How AI Is changing SaaS and search: Insights from Mike Walrath (Yext)

0:02You know, if I have to predict the future, I think what we're going to see is more bundling. I think we're going to see that the half a trillion dollar SaaS industry is going to get a lot harder to differentiate from the call it$1.6 trillion IT services, you know, annual spend. And that's both, you know, I think scary and exciting depending on your lens. Welcome to the SaaS Revolution Show, a podcast by SaaS. stop. Here we interview SaaS founders from around the world who've been there and done that, as they share the ins and outs of how they built their businesses, their operations, their path for securing investment, and more.

0:40Our mission with the podcast is to help you, the founder, learn how to scale your SaaS, maintain your wellbeing, and navigate the complexities of this ever-changing industry. I'm your host, Alex Deema, and together we'll explore the good, the bad, and the ugly in the journey to SaaS success. Welcome back to the SaaS Revolution Show. I am your host, Alex Thuma, CEO, founder of SaaS, also general partner of BackFuture Ventures. Delighted to be joined today by Mike Walrath, who's the chairman and CEO of Yext and was also the founder of Right Media. Mike, how are you doing? Alex, thanks for having me.

1:16Great to see you. Good to have you on the podcast. I see a big fish behind you. Does this give any indication that you might be by the coast? I do happen to be by the coast. That is a very big rendering of what is typically a pretty small fish. That's a black sea bass, which is local to our waters here in Montauk. And a really big one is maybe three or four pounds. So it looks a lot bigger there. I mean, edible, no, the fish. Oh, yeah, delicious. Yeah. Yeah. Very good. So you're getting the appetite for me to have fish for dinner tonight, Mike, but also the appetite to jump into the podcast to learn more about you, talk about some very topical AI-related content as well.

2:03Mike, we always start getting to know the guest a little bit more. So many of the audience here perhaps coming across you for the first time. So I would love to know who is Mike Walrath. That is a small one to start with. So I've been around the software industry, Since 2003, it was not necessarily the plan. I went to the University of Richmond. I got a bachelor's in English mainly because I could go to classes where I didn't have to do any math or take any tests and could fill pages with words. And that was sort of the best way for me to get through the college experience. Left there, got into sales, and wound up, found myself in the late 90s working for DoubleClick selling advertising.

2:51And that kind of launched a journey that everyone, including myself, was pretty unexpected and started. Right Media in 2003, which I'm not sure we even knew to call it SaaS at that point. We're building a digital exchange platform that buyers and sellers have advertising licensed from us and used to trade media. And it just kind of, you know, right time, right place, took off, sold that company to Yahoo in 2007, ran the global search business there, the global advertising marketplaces business that included the search marketplace there, and left there in 2009, helped start Yext or helped, you know, really pivot Yext into what it is today.

3:32Invested in a lot of business, did some crazy, you know, completely outside of the software industry things. And then again, you know, pretty unexpectedly found myself back in the CEO seat at Yext about three, just over three years ago. How comes that came about, as you said, unexpectedly, given that point in life? Why take on this opportunity? Yeah, it was, I mean, Yext has been a really interesting journey. So Howard Lerman, Brian Distelberger really founded the business along with the third founder who wound up leaving the business pretty early. So they started the business in 2006. By 2008, it was clear that the original business that they had started was, it was a good business, but it wasn't going to scale and it wasn't a software business.

4:25It was a marketing business, marketing services business. So I invested in the company in 2008. In 2009, we did sort of a hard pivot to software around listings management, which is really being driven by the fragmentation of the digital experience based on the mobile smartphone, which I guess is a redundancy. It's just a smartphone. Anyway, so we launched this business then. I became the chairman of the company. We had a huge growth curve from 2010 until the IPO in 2017. And then it got really, really interesting. So the business was geared around helping local marketers be discoverable. And a couple of things happened there as we got into sort of the 2020 timeframe that you had, you had sort of the perfect storm of three different things going on.

5:20The first was Google was just consuming all of the market. And so it candidly just got easier to manage, at least seemed easier to manage your digital presence and your digital visibility. So that made our product a little harder to sell. Then we had COVID, which when you're selling a product that's really geared towards local marketers who are trying to drive feed into doors, that caused sort of another hurdle for us. And then the third thing that happened was the Zerp environment. And we had a lot of small upstart competitors with a lot of funding. And so we kind of went through, I'd say from 2019 to late 2019 until very recently, kind of went through this very difficult period where the growth got really hard to come by.

