centric, and they all start with F!

1. Founders
2. Financiers
3. Fashionistas

Founders

There are many different types of founders who get into it for many different reasons, but the reality is that the majority of founders of ProcureTech fall into two categories:

Procurement Practitioner

Typically, a practitioner who was stuck in the dungeon of the Tower of Spend with outdated tools, insufficient support, a crushing workload, a belief there has to be a better way, and enough will to quit and try to find it.

Tech Guru

Typically, a tech guru who invented a great new piece of tech which they think will revolutionize the Procurement space or has a history of “transforming” different back-office areas and believe that, if they tackle Procurement, they can solve it too.

But they both have one thing in common:

They don’t know the space. They don’t know the terminology, the vendors, the solutions (beyond the antiquated ones they used), or the unsolved problems (as they haven’t even looked beyond the basic problems that their tech didn’t solve). They Don’t Know. And it’s hard to build a good solution when you don’t know. When you don’t know what your competition does (because you don’t even know who your competition is). When you don’t know what problems your competition is not solving (and what you should be building). And you don’t know what your target customers would pay the most for, now, without having to go through a year-long sales cycle. This holds true for both of these categories of founders.

Let’s take practitioners. They don’t know the terminology, think it’s still purchasing, and don’t know how to do proper research. They’ll do a few Google searches, find a few mass market simple finance payment platforms (such as ramp.com for billpay, airbase, etc.), think they’ve found everything, and start designing their solution. They’ll add a few additional features, basic e-Procurment/catalog support, maybe an RFP, and think they have the best Procurement solution ever designed and run with it. Or, stuck using spreadsheets and email for RFPs, design a simplistic RFP solution, add in some Gen-AI to auto generate requirements from spec sheets and auto-parse RFP responses, and think they’ve revolutionized strategic sourcing.

the doctor is not being melodramatic here. Having analyzed over 500 solutions in his career as an (independent) analyst, he’s talked to well over 500 companies, and asked quite a few of them how they started, especially when he was doing due diligence projects. And when the company was founded by a practitioner, this was the story all too often — that they started the company because the solution they had wasn’t doing the job, the 2 or 3 solutions they looked at (which weren’t at all relevant) weren’t doing the job either, and they believed the market needed a better one. Not knowing the market (beyond maybe what they saw in the odd Gartner or Forrester report), they believed there were next to no modern, affordable solutions for small-to-midsized companies that did what they believed needed to be built, so set out to build one. The good news is that they usually designed a decent solution (as they started with great intentions and built something they felt they could use). The bad news, there are twenty others that more or less do the same thing (already existing and designed by a couple dozen other founders who had more or less the same idea before them or at the same time around the world) and it’s hard to get the message out.

Then there are the tech gurus, who believe there is no modern tech in Procurement, and that the optimization, analytics, automation, and, today, AI they can bring will revolutionize our space! That all the current solutions are missing is modern tech, and if you just inject a bit of it, miracles will happen. This group of founders typically builds really cool analytics-based apps, but tends to miss a lot of the basics or ignore the 80% of the workload an average Practitioner does on a day to day basis, either because they assume the existing platforms do it well (and the existing platforms usually don’t do it well enough) or because it’s not cool. They tend to build better tech but worse solutions.

Short story is that, the majority of the time, neither of these groups do proper research before they start, or when they launch. Not only into competitors, but into the analyst firms (beyond Gartner, Forrester, and IDC), the professional organizations, or the independent experts who they could ask for advice and help. Research that could help them create a solution that checks all the base boxes, tackles some of the thornier problems, and that actually does something different from their competition.

And if this was the worst of it, the situation would not be so bad. It would barely be a problem. The worst of it is that many of these founders not only believe they know everything they need to know about how to build a great solution, but also on how to market and sell it, package and deploy it, build, and run, a company around it. But they don’t. Sometimes, not even close.

And even worse, they won’t admit it. They won’t look for the help they need, and, even worse, they won’t accept it if you offer, even if you offer to help them for free! Some will even get very defensive, double insist they know everything they need to know, and cut off communication. (Fortunately, this particular situation only happens a small percentage of the time. But still.) This is the problem. Not all founders have this level of ego, but some do.

the doctor has direct and indirect evidence for and (personal) experience with the situations described above. Even when the doctor has tried to help indirectly, such help has been ignored. There’s a reason that the doctor wrote a series on Ten Best Practices for (Software) Vendors, a series on iZombie, and two series on Dumb, Dead, and Smart Companies. To politely, less politely, and when they still wouldn’t take the hint, bluntly tell them what they needed to know in the hopes that, since they didn’t have to admit to anyone they didn’t know everything, they would heed some sound advice and not join the ranks of the vast majority of their peers, which, over time, eventually disappear. Having followed this space for over two decades, one thing the doctor knows is 90% (or more) of companies WILL disappear. Not the typical 70% that the statistics tell you for startups. 90%! The lucky will be acquired on terms they can accept, the survivors will be acquired on terms that a decent percentage of their staff continue to be employed, and the rest will just disappear. And the companies with great solutions WILL NOT be spared. Success requires a lot more than a great solution.

The majority of founders just aren’t up to the task. And that would be totally fine if they’d admit it, because not everyone has the skills it requires to grow and run a company, but anyone with the skills to found one obviously has a valuable set of skills the startup still needs, and there’s nothing wrong with stepping back to the COO, CTO, CSO, or CRO role you’re best at, especially if it’s for the greater good. But with a number of these founders, ego gets in the way. But they aren’t the only problem!