Jay Hallberg along with three other entrepreneurs started Spiceworks. in 2006 to provide network management software that was easy to use and low cost. He talks about how they discovered the idea and created a product and brought it to market.
What is your background? How did you find your way to Austin?
I come from Minnesota and worked at 3M. 3M moved me to Austin in the mid-90s. I went to Harvard Business School in 1998, where I met Mike Maples Jr, one of the founders of Motive when he came to campus. Through that connection I interned at Motive and later went to work there.
How did you come up with the idea for the application?
Good old fashioned market research. Frankly, a lot of startups go past that step. They have a good idea and then they just build the product and 24 months later no one’s willing to pay or there’s no demand. About 2 years ago, Scott Abel, Greg Kattawar, and I, started kicking around some ideas. We knew we wanted to do something but we didn’t know what. We came up with about 20 to 30 ideas a lot of which were in the consumer space. Then the goal was to kill all of them. If you go through the rigor of analyzing each idea you can find reasons why they won’t work.
What are some of the other ideas you came up with?
Interestingly, there were things around Office 2.0 such as storage in the sky, applications in the sky, and people’s connections via email -- kind of like the things people are doing with social networks today. But we thought if everyone is doing consumer stuff, then there’s probably a better opportunity in enterprise because there’s not a lot of people there. Everything in systems management which is our background had been done. How much more arcane stuff does the world need? Then we started looking at the SMB (Small to Medium Business) space. We thought there wouldn't be an opportunity there because Microsoft would own it. So, we just went to about 30 small businesses here in town. We talked to their IT guys.
What did they tell you?
We went in and asked to see their IT guy. They would take us back to their office which was usually a closet filled with computers and servers. We asked, what do you do every day? What tools do you use? Everyone used about ten different tools and there was no overlap from one company to the next. They used little utilities – some free, some low-cost. They were afraid to buy expensive IT management software because they feared their manager would ask for an ROI on it. Then we asked, what software do you hate? And they would go on for 20 minutes. Literally, talking about what they hate. That’s a strong emotion. Then I asked, what software do you love? One guy said “Doom.” In other words, they didn’t like any of the software available to them today.
What about Microsoft’s software for this area?
It turned out Microsoft’s products for managing networks in SMBs aren’t that great. They’re expensive and system administrators didn’t have a love of Microsoft in general. They might go to a 500 employee company, but they can’t get down to the masses at 250 people. Everyone we talked to had 20 to 250 employees.
What convinced you this was a market to pursue?
The emotional reaction was the cue to me that there was an opportunity for us.
From my days of selling enterprise software at Motive, you usually met with the CIO and the words ‘hate’ didn’t come up in those meetings.
Now you have the idea, how did you come up with the product?
The product idea was to come up with the “iTunes for systems management.”
In early 2006 we were looking at what Apple was doing to the music industry. Before the iPod they had iTunes and it was a cool program for managing your music. Anyone could figure out how to use it. We wanted to do that for systems management. Our CEO, Scott Abel, had worked for Steve Jobs when he was at NeXT so he had inherited that “Steve Jobs” focus on product UI which is pretty unique since most CEOs focus on the sales or the finances.
The software we built focused on the key pieces of their job – track things on their network, are they up or down, helpdesk, solve problems, troubleshooting. If we could put all of that in one software package, we could impact 70% of their workday.
Spiceworks gives its network management software away for free. How do you leverage that?
We allow users to provide feedback on the software so at any time we can see the top features that people want. As we crossed 100,000 and then 150,000 users the activity in there means there are a lot of smart people monitoring questions and are responding to each other’s questions. The application now feeds the community. We have a vibrant community.
When there’s no response do you answer the question yourself?
If something has gone unanswered, we jump in and answer it. There’s nothing that goes unanswered for 24 hours.
How do you incentivize people in the community?
We have Spiceworks Product Advisors who get a special stamp on their name. They provide great support.
What is your revenue model?
We make money off advertising. We looked at a subscription model but felt that eventually the price in this market would go to zero, so we decided to jump to that point first. As far as I can tell, everything on the consumer internet is free. You get mail for free. You get search for free. You get news for free. Why wouldn’t that migrate to businesses and network management? I was using Gmail and I was emailing Scott Abel about getting a logo designed. We found a company that wanted to charge us $2000. It didn’t sound that bad. In Gmail over on the right side there were little ads and I found one saying, “get your logo for $69.” So I had to give it a try. It was a cool site and within a day I’m getting my logo done for $69. That's an example of an ad being relevant and useful -- why wouldn't it work in IT?
Are you planning to do subscription?
We have no plans to do so. We’ve looked at that but one of the challenges is where do you draw the line? If the “freemium” model becomes your primary revenue generator then you start worrying about what's in the free version and what features are in the premium version. It draws your focus away from the community. We’ve done 8 product releases since we launched in July 2006, or 18 months ago.
That’s a lot of revisions. How do you upgrade everyone?
Partly, that is driven by the community feedback. Secondly, we architected it so we can update everyone automatically without lengthy installs. We also wrote it in Ruby on Rails so we can crank out the updates pretty fast.
How is the scalability of the software?
We had a smart architecture decision in that most of the application runs on their local network. A pure software as a service would require huge amounts of servers on our side.
How was the fund raising process?
It was pretty straight forward. Scott Abel was a founding member of Motive and already had contacts with Austin Ventures. When we formed a team, AV was pretty excited to work with us. We raised $5M in our Series A in May, 2006. Last July we had a Series B which was led by Shasta Ventures. The concern in fund-raising was could we get to enough to SMBs. In the past year we figured that out. The key is to leverage word of mouth of the users. If the product is easy to use, free, and the supplier will give you support, it will generate positive word of mouth.
What is next for Spiceworks?
There are two sides to our business – users and advertisers. For the user side we’ll expand the community capability with product reviews and much more. To date we have over 2,000 product reviews on our network. We plan to leverage the “wisdom of the IT community” within the application. The other side of our business is advertising. We’ve added email sponsorships and other methods that let the advertiser market, sell, and educate the community.
What do you see coming for the enterprise space?
I think we’re at the beginning of a new generation for enterprise software. It could be Enterprise 2.0. If we were slugging this out with the traditional direct sales model, we wouldn’t have a chance. A mix of new revenue models and new distribution models will make things really interesting especially in the SMB markets... which accounts for 1/2 of all IT spend.