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Microsoft or Slack: A turning point for enterprise software

Enterprise software startups have enjoyed a decade of success overturning the old order. The disrupted have seen enough.

The Slack logo at the New York Stock Exchange

Slack went public last year, but its stock has languished as Microsoft has aggressively pushed its competing Teams service.

Photo: AFP via Getty Images

Over the last few years, the most promising way to build a startup in Silicon Valley was to focus on enterprise software. The days of easy money might be over.

One place to see this potential change is the competition between Slack and Microsoft to provide the workplace collaboration tool for the moment. Slack's rise as a Valley startup darling translated into a 2019 IPO on the back of strong growth inside techie circles, but its stock has languished over the last eight months as Microsoft has aggressively pushed Teams, part of its powerhouse Office 365 productivity suite.

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Slack's rise came during a renaissance in enterprise software product development, driven mostly by the ease of buying and selling the software needed to run a modern business over the internet. The cloud also had a second-order effect: "The thing that catalyzed all this was the consumerization-of-IT movement," said Tomasz Tunguz, a partner at Redpoint Ventures focused on enterprise software.

That movement introduced a shift in power from centralized IT departments that made purchasing decisions for entire companies to smaller teams or departments, who are generally in the best position to determine the best tools for their jobs. And these trends favored the startup community — unencumbered by existing revenue-generating business lines they were afraid to disrupt — allowing them to identify underserved markets and build a growing business around a promising tool.

But another shift might be around the corner.

Microsoft Teams ended 2019 with over 20 million daily active users, far ahead of Slack and a sign that "good-enough" workplace tools sold by one vendor might be back in style after several years of so-called "best of breed" tools winning the day. As companies start to accumulate a ton of valuable data on a cloud platform, the incentive to use tools with deep integration into that data only grows: It's much easier to share data between products sold by a single vendor.

A handful of cloud platform companies and large enterprise software vendors can't make all the software needed to run a modern business, and whenever big established companies gain more control over IT spending budgets, they tend to grow complacent, which tips the cycle back in the other direction. But tech has always swung between periods of walled gardens and periods of free-for-all innovation, and right now, enterprise software buyers and sellers might be thinking about going back to the garden.

Bundle up

Microsoft Teams is growing because Microsoft is dangling lots of incentives in front of its internal sales force and partner network to sell Teams. Around 95% of Microsoft's "commercial cloud" revenue — a bucket that included commercial Office 365, Azure, Microsoft Dynamics 365 and a few other products — comes through partners, and last year the company introduced new incentives for partners that will pay 1.5x the normal rate they earn when selling one of Microsoft's cloud services.

Teams was already surging even before those incentives were introduced in October: The 20 million users Microsoft announced in November was a 54% surge. That's far ahead of Slack's 12 million daily active users, which grew 37% over the last year. (In a statement, Microsoft told Protocol that "[o]ur customers tell us that their people love Teams because it simply does more in one app." Slack would not comment on the record.)

As a result, Slack's stock fell 15% over the course of 2019, although it has rebounded in 2020 thanks to new deals with IBM and Uber.

But it's not just Microsoft that is starting to fight back against a wave of scrappy startups and young public companies.

Google is reportedly working on its own chat and collaboration tool that would rival Slack and Teams inside G Suite, the leading online office productivity package, according to Statista. Earlier this month, the third-place cloud platform company completed its $2.6 billion acquisition of business intelligence software provider Looker.

Last year Salesforce acquired Tableau, a popular business-intelligence visualization company, for a whopping $15.7 billion to give customers of its other sales and marketing tools a fresh option for making sense of their data. On Tuesday, it purchased Vlocity for $1.33 billion to add marketing-oriented no-code tools to its arsenal.

Workday, which rose to prominence on the back of these trends and is now worth $43 billion, acquired procurement software startup Scout for $540 million to bulk up its product lineup. And last year VMware bought Carbon Black for $2.1 billion to add security services to its growing portfolio of cloud assets.

This could be the start of a new wave of consolidation in this space, as several assumptions that drove this decentralization boom start to shift once again.