6:07We were being beset by these kind of commoditizing competitors on all sides who had a lot of money to spend. And so it all kind of, at the end of 21, as the market started to get soft, that sort of all came to a head. I think it became clear that the business needed a pretty hard reset. Howard was ready to go back into his sort of entrepreneuring zero to one phase, which he's done brilliantly and has a startup that is doing really well called Rome. And so, you know, we sort of looked at each other and it was clear that someone had to kind of steer the ship for a while and that, you know, There weren't too many other people to look at.

6:46And so I sort of somewhat reluctantly took that job and took that on in March of 2022 officially. And I have to say it was far harder than I thought it was going to be. Being a low growth, declining growth SaaS business in 22 and 23 in the public markets is just, you know, it's been a very humbling experience. And there were many times where we wondered why we didn't take the company private and sort of get behind a black screen and do this. I think in the last 12 months, what we've seen is that the hard work that we've done over the last few years is starting to pay off. And we've got a lot of runway ahead of us with the kind of what I would call the refragmentation of the brand visibility environment.

7:32With that, I mean, just kind of rewinding to sort of right media and I guess the significant exit there and you sort of down the path of like making a number of investments, like starting businesses and so on. and then this opportunity uh coming up i i guess you for you for like the personal decision you know that point in your life um in terms of not needing to do it but like the perhaps the challenge and the opportunity just kind of like want to get some insights as to like the mindset of i don't really need to do this but why why would somebody uh do this you know at this point in time Yeah, I think a lot of things we do in hindsight, you know, if you knew everything you knew, like, you know, starting a, I mean, the right media story was, was from the outside looked, you know, like a sort of rocket ship and, you know, exactly what you would expect to be really fun.

8:32and it was really fun in a lot of ways. But when you look at sort of what, if you knew what, what, how hard it was going to be, even with something that was kind of wildly successful like that, going into it, if, if, you know, if someone sat you down and basically allowed you to, you know, this condensed experience and, and, and, you know, in a few hours of what it was going to feel like the rollercoaster ride of that, I don't know that I would have done it. And I think that's true with a lot of founders is like you have to have this ability to suspend this, you know, sort of suspend disbelief that it's not going to be that hard.

9:07And, you know, that's what that, you know, that decision in 2022, late 2021 to kind of go back into the arena. And, you know, like it was really based on a number of underestimations of how hard it was going to be. You know, it was also March of March 9th of 22, which is my first official day on the job as the CEO is, I think, like just like three or four days before the first interest rate hike. And so we were kind of sitting there in March thinking like, OK, there are all these things that we believe can be true. The first is that the default multiple revenue multiple for SaaS is like 10x. And so if we're sitting here at, you know, one and a half X, then like it's going to be easy to get back to, you know, where we were.

9:51the interest rate environment, the recessionary environment, like that all changed. And those assumptions, you know, have proven to be totally, you know, sort of not very good assumptions. But again, I like I go back to, you know, most things in life that we do that are hard. The blessing is that we don't know how hard they're going to be when we start them, and then we're stubborn. And so we we attack them, you know, we work through the pain. yeah i mean a lot of things there and uh i mean obviously probably since 2020 the the world the macroeconomic state is just it's throwing up you know one thing after the other at us and so very difficult to predict the future and when you start to think that you know there are signs that this year you know like things are coming back and it's getting better uh lots of things kind of like kick off, right?

10:46And, you know, threats of World War III, you know, etc, etc. So definitely, you know, well, running a business, you know, over the last four or five years has certainly been very challenging to navigate that. You know, we certainly feel that ourselves. Part of the problem in SaaS in particular is like we went from, you know, sort of not even really existing as an industry to one of the great all-time 15-year bull runs. There weren't a lot of hard times during those first 15 years. Growth was easy to come by. The digital transformation was driving everything. And we just got really, I think, used to an environment where if you weren't growing 30%, 40%, you were just failing.

