Jun 12, 2022 9 min read SaaS Weekly

☁️ Parker Conrad is Back

[Week 23, 2022] 📉 Cloud stocks plummet 7.5%, 🔥 Inflation sucks, and 🚀 Rippling is the CRM of HR data.

Cloud stocks plummeted 7.5% for the week ending June 10, 2022 on higher than expected inflation.

😬 Inflation. Inflation. Inflation. Selling pressure began to accelerate late Thursday as European inflation came in at 8.1% for May and JPM predicted Friday's CPI would come in above expectations. They were right 🙄. CPI increased the most since 1981 (8.6%) suggesting the Fed will contiue to aggressively raise rates.
🛢 Gasoline tops $5 nationally. “By my calculations, the typical household is spending about $160 more on gas a month than a year ago,” said Mark Zandi, chief economist at Moody’s Analytics. “That’s a big bite.” - CNBC

The Return of Parker Conrad, CEO of Zenefits Rippling

In ☁️ Software is Eating Your 401k we wrote about Parker Conrad's new start-up, Rippling. Since that time I've dug into a few podcasts and long-form interviews to learn more.

Rippling's most-recent $11bn fundraising round in May comes just 7 months after the company fetched a $6.5 billion valuation in October. Obviously even more impressive in the current funding environment.

Parker has an openly ambitious vision fueled by the automation complexities Zenefits faced scaling when he was CEO. Rippling is side stepping these pitfalls by having a heavy focus on PLG, with 50% of revenue spent on R&D and a strict "no outsourced admin work for customers" policy.

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Building a compound start-up

Building a best-of-breed SaaS has been modus operandi for SaaS companies and VCs for the past 10+ years. The playbook follows finding a single vertical niche to solve, allowing a company to focus VC capital on building one great product that solves a narrow issue better than any other competitor. 10 years ago, this worked great. Find a single use case and there's a good chance you could grow into a large enterprise. Now? All the obvious, low-hanging fruit is picked over.

Single-point solutions are great, but...

The problem is all these best-in-class start-ups can't work well together. Companies are left trying to hire consultants to make custom solutions or cobbling together providers via APIs which sometimes work... but barely.

The solution? A "compound start-up"

Rippling works on multiple products at once which share a common middleware layer, called Unity, allowing the company to innovate and engineer new products quickly and most importantly integrate and allow better collaboration across the product portfolio.

Rippling is also able to provide better analytics and a consistent UI which point solutions can not match.

From unbundling and back

For the last 15 years, there has been a trend of unbundling large, legacy software providers (Oracle, SAP, etc.). This trend persisted for so long because the legacies were generally not known for having great products and were late moving to the cloud. With the vacuum now filled with so many SaaS solutions, Parker is expecting a great re-bundling and all-in-one packages to dominate moving forward.

Salesforce is a great example

Companies need a source of truth for all customer interactions. While the company started with a CRM product, the flagship product is a shrinking percentage of its overall business and is now focused on a broader goal of owning the entire ecosystem around customers.

Centering on employee data

Parker is quick to note: Yes, Rippling focuses on employees, but it is not simply a payroll provider (and it is definitely not another benefits provider like Zenefits).

So what does Rippling do?

Rippling is the first way for businesses to manage all of their HR & IT — payroll, benefits, computers, apps, and more — in one unified workforce platform. By connecting every workforce system to a single source of truth for employee data, businesses can automate all of the manual work they normally need to do to make employee changes. - LinkedIn

Ok... so what does Rippling actually do?

Let's take an example: Employee onboarding.

Think of all the processes connected to this singular event. They must be connected to payroll, signed up for health insurance, sent a laptop (loaded with the correct software), and given access to a variety of third-party apps (Slack, Zoom, Office 365, etc.).

Now, what if something changes?

You go back to the payroll provider and make sure all the personal information is updated (from location to employee type). You go back to the 401k provider and make sure their address is updated. You go back to benefits and make sure they're still eligible for insurance in their new home state.

Because of the sheer breadth of data that must be kept in constant sync across so many disparate systems, companies are typically left reducing the amount of identifying information provided to different systems even if that limits performance and outcomes.

A source of truth

Rippling aims to solve this problem by being a single source of truth of all employee information. Update Rippling and it automatically pushes all the relevant data to each third-party system without an expensive IT budget and hours of manual labor.

And as we discussed, Rippling is also kind enough to build many of the products you'd normally have to buy from multiple providers making integration and employee ramp time seamless and painless.

The New Identity Ecosystem

Ben Thompson did a great interview with Parker Conrad on his vision of employee graphs vs. a simple directory, comparisons to Okta, and how Rippling may be best positioned to be the center of a large identity ecosystem. As a side note, I signed up for Stratechery just for this interview and it was well worth the subscription.