Three years ago, Microsoft Chief Information Security Officer Bret Arsenault, fed up with the sprawl of security tools used by the company, asked his team to reduce the number of software vendors. They wound up reducing it by 48%.

"When you start to commoditize features, best-of-integration will outdo best-of-breed," Arsenault said during a recent conversation with the media at Microsoft's headquarters.

Startups at the gates

Still, cloud computing brought an unprecedented amount of choice to enterprise tech buyers. While those buyers might not need dozens of choices for a given piece of enterprise software over the next few years, they're going to want more options than were available before the cloud.

A new generation of office workers now expects the freedom to choose the best tools for their jobs, from chat and collaboration software to data visualization tools to monitoring dashboards. While the suits might value consolidation and integration, rank-and-file workers are going to grumble about tools selected by people who don't always fully understand what their jobs entail.

"Marketing teams aren't going to want the same thing as engineering teams," Tunguz said.

There are several examples, however, that indicate enterprise software startups are thinking about bringing a more complete package of tools across several disciplines to their customers. The first wave of enterprise software upstarts like Salesforce, Dropbox or New Relic rose to prominence on the back of a single product that stodgy competitors couldn't match, and added new business lines later through the above-mentioned flurry of acquisitions.

Newer entrants to cloud services, such as Cloudflare and HashiCorp, focus on building a more complete suite of products early in their life cycle. That means they can come to customers with several options to run alongside the product that initially caught their eye, which also makes it easier to sync data between those various products.

Do you even code

There's also a third option that's starting to emerge: the rise of low-code or no-code application development.

Such tools allow business professionals without proper coding experience to create simple-but-effective apps that can automate some of the more annoying parts of their jobs without tying up the real software developers. As these tools evolve, enterprise software buyers might find it easier to empower their teams to build the tools they really need themselves, said Jason Wong, an analyst with Gartner.

Companies looking for tech tools have always faced a simple question: Do I build it, or do I buy it? The expertise required to build all complex internal tools needed to run a business on the internet in the 21st century is beyond the reach of almost everyone but the largest tech giants, which has created a thriving market for enterprise software over the last decade.

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Still, as 2020 rolls on, it's clear most of the old guard enterprise software companies have absorbed the lessons of the upstarts. Yet it's also unlikely that the market will ever tolerate a handful of enterprise software suites, paving the way for a complex future inside the modern enterprise.

Same as it ever was. "There are no beautiful architectures in massive enterprises," Tunguz said.

 Tom Krazit

Tom Krazit ( @tomkrazit) is Protocol's enterprise editor, covering cloud computing and enterprise technology out of the Pacific Northwest. He has written and edited stories about the technology industry for almost two decades for publications such as IDG, CNET, paidContent, and GeekWire, and served as executive editor of Gigaom and Structure.

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Protocol | China

Everything you need to know about the Yuanxin Technology IPO

Image: Yuanxin

Yuanxin Technology doesn't hide its ambition. In the first line of its prospectus, the company says its mission is to be the "first choice for patients' healthcare and medication needs in China." But the road to winning the crowded China health tech race is a long one for this Tencent- and Sequoia-backed startup, even with a recent valuation of $4 billion, according to Chinese publication Lieyunwang. Here's everything you need to know about Yuanxin Technology's forthcoming IPO on the Hong Kong Stock Exchange.

What does Yuanxin do?

There are many ways startups can crack open the health care market in China, and Yuanxin has focused on one: prescription drugs. According to its prospectus, sales of prescription drugs outside hospitals account for only 23% of the total healthcare market in China, whereas that number is 70.2% in the United States.

Yuanxin started with physical stores. Since 2015, it has opened 217 pharmacies immediately outside Chinese hospitals. "A pharmacy has to be on the main road where a patient exits the hospital. It needs to be highly accessible," Yuanxin founder He Tao told Chinese media in August. Then, patients are encouraged to refill their prescriptions on Yuanxin's online platforms and to follow up with telehealth services instead of returning to a hospital.

From there, Yuanxin has built a large product portfolio that offers online doctor visits, pharmacies and private insurance plans. It also works with enterprise clients, designing office automation and prescription management systems for hospitals and selling digital ads for big pharma.

