Why we invested in Katana, the Manufacturing Entrepreneur’s Secret Weapon 🗡️
Enterprise Resource Planning is one of the largest individual software categories, accounting for 8.3% of software spend globally in 2019. It’s also a category that has seen some of the least innovation from the current generation of technology startups; many of the market-leading systems today were developed decades ago and fall short of customers’ expectations. Case in point: NPS is a dreadful -6 at market leader SAP, way below the SaaS average of 30.
Ben and I both have our own connections to this category. I grew up in the small town in southwestern Germany where SAP was founded, and Ben built what he now realizes were custom ERP systems for small businesses when he was running his own software development company while studying.
So as we came together to look at the market, we both felt that there must be opportunities for significant improvement, which led us to ask ourselves why the market hadn’t seen the same kind of disruption we have witnessed in many other categories.
What does the ERP market look like today? 🗺️
The ERP market today is highly fragmented, particularly on the SMB side. One research report covering just the German market profiled 50 local vendors for its curated ‘top’ list. Tracxn identifies over 1,600 players in its “SMB ERP” category. The questions guiding our market review were therefore: “What are the fundamental reasons for this fragmentation?” and “How can one company possibly counter these?”
We ultimately came up with a view on the “three axes of ERP fragmentation”, shown below:
- Industry: Vendors develop highly-focused products to suit the exact processes of a specific industry, and can then optimize their go-to-market with pre-built integrations and known channel partners. We’ve seen ERPs for industries as specialized as meat processing (yes, they’re German) and furniture manufacturing.
- Geography: ERP has historically been bought through systems integrators who are even smaller and more geographically distributed than the software vendors, and this local mentality has driven the market to fragment by region. Product features such as local accounting standards and language also play a role here
- Company size: The larger a company gets, the more sophisticated their processes are, and so the more features and customization they require of their ERP. Increasing the number of features while maintaining a usable UX and keeping customization and configuration manageable has been an insolvable trade-off in the industry
So why has this fragmentation existed for so long? We believe that technology is not the fundamental reason for this fragmentation, rather it’s due to other factors. Many smaller vendors have lacked the ambition and access to capital to scale up beyond their original focus areas and rely heavily on local channel partners. And without embracing what is possible with more modern software techniques, generalizing ERP to support a wider range of feature demands across company sizes and industries while maintaining a superior UX is almost impossible.
What is next for ERP? 🔭
Not a surprise: ERP is shifting to the cloud. Cloud-based ERPs should significantly reduce implementation time and cost, allow systems to scale as their customers do, and make deploying great user interfaces and market localization significantly easier.
Over the last decade, ERPs have also been moving away from a monolithic structure to become more integration-led and adapt to the reality of an exploding specialized software stack. Whilst ERP used to be the only business software companies needed, modern SMBs use Pipedrive for their CRM, Xero for their Accounting, sell through Shopify, manage their projects through Asana, etc. Why should an ERP replicate all of these tremendous software products?
Gartner called the first integration wave “postmodern ERP,” characterized by tools that were more flexible and specialized. While that first wave has still only partially penetrated the market, a second wave that they call “composable ERP” is now emerging, characterized by modular and flexible architectures which allow ERP to rapidly adapt to changing business scenarios.
Further, with better-structured data made available in the cloud, there is a clear opportunity to bring the best of modern automation and intelligence techniques to this software, allowing processes to be run in the background and before they are needed, and utilizing smarter forecasting to improve business efficiency.
Enter Katana, bringing new life to the manufacturing ERP industry 💥
The manufacturing industry accounts for 17% of global GDP and is undergoing a significant shift, with a growing demand for customized products leading to smaller batch sizes and an increasing share of manufacturers making locally and selling directly to their customers. Current software is just not up to cater to these needs — small, fragmented ERP providers can’t keep up with integration, UX, and self-serviced flexibility demands.
Katana is a next-generation manufacturing ERP developer, focused on bringing world-class software to small and medium manufacturers. We see the manufacturing industry as an exciting opportunity, large enough to build a significant company, but focussed in a way that will allow Katana to build a best-in-class product.
As an interesting aside, Katana started by building an MRP (material requirements planning, core: inventory management & production scheduling) offering. They have since branched out to become a true ERP system by building wider functionality around order fulfillment, shop floor control, purchasing, and costing — and by building integrations into adjacent tools in e.g. commerce and accounting. It is a striking parallel to software history as ERP developed from MRP in the 1960s, strengthening our belief that MRP is (again) a great starting point to fundamentally rethink this industry.
Ben and I each met Kristjan, Katana’s Co-Founder and CEO, when he was raising their Seed round. We were impressed by the clarity of the company’s vision even then, and just over a year later are even more impressed with how they have delivered, outperforming on revenue growth, churn reduction, account expansion, and feature and integration building.
One of the most impressive characteristics of Katana is that they were global from day one. As the majority of customers self-onboard and they see a high degree of organic inbound leads, Katana now runs in manufacturers’ offices and shop floors on every continent. We saw this as a very impressive achievement for a young company in a historically geographically-fragmented space.
Katana’s long-term vision is to build software for every manufacturer globally. The team recognizes this is a journey, and maintaining a best-in-class product while adding more sophisticated functionality is a challenge we are confident that the design and product team can take on. Katana has already moved from ‘micro’ towards ‘small’ customers and will continue to take steps along this axis. Their API-first architecture very much supports this progression, when adding new features can also be achieved through integrations, third-party developers, or side-stepping partners altogether and rapidly building something using the Zapier module.
Katana started from a core of supporting D2C manufacturers, but their customer base has already developed rapidly to include many B2B businesses and a diverse range of industries. Their customer reviews speak for themselves and are one of the clearest signs that Katana is solving a problem where others have failed. We were overwhelmed by the product love in a category that has been historically so loveless, it inspired a whole series of uncomfortable Valentine’s Day-related blog posts.
Old and new friends, and a flywheel 🇪🇪
One of Atomico’s founding theses is that great companies can come from anywhere. Estonia, a country of 1.3 million that has birthed five unicorns, is a perfect example of this thesis in action. The flywheel of talent, capital, and belief is spinning faster and faster here, inspiring a whole new generation of founders and angel investors, supported by an unparalleled talent pool with global scale-up experience.
Katana’s track record so far gives us confidence that they will be the next Estonian success story. Kristjan, Hannes, and Priit have done a tremendous job to date, assembling a team of Skype, Pipedrive, Playtech, Bolt, and TransferWise veterans, with amazingly high ambition and meticulous execution against their roadmap, and tackling an immensely large industry and with global ambition from day one.
For Atomico, the parallels to another Estonian company, Pipedrive, are striking: redefining a large category, building a world-class product, and meeting the needs of underserved SMBs. Having been part of Pipedrive’s journey since Series B, it was easy for us to see the opportunity Katana has ahead.
We greatly look forward to partnering with Kristjan, Priit, Hannes, and the rest of the Katana team, as well as great friends of Atomico Alex Meyer at 42Cap, Ott Kaukver, and Sten Tamkivi, and new friends Sergei Anikin and Kairi Pauskar to turn the manufacturing ERP industry upside-down and build the very best software for the modern maker. Katana, welcome to the Atomico family!