Most identity product offerings are just authentication with usernames and passwords

But what is the underlying intent of identity?

It's having a true understanding of how an employee relates and interacts to and with the rest of the organization. Parker notes the Rippling offering is closer to a "graph" instead of a simple directory.

The other big difference is that in practice, Active Directory and a lot of these identity systems more broadly tend to be actually — they call themselves identity, but what they actually are is authentication, it’s for the most part usernames and passwords. But if you went to the original meaning of that word identity, what is an employee’s identity? What you would think of are the HR attributes, the role attributes. What is this person’s job and role and function? What’s their employment type? Who’s their manager? What’s their work location? What country are they in? Those are the things that actually drive when you federate these other business systems back to Active Directory. Those are the attributes that actually really matter for all of this downstream functionality in these different systems. Not just systems access, but also policies and permissions and configuration within those systems. It matters for, like we were discussing workflow and approvals and alerts within those systems, for reporting and analytics for the data within those systems. - Stratechery

And Okta is great... if you have an in-house IT team

But in reality, most companies don't invest in that capability until they're at 200-300 people. Parker notes "If you can install Candy Crush on your phone, you can set up federated identity across all of your different business applications in Rippling."

And once companies choose Rippling, there's little benefit (nor need) in actually switching once they get bigger.

Rippling's insight is that historically multi-system solutions should simply be one offering that's based on the employee data source of truth.

This singular system also has the potential to grow into a significant ecosystem where everyone plugs in and interacts with Rippling's core data graph.

One way of thinking about it is like, okay, where would you go if you needed to sign up for a new 401(k)? Where would you go to get a list of who all the employees are that need to be set up there? And the answer is you’d go to your payroll and HR system, and that’s where you’d get that report. If you needed the information to really be right for some important thing where you’re trying to understand — maybe you don’t need contractors, you want W2 employees. Maybe you need to make sure that you’re just getting people in California or just people in this department or on this team. That type of information is always in these payroll and HR systems. It’s just, I think, a weird anachronism that the identity system that was used by the IT department has always been this completely separate thing that’s not part of this HR system, that’s the core system for employee data. I think the different thing about Rippling is this belief that those are really the same thing and that if you put them together, there’s a lot that you can do that’s much more powerful both sides and across the entire organization. - Stratechery

The Return of Ambition

John Luttig, principal at Founders Fund (an investor in Rippling), wrote a great piece on Parker's vision for Rippling representing a return of ambition for software companies vs. a long period of incrementalism.

SaaS apps are exploding. And wrecking productivity.

In the age of SaaS incrementalism, companies have succeeded (and investors rewarded) by simply choosing a niche and following the playbook that has worked 100s of times before.

Where does that leave us?

The average organization has 100+ SaaS point solutions.

Companies spend more time managing software and wasting time onboarding than building products and solving real business problems.

For fast-growing startups, this overhead requires sacrificing precious time and elevating burn rates. For non-tech companies, maintaining a web of HR, IT, and compliance obligations is a constant burden, prohibiting them from investing in growth, building a strong culture, and solving big problems. - John Luttig

A common infrastructure

Looking at a typical software roadmap, there are a few common pieces of middleware: permissioning, reporting, approvals, and compliance.

When you're building a point solution, a company has to rebuild these by scratch. At Rippling, they just reuse the core pieces over and over.

Not only does this allow the company to amortize R&D costs across more products, but it speeds new product go-to-market and unlocks workflows that are nearly impossible using separate point solutions.

So how does a founder manage this ambition? More founders.

While the R&D can be spread across multiple products, the pure scope of each product leads to significant organization and resource allocation complexity.

To deal with this complexity, many of the products are actually managed by former founders (Rippling has over 50 within the company) which are relatively autonomous. In essence, each product line can be thought of more as a micro-startup within a start up.

A framework for future SaaS CEOs

Will Rippling succeed in its grand vision? While it's early to tell for sure, the company is growing rapidly and customers are clearly responding to its product roadmap.

More than anything, the company is laying out a new framework for how entrepreneurs and founders can build successful software companies moving forward.

1️⃣ With a heavy focus on PLG and R&D, the company is aiming to reduce its dependence on services and customer support.

2️⃣ Rippling is expanding the vision of vertical software building a middleware layer which can be reused across the organization.

3️⃣ Parker is hiring an army of former founders to run its divisions and giving them the capital, resources, and broad execution discretion to make them successful (Constellation Software anyone?)

This will be a fun one to watch over the next few years.