Thought Leaders in Financial Technology: Expensify CEO David Barrett (Part 3)

Sramana Mitra: Let me address the points that you have made. The first point is that one of the most successful ecosystems where 30% of the apps revenue has gone to the company and has immensely added to the company’s success is Apple. It’s a platform ecosystem. 

David Barrett: I completely agree with you if you can monopolize a platform. That’s a very different world where you are a monopoly of a closed ecosystem. 

Sramana Mitra: No, that’s not the only one. If you look at Salesforce’s revenue, a huge amount has come from the ecosystem and to understand that, all you need to do is look at companies like Veeva, which was built for $4 million in financing on top of the Salesforce platform.

Now it has become a multi-billion dollar public company. You need to look at Velocity which did very well. They went to $100 million plus in revenue and have been acquired by Salesforce lately.

We need to look at companies like Apttus which was also a successful app in contract management. This is one of the things that is important to the companies that are using their developer ecosystems to build exit barriers and to expand the number of products built on their platform.

The Atlassian strategy is outsourcing the R&D developer ecosystem. Then when they see companies gaining traction, they acquire them. They have done numerous acquisitions of bootstrapped companies that built products in that ecosystem and are very successful in that strategy. 

Shopify has built a wonderful strategy and they report how much money they are paying out to their developer ecosystem by selling them to their customer base. Their main strategy is exit barrier, so Shopify is a little e-commerce platform and the amount of exit barrier they have created for their customers is because each customer uses five to six of their ecosystem partner applications.

I think your pushback may be because you experience a failure in trying to work with Intuit. I’ve spoken to Intuit and they would like to do a platform ecosystem, but so far, you are right in that Intuit has not succeeded in building an effective platform ecosystem.

That’s a question mark that I don’t know what they have done so far and why they have failed. It could be accounting, or maybe it’s not a good place to do this. I think your blanket statement that it doesn’t work and it’s all bullshit is not correct. 

David Barrett: Let me defend my blanket statement. If you give a lot of examples of how people have built a business on top of Salesforce, I don’t disagree with that. I would be curious to look at the actual revenue of Salesforce and what fraction of their revenue has come from people licensing the platform versus people buying Salesforce products.

I’m asking what fraction comes through a developer ecosystem for licensing the platform to build on top of it versus directly just paying for products that Salesforce hosts in its platform.

Sramana Mitra: Yes, but I think it’s a combination. All the examples I gave you, it’s all of those factors contributing to companies wanting to do a developer system.

Number one is the exit barrier. Cloud is a very easy switch. If there are 10,000 more tech companies out there, imagine how much of a risk you are for churn. Somebody else has a better solution or you think has a better solution, so you switch out.

The only ones that can rise above the noise and preserve their positions are the ones who create a good barrier. The Shopify strategy was very critical in that sense. Similarly, they are all trying to expand their product portfolio.

If you try to look at Salesforce strategy, why is Salesforce acquiring Velocity? Why is Salesforce acquiring MapAnything? Because they are trying to expand their product footprint and each of those are revenue generators and are identified as much bigger revenue generators because Salesforce has to grow off of a much bigger base.

I’ve had many conversations on this and that’s why I’m pushing back so heavily into it because I can’t have you make these statements and create a false impression in the market.

The other big issue is merger integration. Why is it so easy for Atlassian to acquire a company that is built on their platform? It’s because there is no integration overhead. For a SaaS company to acquire another company that is not built on their stack is very tricky. 

David Barrett: I agree with that. We might be saying different things. There are certainly multiple ecosystems out there that are successful. I think the most successful in your point is Apple. If you can make a walled garden ecosystem and then take a huge tax out of it, then yes, that works well. That has been demonstrated by Google and Apple.

It’s much harder to have an ecosystem where there are many competing ecosystems like the Salesforce versus Atlas. That’s more of a mixed bag. Shopify is different from Salesforce because, to my knowledge, Shopify doesn’t sell anything to the consumer. They are a platform for other businesses. 

Sramana Mitra: It’s a SaaS platform for merchants to sell through e-commerce. 

David Barrett: Shopify’s platform is successful because it’s the only thing they do. The point I’m trying to make is that for companies that sell directly to consumers and also have a platform, the majority of their revenue comes from the direct sale of their product like most of Apple’s revenue is not the app revenue, most of Google’s revenue is not from Google Play.

Most of Salesforce’s revenue, I think, is not from licensing fees from their platform. You’re right if your strategy is to build a product and your intention is to get acquired as soon as possible. Then building on top of someone else’s ecosystem helps that person acquire you.

It also makes it hard for someone else to acquire you if you’re not in the ecosystem. If you build on Jira, then Salesforce is not going to acquire you, and vice versa. It’s a risky strategy to basically start with only one door and betting everything on one door. 

Sramana Mitra: It may be a dangerous strategy, but it’s also very expensive to build a SaaS company.

David Barrett: It’s not though. Let’s talk about the biggest platform AWS. I think nearly all of your listeners would agree that it is cheaper to use than running your own servers. It’s faster and more efficient. The cheapest you can get a server from AWS, for example, is if you commit to a three-year contract and you prepay for the first year. The cost of that first is just slightly more than the actual cost of buying that actual hardware. Hardware would last for more than three years.

I would say that the absolute cheapest that you can buy hardware is from EC2. If you just go by the math of what it would take to buy the same hardware, it’s roughly five times more expensive and that’s if you prepay for an entire year. 

This segment is part 3 in the series : Thought Leaders in Financial Technology: Expensify CEO David Barrett
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