Yuanxin's Financials

Yuanxin's annual revenues have been steadily growing from $127 million in 2018 to $365 million in 2019 and $561 million in 2020. In each of those three years, over 97% of revenue came from "out-of-hospital comprehensive patient services," which include the company's physical pharmacies and telehealth services. More specifically, approximately 83% of its retail sales derived from prescription drugs.

But the company hasn't made a profit. Yuanxin's annual losses grew from $17 million in 2018 to $26 million in 2019 and $48 million in 2020. The losses are moderate considering the ever-growing revenues, but cast doubt on whether the company can become profitable any time soon. Apart from the cost of drug supplies, the biggest spend is marketing and sales.

What's next for Yuanxin

There are still abundant opportunities in the prescription drug market. In 2020, China's National Medical Products Administration started to explore lifting the ban on selling prescription drugs online. Although it's unclear when the change will take place, it looks like more purely-online platforms will be able to write prescriptions in the future. With its established market presence, Yuanxin is likely one of the players that can benefit greatly from such a policy change.

The enterprise and health insurance businesses of Yuanxin are still fairly small (accounting for less than 3% of annual revenue), but this is where the company sees an opportunity for future growth. Yuanxin is particularly hoping to power its growth with data and artificial intelligence. It boasts a database of 14 million prescriptions accumulated over years, and the company says the data can be used in many ways: designing private insurance plans, training doctors and offering chronic disease management services. The company says it currently employs 509 people on its R&D team, including 437 software engineers and 22 data engineers and scientists.

What Could Go Wrong?

The COVID-19 pandemic has helped sell the story of digital health care, but Yuanxin isn't the only company benefiting from this opportunity. 2020 has seen a slew of Chinese health tech companies rise. They either completed their IPO process before Yuanxin (like JD, Alibaba and Ping An's healthcare subsidiaries) or are close to it (WeDoctor and DXY). In this crowded sector, Yuanxin faces competition from both companies with Big Tech parent companies behind them and startups that have their own specialized advantages.

Like each of its competitors, Yuanxin needs to be careful with how it processes patient data — some of the most sensitive personal data online. Recent Chinese legislation around personal data has made it clear that it will be increasingly difficult to monetize user data. In the prospectus, Yuanxin elaborately explained how it anonymizes data and prevents data from being leaked or hacked, but it also admitted that it cannot foresee what future policies will be introduced.

Who Gets Rich

  • Yuanxin's founder and CEO He Tao and SVP He Weizhuang own 29.82% of the company's shares through a jointly controlled company. (It's unclear whether He Tao and He Weizhuang are related.)
  • Tencent owns 19.55% of the shares.
  • Sequoia owns 16.21% of the shares.
  • Other major investors include Qiming, Starquest Capital and Kunling, which respectively own 7.12%, 6.51% and 5.32% of the shares.

What People Are Saying

  • "The demands of patients, hospitals, insurance companies, pharmacies and pharmaceutical companies are all different. How to meet each individual demand and find a core profit model is the key to Yuanxin Technology's future growth." — Xu Yuchen, insurance industry analyst and member of China Association of Actuaries, in Chinese publication Lanjinger.
  • "The window of opportunity caused by the pandemic, as well as the high valuations of those companies that have gone public, brings hope to other medical services companies…[But] the window of opportunity is closing and the potential of Internet healthcare is yet to be explored with new ideas. Therefore, traditional, asset-heavy healthcare companies need to take this opportunity and go public as soon as possible." —Wang Hang, founder and CEO of online healthcare platform Haodf, in state media China.com.

Zeyi Yang
Zeyi Yang is a reporter with Protocol | China. Previously, he worked as a reporting fellow for the digital magazine Rest of World, covering the intersection of technology and culture in China and neighboring countries. He has also contributed to the South China Morning Post, Nikkei Asia, Columbia Journalism Review, among other publications. In his spare time, Zeyi co-founded a Mandarin podcast that tells LGBTQ stories in China. He has been playing Pokemon for 14 years and has a weird favorite pick.
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