Why Venture Capitalists Should Care About Integration

Investors often overlook an important part of a software company when they are assessing potential investments or supporting their current portfolio of investments.

While this overlooked aspect is relevant to all investors, it's of particular relevance to venture capitalists who intended to create outsized returns, where the risk is already insanely high.

Investors need a deeper understanding of software integration, how it gets done, and how it impacts the success of a portfolio company.

In this post, we dive into three fundamental ways integration impacts some of the key concerns investors have (again, with bias toward VC). It also suggests some questions venture capitalists can ask of founders.

Integration impacts capital efficiency.

Investors look at "capital efficiency" as a way to assess how well dollars are being deployed to create financial value. (This article is a really nice summary.)

Your integration program can have a massive effect on your business's capital efficiency, especially if your product is B2B. Consider the following truths:

  • Integrations cost money to build and maintain
  • The dollars spent on integrations are not being spent on your core product (or sales & marketing, for that matter)
  • The existence of any given integration opens up some amount of revenue possibility

Best practice governance and technology deployment for integrations results in more integrations that cost less to build. That simultaneously means more unlocked revenue opportunity faster. Finally it means, fewer dollars diverted away from core product or sales and marketing.

Conversely, undisciplined or ineffective governance or technology deployment of your integrations means higher costs, lower value, and as a result, less efficient deployment of capital overall.

Entire teams are built within a company to scientifically assess the dollars in and out of sales and marketing spend. We have ratios like CAC, LTV, and conversion rate to benchmark success. The same rarely exists for integration.

Investing in sales and marketing isn't investing in your product. It's investing in something absolutely critical to ensuring your product generates economic value for customers (and ultimately shareholders).

You can't have a successful product without sales and marketing.

Likewise, investing in integrations isn't investing in your core product. It's investing in something absolutely critical to ensuring your product is viable in the ecosystem--and therefore is able to generate economic value for customers (and shareholders).

You can't have a successful software product without best practice integrations!

What should investors ask?

When talking to portfolio companies or evaluating new investments, investors should as the following questions:

  • How many integrations to other products need to be developed over the next five years? How complex are those integrations?
  • Do you have an intended technology approach for deploying those integrations? What is it?
  • What is the estimated the cost to deploy those integrations? What about the ongoing costs to maintain them?
  • What measures will you take to minimize those costs, given doing so frees up capital for other investments?

Integration impacts product management.

So much about building a successful product is about mastering the discipline of knowing your customer and building product that addresses their needs. If you cannot do this, little else matters.

This is why there are books and blogs and podcasts and every other type of media dedicated to helping founders and product managers master the discipline. You must have a fanatical approach to reflecting customer needs with product, which means you need to maximize the hours, the dollars, and the brain share dedicated to it.

Integration is kind of an ugly stepchild on the product manager's journey to meeting the customer needs. Integration is something that nobody wants, but everybody needs.

Integration complicates the customer-driven product approach in the following ways:

  • Customers don't actually want integration. They don't care. Even if they tell you, "I need an integration X product," they are really saying, "I need this kind of inter-product experience".
  • Customers don't care (or often even know) that accomplishing this is difficult.
  • Customers will not experience the integration positively and negatively. Their inter-product experience will be positive or negative.
  • This means that at all times, what your customer says and does will need to be translated into and out of integration vocabulary and technology.

Sound complex? It is.

This is why there's value in a software team that has the technology, process discipline, and expertise (even if outsourced) to minimize the hours, dollars, and brain share dedicated to this integration conundrum.

This gives the team more to dedicate to building what everyone wants (the core product), because less must be dedicated to the thing that nobody wants, but everybody needs (the integrations).

What should investors ask?

When talking to portfolio companies or evaluating new investments, investors should as the following questions:

  • How do customers want to use their products alongside or embedded within other products that they may use?
  • How much time (and money) do you plan to allocate to integration features versus core product features?
  • What is your process for monitoring and controlling that spend ratio?

Integration impacts market position.

Every software product (yes, every) exists in a larger context called an ecosystem. That ecosystem contains competitors, similar products, complementary products, and products that are indirectly related.

A look at Scott Brinker's marketing technology landscape provides a good look at what an ecosystem can look like. It also demonstrates how large and complex an ecosystem can be.

In any ecosystem, there are hub products and there are point solutions.

Hub products are the few dominant products that have massive amounts of market share. Hub products don't integrate to you. You integrate to hub products. They are the 800 pound gorillas who can be used as a great channel for growth. They can also squash you by releasing your product as a mere feature. Hub products generally seek to solve a large number of the customer's problems in a domain--they'll often claim to solve all of them.

Point solutions, on the inverse, are dedicated to solving one specific problem in a domain. They specialize in that problem and are often better at solving it than a hub products competitive feature is. As they mature, they begin to solve more problems, but generally still around a specific problem set.

This also isn't binary. There is a spectrum between "hub" and "point solution" where most products realistically fall.

But, why is this important?

A product team needs to understand this journey through their ecosystem. They must understand where they are today and where they intend to go. They must understand the reality of how far toward "hub" they can actually get.

Most importantly: they need to understand how their integration strategy evolves along that journey. The things you need to do, the people you need to hire, and the technology you need to deploy is very different if you are a hub technology versus a point solution.

In any ecosystem, there can only be a few 800 pound gorillas. Sometimes there can only be one. This dynamic creates a ceiling on the return of your investment. The closer you can get to "hub", the more valuable you are. But, it's exponentially more difficult to take each step closer to "hub".

One hugely important key to reaching that ceiling is the company's integration strategy.

What should investors ask?

When talking to portfolio companies or evaluating new investments, investors should as the following questions:

  • How do you think about the dynamics of your ecosystem? Who are the players? How is it evolving?
  • What is the maximum position you can achieve in your ecosystem? What will it take to get there? How are you reasoning this?
  • How will integration needs (feature, people, technology) change along that journey?
  • How does that reflect in your capital deployment plan?

Don't overlook integration.

Integration is something that nobody wants and everybody needs. It's also something that nobody wants to talk about but everyone needs to talk about.

This is huge significance for venture investors who put large sums of money into software companies intending to create exponentially larger sums. Investors would be wise to have enough understanding to prod into a portfolio company's (or potential investment's) integration approach.

Don't overlook this.

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