Much has been written over the last week about the recent demise of Lucidera, one of the on-demand BI pioneers. Some writers saw it as a general sign of the current economic times during which venture funding has become harder to raise. Others saw it as a direct consequence of the unsustainability of Software as a Service models. In my opinion, none of these are the reasons for Lucidera’s failure.
Lucidera started as a well-capitalized startup. The company had raiased over $20M in 2 rounds of funding from very well-respected investors with long experience in funding successful IT startups. In addition to its strong founding team it had also attracted top management talent, most recently Rob Reid who last year became the company’s CEO. Lucidera benefited from the strong overall interest (by customers, investors, and executives) in on-demand software and its application to business intelligence. So, what went wrong?
My suspicion is that Lucidera made two wrong choices which led to its predicament. The first wrong choice was around its platform. To expedite its time to market, Lucidera started building its on-demand BI platform by modifying an existing platform that had been developed by Broadbase. While at the time this might have appeared as a brilliant idea, my sense is that the company couldn’t make things work out the way it was expecting. Perhaps the platform was not scaling to the expected levels. Or modifying it to make it into a modern multi-tenant SaaS platform was taking longer and costing more than expected. The wrong choice of platform could also have another financial consequence: operating the platform was more expensive than originally projected. This means that to properly scale and process the data sets the customers wanted to analyze, more hardware than the team had originally planned was necessary, implying that the company was burning through more money than it had anticipated. My suspicion is that Lucidera’s management team may have decided to focus on specific analytic applications in order to finesse some of the platform issues. Unfortunately, the second mistake was due to the applications chosen to be built on top of the platform. While I’m sure these applications were selected in order to address a genuine market need, I wouldn’t be surprised if their selection was also due to the underlying platform’s shortcomings. However, I think that customers were not willing to pay as much for these applications as the company may have expected. If this is true, then it would imply that the company was burning through cash faster than it had anticipated.
Its burn rate caused Lucidera to seek a new round of funding in the fall. It is true that last fall was the absolute worse time for companies to be raising money. However, the timing alone was not the reason Lucidera failed to raise money. While last fall venture investors had turned mostly inward and were scrutinizing potential investment opportunities much more than usual, financings did get done, especially in companies that were performing well. For example, Pivotlink, one of my portfolio companies and a direct competitor to Lucidera, closed its most recent round in January. Good Data, another Lucidera competitor was funded about the same time. I’m sure the investors that were considering Lucidera had difficulty seeing how the company’s business model around the analytic applications it had developed was going to succeed, particularly during these economic times. As a result, investors didn't want to invest additional money since they couldn't see their way to a return.
Some also say that investors may be having second thoughts about funding SaaS companies today because on-demand software models are not capital-efficient. They claim that the reason for this inefficiency is because SaaS vendors must invest upfront for the creation of the infrastructure (including the data center) on top of which the on-demand solution is running. While it is true that SaaS companies require more upfront capital to set up their infrastructures than their on-premise counterparts, more recently, as a result of the lessons that have been learned from the SaaS pioneers, and the use of open source software and commodity hardware, the capital requirements of SaaS companies have decreased significantly making on-demand software companies as capital efficient (if not more) as on-premise ones. Moreover, judging from the financing activity of the last 6 months one can safely conclude that SaaS may be the only software models funded by venture investors.
Will Lucidera’s demise have a long-term impact on on-demand BI? I don’t think so. Lucidera’s customers may spend some time thinking whether to sign up with another SaaS BI vendor, even though both Pivotlink and Good Data have announced programs for taking over Lucidera customers. However, demand for SaaS BI solutions is growing. I can state this not only because of Pivotlink’s and Host Analytics (another of my SaaS BI portfolio companies) success, but also because of discussions with large on-premise BI vendors all of which are readying SaaS offerings. In fact, SAP/Business Objects will introduce a new offering this fall. The demand is growing because corporations of any size and industry are starting to realize the attraction of on-demand BI’s value proposition (time to value, strong and quick ROI, small set of preconditions). You don’t need to: (a) have your data already in the cloud, (b) work with only small data sets, or (c) try to address simple problems before you can effectively utilize on-demand BI, as some people claimed. As with on-premise BI approaches, you need to start with the right vendor that is adequately capitalized, has the right platform and the right business model that allow it to grow profitably and quickly become a self-sustaining company.
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