Most massive software companies structure themselves with an office of the CEO, which allocates capital to different business units. Within each business unit, a general manager operates one or more products.
There are three paths I’ve seen to achieve this scale:
- The dominant path of the last ten years: focus on a single product until the company is roughly at $100m in ARR, then build adjacent products. Snowflake, DataDog, Zendesk, CrowdStrike etc.
- Build a financial holding company acquiring lots of small businesses & use the profits to acquire more businesses. Constellation Software.
- Develop multiple products from Day One. This is called a suite strategy: Zoho published a history of the 2-4 product launches per year, which illustrates the idea.
In a recent podcast, Parker Conrad champions the suite strategy, also called a compound company. Parker founded Rippling, a six-year old company with about 1800 employees.
Rippling sells about 13 products for information technology teams, finance teams, & human resources teams like mobile device management, payroll, & talent management.
A compound company must excel at new product development & launch.
At Rippling, new products must leverage the 4 strengths of a compound company:
- Compound companies develop shared infrastructure across products to move faster & enable integration.
- Superior reporting arises from a shared data model on a vital customer data asset (customers & employee data are two examples). Prospects buy software for a report: the better the insight, the more valuable the software.
- Common design language across products simplifies on-boarding. A customer learns the software once & then can work with new products without much of a learning curve.
- Bundling of software justifies discounting, reducing the blended cost of customer acquisition & improving net-dollar retention which creates very large ACVs in the mid-market, not just the enterprise.
When the office of the CEO approves budget for a new product, the company hires a general manager for the product. The GM hires the first 4-5 people on their own – without Rippling’s talent team. This test reveals the GM’s ability to sell others on the team’s mission & prospects.
Then the team of 10 people or so launches the product into the customer channel, rapidly iterating until the product has achieved its goals.
Why might it be the right time to start a compound company?
In the first two decades of cloud, Parker argues startups built superior point solutions to compete against the distribution might of on-prem incumbents.
Cost-cutting CFOs prefer consolidating spend on suites. Suite strategies trade depth for breadth at least in the short term & require a different mentality for building a company.
Today, new startups have to compete with a cloud-native incumbency. These different competitive dynamics raise the question : is the better approach is point solution or suite?
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- Source: https://www.tomtunguz.com/suite-strategy/