The traditional startup playbook tells founders to focus on one thing and do it extremely well. However, this approach may be fundamentally flawed for modern enterprise software companies. Through my analysis of Parker Conrad’s journey from Zenefits to Rippling, a compelling case emerges for what he calls “compound software businesses” – comprehensive platforms that integrate multiple applications to solve deeper organizational challenges. I took a look at Y-Combinators sit down interview with Parker Conrad to see his perspective on the future. Here are some of my takeaways.
The concept is almost heretical in today’s startup landscape, where point solutions dominate. Yet, this model resembles how legendary companies like Microsoft, Oracle and SAP were built. They didn’t just do one narrow thing – they created interconnected software suites that transformed how businesses operate.
The Problem with Point Solutions
The rise of cloud computing created an opportunity for narrowly-focused SaaS companies to thrive. Each could carve out a niche and potentially build a billion-dollar business. But this model has clear limitations:
- Point solutions can only solve surface-level problems, not deeper organizational challenges
- They lack resources for substantial R&D investments across multiple domains
- Sales and marketing costs have skyrocketed while efficiency has declined
- Markets have become oversaturated with similar offerings
The data tells a concerning story – public SaaS companies are spending 50% more on sales and marketing but generating 10% less new ARR compared to five years ago. This suggests the current business model for many software companies is becoming unsustainable.
The Compound Software Advantage
Compound software businesses take a fundamentally different approach by building multiple integrated applications that work seamlessly together. This creates several powerful advantages:
- Ability to solve complex business process and coordination challenges
- Deeper R&D investments in cross-cutting capabilities like analytics and automation
- Higher revenue per customer through expanded product offerings
- Stronger competitive moats once established
While this approach requires more upfront investment and patience, it can create significantly more value in the long run. Rippling demonstrates this by offering everything from payroll to IT management in an integrated suite, capturing hundreds of dollars in revenue per user versus just $10-15 for point solutions.
The AI Opportunity
Artificial intelligence is poised to accelerate this trend toward compound software. The real power of AI in enterprise software isn’t in generating content – it’s in the ability to process and analyze vast amounts of company data across different systems.
This capability allows AI to help larger companies operate more efficiently, similar to smaller organizations. A 2,000-person company can now be run more like a 200-person company because AI can provide executives with deeper visibility and insights across the organization.
AI enables software to be more precisely tailored to specific industries and use cases while maintaining the benefits of a unified platform. This combination of customization and integration was previously very difficult to achieve.
The Future Landscape
While compound software businesses may represent the future, this isn’t necessarily good news for the broader software industry. The market may only support a handful of these comprehensive platforms, leading to consolidation rather than proliferation.
This shift also demands a different approach to company building. Rather than rushing to market with a minimum viable product, successful compound software businesses may need to invest significant time in building their foundational platform before going to market.
The success of this model isn’t guaranteed – most software companies are still taking the point solution approach. However, the mounting evidence suggests that compound software businesses may be better positioned to create lasting value in enterprise software.
Frequently Asked Questions
Q: What defines a compound software business?
A compound software business builds multiple integrated applications that work together seamlessly, sharing common infrastructure and data. Unlike point solutions, these platforms solve broader organizational challenges through comprehensive, interconnected solutions.
Q: Why aren’t more companies building compound software?
Building compound software requires significant upfront investment, longer development cycles, and more patience before going to market. Many startups opt for quicker-to-market point solutions due to pressure from investors and limited resources.
Q: How does AI fit into the compound software model?
AI enhances compound software by analyzing data across different systems, providing deeper insights, and enabling more precise customization for specific industries. Its value lies more in processing and understanding company data than in generating content.
Q: What are the key advantages of compound software over point solutions?
Compound software offers deeper problem-solving capabilities, enables substantial R&D investments, captures more revenue per customer, and creates stronger competitive advantages once established in the market.
Q: Will compound software replace all point solutions?
While compound software may dominate certain markets, there will likely still be room for specialized point solutions in specific niches. However, the market may only support a small number of major compound software platforms.