11:38Now, if you look at the public market, there's maybe one company who's growing over 30%. You know, three years ago, four years ago, it was every company was growing over 30%. And so, you know, we weren't trained, you know, in a lot of ways, I was lucky, because I came up in the early 2000s during the, you know, sort of the internet, you know, bubble recession. And so I had this pattern recognition around like, these things last longer than we think. And the corrections are harder than we think. And so I think in a lot of ways, that was an advantage for getting through the last few years. to know that even though we really want it to get better in the selling environment for software, that it doesn't get better as fast as we think.

12:18It doesn't really get better until there's a big impetus for corporate America, big, small, from the S &B up to the largest enterprise, to deploy lots of capital into software-like solutions. And look, I'm optimistic that we're starting to see that unlock. but you know we were optimistic a year ago and two years ago also we tend to get optimistic as we go into the second half of the year because because we've had 15 years of pattern recognition around this is when the big buying happens so we'll see how it plays out yeah i mean probably just a good segue then from that like uh maybe a two-part question here just like touching on the state of SaaS now and maybe some of the disruption or evolution impact of AI into that.

13:08And then perhaps the second part to that is like maybe with Yext as, let's say, a software SaaS native company and how it's thinking about AI, what you're doing around that would be good to understand. Yeah, I'm happy to talk about that a bit. I think it's really something that the market and, you know, management teams are trying to figure out. So it's been an interesting, Yext was very early to AI. We were talking about, you know, AI around our search solutions as early as 2019, 2020. I think we're way too early in a lot of those conversations with customers, you know, and at the expense of, you know, our core business, which I've already covered.

13:53I think we've seen this sort of initially, we saw this big bump in 2023 when, you know, language models were taking off and we're starting to, you know, see some benefit. And the first thing we saw was we saw lots of SaaS companies rebounding, you know, in the middle of 23 because it was, okay, AI is going to drive huge productivity and huge uptake in these products. And then, you know, the bookings didn't follow, right? Right. And then the narrative became, well, AI is going to kill SaaS. Right. We're going to be vibe coding CRMs and you're not going to need Salesforce anymore. Right. And there was a whole new cycle around that that really, I think, took a lot of the sort of market.

14:33Again, I tend to use the public markets as a comp just for like how the market's thinking about SaaS. So what we've seen is this really significant multiple compression around SaaS over the last, call it six quarters or so. And I'm not sure either one of those. I mean, I think it's quite clear that the first narrative didn't take place. I think this notion that AI is going to kill SaaS is a bad take. But I think it's going to fundamentally change it. And I think it's going to cause us to really examine some of the things that we believe to be true about the way that we do business. So, you know, some examples of that.

15:09The first one that I think we really are going to wind up thinking about as an industry is historically, and we've had this kind of 15, 20 years of history where the market has told us that the more pure SaaS you are, the more valuable you are. Right. And so we, you know, as SaaS companies have run away from this notion of there should be a services economy around our business. we love the idea of a services economy around our business, but we want it to be outside of our business. So, so if you know, when you read the SAS playbook, if you will, over the last 15 years, you hope that you can catch this magic where services company, IT services companies build a practice around selling and deploying your software.

15:51Right. And that's just taken as like sort of gospel dogma as like, that's how you create value. And the reason why is because those services are really expensive to deliver in low margin. And so, you know, we wind up coming up with these sort of rules and takes that say, if more than 10 % of your revenue is coming from services, then you're not a good software business, right? And it's really interesting, because if you look at like, who has who has suffered or who's who's been maligned by that take? It's companies like ServiceNow and Palantir, right? They happen to be two of the most valuable, highly valued, high multiple software companies, software services companies out there today.

16:30This, I think, is a sort of fundamental shift we're going to have to deal with, which is it's far more likely that AI changes the economics and the dynamics of the IT services market than the SaaS market. But SaaS companies will have to adjust to that. And the first thing that I think goes out the window here is this notion that to be a great SaaS company, you can't be deploying services. I think in the new world, you have to deploy services. It's going to be a more profitable business because you can bring AI to the table and you can automate a lot more of the services work. But if you're not coming to the customer with a complete solution to their problem, then I think you're going to have a really hard time.

