Crosspoint Invests in Verticals
Choosing an application service provider is a gamble, with uncertain odds on the viability of the business plans not to mention long-term health of some ASPs. Crosspoint Venture Partners, a successful California investment shop, has $350 million on the table that says so-called vertical service providers will end up in the money.
Crosspoint has investments in 14 service providers that focus on narrow industry segments, or verticals. The world may not need another technology acronym, but it does need vertical service providers (VSPs), says Rich Shapero, managing partner at Crosspoint. "Imagining that one size fits all for these verticals is absurd," he says. "Were starting to believe that the real impact of broadband will be the change from horizontal building blocks to vertical service providers."
Managing software for a broad range of businesses is "a shaky business model," Shapero says. "We think those businesses look like a combination of software distribution and consulting, both low-margin businesses." The company has invested in some broader-based ASPs, but only ones that bring substantial intellectual property to the table.
While many horizontal ASPs specialize in particular industries, Crosspoints VSPs tend to bring intellectual property to tightly defined categories and specific needs. "Youve got to be pretty narrow, because the magic of the VSP model is to aggregate similar needs," Shapero says. "Getting into the guts of any shop is the hardest part, and business processes are 90 percent of the problem."
At Dorado, a Crosspoint-backed provider of customer relationship management and other services to the banking industry, Chief Operating Officer Joe Jennings says specialized processes require specialized applications. "People outside the mortgage business dont sell loans to Fanny Mae," he says. Dorado built its browser-accessible applications from scratch, and Jennings says the company is best understood as a software vendor. "The VSP business is a delivery mechanism and pricing model that can reduce total cost of ownership, but we live and die on great applications."
Dorado has more than a dozen customers, including an extensive relationship with Chase Manhattan Mortgage. The company manages its applications at Exodus Communications data centers or on-site at a customers facility, and will license applications for sale with a one-year management agreement. Crosspoint has pumped $29 million into Dorado.
Mike Neal, CEO of VSP DemandTec, which provides pricing and promotional services to retailers, says Crosspoint made its priorities clear before investing. "The fundamental value-add is the big question for those guys," Neal says. "Every business has promotional and pricing needs, but we are a company full of people who have deep knowledge of the consumer products supply chain vertical."
Again the software, not how its delivered, is of primary importance. DemandTec, which received $11.5 million from Crosspoint, runs its apps on a supercomputer, but Neal says larger customers could someday run it themselves.
Another VSP in Crosspoints portfolio, AristaSoft, includes applications from J.D. Edwards & Co. and other horizontal vendors in its suite of services for electronics manufacturers, along with software written in-house. The commercial applications are extensively preconfigured and, more important, integrated into a package tailored to high-tech companies. "Our intellectual property is knowing how to implement for high-tech equipment companies," says AristaSoft CEO Drew Hoffman.
Crosspoint injected $26 million into AristaSoft in early 1999.
Following the model popularized by Cisco Systems and Dell Computer, high-tech manufacturers move more quickly and outsource more operations than others. A former entrepreneur-in-residence at Crosspoint, Hoffman says "deep domain expertise" in his vertical was a requirement for funding. Knowing what companies need at different points in their evolution makes selling to them much easier. "A key element of the vertical provider is being able to get there ahead of customers," he says.
AristaSoft has 23 customers, but Shapero notes that a narrow market doesnt necessarily mean a small one: "They have 3,000 potential customers in their industry," he says. "Its a billion-dollar opportunity."