My last post covered one of at least two ways Industry Cloud providers can grow large enough to attract the attention of PE firms and the public markets: Serial Verticalization. As the name implies, this means perfecting one portion of the “source-to-settle” process and serially extending this automated process across several verticals.
Another way for an industry cloud to get big is to build or buy or its way across the entire source to settle process within one industry. Within a single industry, an industry cloud might:
- help buyers search for new suppliers and vice versa
- facilitate RFQs and/or commercial contracts between buyers and suppliers
- automate transactions between the parties all the way through settlement, remittance, and perhaps even financing
- serve as a central repository for industry and transaction-related information
In this way, an industry cloud can extract value from being the “go-to” commercial venue for their industry’s buyers, suppliers and other third parties–regulators, financiers, etc.
In most cases, ICs that excel at one part of the source-to-settle process, have typically not excelled at other parts. For instance, payment networks have not been very successful in automating the rest of the procure to pay process. Search and match networks have typically not been successful at automating the rest of the transaction. Ariba spent billions to get the sourcing process added to the procure to pay. But in a few cases, through organic growth and strategic acquisitions, several ICs have come to dominate portions of certain industries:
- DealerTrack in auto retailing
- Medidata in clinical trials
- itradenetwork in food service
- Blackboard in education
In each case of the cases, the company started with one basic application, or part of a business process, and then expanded to the entire process and is now becoming a platform for an entire industry or portion thereof. Even though they are in completely different industries, the investor presentations for these “Industry Dominator” companies are remarkably similar:
- Frequent tuck-in acquisitions to extend a business process
- Sometimes major acquisitions to consolidate the market
- Relentless focus on industry participation and commerce
- Clear, simple metrics
- Pricing tied to value and usage (even pure transactional pricing)
- Eventual emphasis on building a true ecosystem and platform with APIs
- Extended commitments to 20-30%+ annual growth rates
- Pricing power that developed over time
All of these companies, by the way, ended up being great stock purchases. In the next post, I’ll cover these four Industry Dominators in more detail.