17:10Yeah, no, it's interesting. And I agree to the best of my knowledge, right? And I think with the ever more sort of increasing use of AI, what also people are craving, you know, on the back of that and people are loving automation and the velocity and the power it brings is more human interaction. And this can be the differentiation between, you know, choosing one partner over the other. I mean I've had sort of I haven't had lots of experience given the size of of SaaStock as a as a team of enterprise software you know buying and and implementation but in some of my recent experience the service layer that I've had around it which has been delivered by the SaaS company in this case Personatech has been absolutely fantastic right and in terms of weekly calls Slack channels where we're conversing really to enable us to be set up for success so that we're successful, we make money, they make money.

18:15And, you know, that's fantastic. But then obviously there are a lot of, well, the AI native companies that certainly they're in their early stage, which are, I don't know about faceless, but you don't have that kind of human interaction. And perhaps at the point in time where they're at, they don't require that. But that human interaction and service is, you know, is very much becoming ever increasingly important. Right. Yeah. I think as you I think the more upmarket you go. Right. The more you're going to have to answer this question about, you know, is it going to be the way it's always been?

18:52Right. So am I going to, if my customer wants to deal with the fact that the Google monopoly is quickly falling apart when it comes to where consumers ask questions, what dynamic does that create? That creates a dynamic that I now have to understand my brand visibility across a far greater number of platforms. Right. That's a huge complexifier, creates massive complexity for the for the CMO in particular, because they're expected to, you know, at its core, you know, success for a marketer is like, OK, my product, my service, my location, my coffee shop, my pizza place, my doctor, whatever it is, are the answer to the question that the consumer is asking.

19:36For the better part of the last 20 years, the only thing you really had to worry about was what is Google saying about my brand? Where do I show up in the SERP results? Can I buy my way to the top of that page? That is shifting faster than we've probably seen anything shift in this space before. Google will put up a fight here, no doubt about it. They have a huge innovator's dilemma. They have$200 billion of paid search that is much harder to deliver across the Gemini AI experience. And they're going to have to figure out how much of that paid search market they're willing to give up to keep up with the kind of magical consumer experience that companies like Perplexity and OpenAI are delivering with far less monetization.

20:16That's a sort of war of a game of kings that's going to play out. But from the point of view of the marketer, they have to understand in this case, what's the job to be done? And the job to be done here is to build a strategy where you can make sure that you're doing whatever you have to do to influence the answer that's going to be given by ChatGPT, perplexity, Claude, and on and on. And there's going to be grok. What are they all saying about my business? That's a job to be done for the marketer, and it's a really important job. And candidly, these things are all black boxes today, except for Google.

20:59So there's a lot of uncertainty around that. The answer to that can't just be pure software. It has to be a combination of software and intelligence, software and services. And the question that we and everyone else has to grapple with is, how are we going to do this? Are we going to do this by delivering a software platform and then relying on the external market to provide the sort of services around creating content, around distributing that content? Or does that become more of a bundled offering? And I think if I have to predict the future, I think what we're going to see is more bundling.

21:37I think we're going to see that the half a trillion dollar SaaS industry is going to get a lot harder to differentiate from the call it$1.6 trillion IT services annual spend. And that's both, I think, scary and exciting, depending on your lens. There is this real commonality between what is SaaS, what is AI, obviously sitting at the application layer of software. Do you foresee that 10 years time, we still have a SaaS industry that is growing, bigger than half a trillion? Is it going to be renamed, repositioned, sort of AI? what are your thoughts around that? Is AI a separate industry at the application layer?

22:28Again, it's software, very similar businesses it's just slightly advancement on the technology. I think no one knows. I think we can, because I'm old enough to have been around for a couple of these shifts, we had the internet in the late 90s we had before that, but that's really when it took off. And then this mobile shift that we saw in 15 years later, early 2008, 2009. One of the things that happened, I think, was we started defining categories based on the disruption. So in the late 90s, it was all about like, okay, these are internet companies and these are not internet companies. Today, we don't talk about that at all.

23:16We don't say like, you know, oh, Amazon's an internet company and Walmart's not an internet company, right? Like what we talk about is that, you know, they're just, they're businesses, right? And now they all leverage this, you know, the internet, right? Which, you know, mobile, we don't really talk about that's a mobile company. That's not a mobile. We won't talk in 10 years about like, this is an AI company or that's not an AI company. I think that's a moment in time and it's totally normal for us to be over-indexed to, you know, like, Like, are you an AI company or are you not an AI company?

23:46I think the important thing in AI is the intelligence, right? And so the transformation that we're seeing now is that we can build far more intelligence into the products. And what that does is that takes away the need to apply thousands of human being hours to a lot of these jobs to be done. That, I think, causes what we've traditionally defined as the SaaS industry and the IT services industry, which together, it really depends on how you measure them. It's somewhere between$2 trillion to$4 trillion a year, if you include networking and lots of other things. I think probably the more conservative way to estimate those two is to just take the IT services piece and the software piece, and you put them together and you're over$2 trillion a year.

24:39that I think how those$2 trillion plus get spent every year and how they incorporate the I, the intelligence piece is going to be the thing that we're talking about in five or 10 years, because AI, you won't say I anymore. You just talk about like, you know, these are intelligent systems and more and more, you know, we'll be able to deliver the intelligence of the system without as many human being hours. And that's the huge productivity gain that we can expect. and then sort of jumping back you spoke a little bit about the uh the impact of uh ai and how on seo and sem and everybody like certainly getting better more and more sort of using uh you know all the gpts to to search for their their answers and you said it's a black box like marketers need to figure out the strategy what what are some of the things that you maybe you're whether it's Yext is doing itself or some of the companies that you're working with to influence, you know, ChatGPT to, you know, to get your company ranked?

25:41Yeah. So so this is sort of bullseye for where Yext has historically sat. The approach that we've always taken, you know, and for like I said, for the last five or six years, this has really been about how do you influence that Google search results page has always been, you know, it's been a citation approach. It's been a content approach. You distribute your data accordingly. We have a really robust data system that sits at the, you know, underneath all of the different products that we offer. And that allows you to distribute listings, information, to manage your reputation, to distribute social media campaigns, all of which is kind of, you know, in the service of driving organic visibility on Google.

26:22We don't today play in the paid service. I'm sorry, the paid search space. And so I think the most fundamental shift that we're going to see here is that these large language model-based AI assistants are going to have context and memory that the traditional search engines have not had. And that becomes really, really important to marketers because the more that my AI knows about me, the more important it is, the deeper it's going to delve when it looks to give me the answer to the question. So I'm going to train my AI either through just interaction with it or very specifically. I can tell it.

27:08I have a child with a nut allergy. I don't ever want you to recommend a restaurant to me that isn't nut allergy friendly. right? I don't like to eat seed oils, right? Whatever. I can say anything, right? I'm a vegan or whatever, whatever it is. And it'll remember that. So no matter what I ask it, like I can just be, Hey, I'm hungry. I'd like some tacos, right? It's going to take all that into account. That creates a huge challenge and opportunity for marketers because what they're going to have to figure out is that every query, every prompt becomes bespoke. And so you can't play this game anymore.

27:42We're like, just, you know, well, I'm going to buy as much time, you know, of the first position of tacos near me as I can. Right. Because tacos near me, isn't tacos near me. It's for me, it's tacos near me that doesn't have seed oils that uses tallow that doesn't, you know, that it's not allergy free and whatever it is, you know, where should I stay on my vacation in the South of France for, for me individually, because of the context and the memory of the AI becomes, I want a place that's pet friendly and has activities for children or whatever. And your version of where should I stay on my vacation to the south of France might be very different, right?

28:21Marketers have to, so that's right, it's a long preamble for why this change is going to be so profound. And what marketers have to understand is that the way these systems are going to answer those questions is going to be what data are you making available to me through all the different ways that I may access that data so that I can give the best recommendation, give the best answer to the question. And we're just frankly not ready for it because we've focused so much for 20 years on how do I influence that Google search results page. Now there are going to be, you know, I mean, even if there's only five or six additional platforms, it's a massive lift to figure out what do I need to do to influence each of these black boxes.

29:00And they're all going to be a little bit different. I want to just jump in just at the end of the show, but a bit of leadership advice for scaling founders. I guess before like some of the quicker fire questions, maybe it's a broad question, but like given your leadership experience, Sony at Yext and also Right Media, maybe what are the couple of things that you kind of wished you'd known, you know, at the start that you know now, that would be, you know, obviously transferable to the audience around leadership? My advice, you know, to particularly startup type, you know, CEOs, entrepreneurs and teams, or even more scaled teams is, I think we get it backwards sometimes, and we over index to the point of view of investors, right?