A few weeks ago Jim Goetz, a leading venture capitalist and partner at Sequoia Capital, said it was “shocking” that more entrepreneurs weren’t targeting the enterprise. Goetz’s point: Since 2002, twice as many enterprise startups as consumer companies had $1 billion IPOs.
While he’s right, I can understand the disconnect. I can count on one hand (and still have fingers left over) the number of VCs investing in the enterprise space in the past 10 years. That’s because the consumer space was sexy and -- thanks to innovations like Amazon Web Services (AWS) -- it was cheap to enter. Using AWS, a handful of engineers working with $2 million or less could write apps like Instagram or Meebo, then sell their companies months later for a healthy profit for their investors.
Contrast that with the enterprise market. Startups in this space need an army of highly expert developers to create an enterprise-hardened platform and apps that meet stringent corporate demands. And forget about courting customers with something that’s merely “cool,” like nifty effects from your mobile phone’s camera. In the enterprise space, finding the right product/market-fit means knowing what enterprises already have and what they need -- and understanding how they work. Until recently, that’s the sort of expertise that VCs have short-changed.
Marc Andreessen defined product/market-fit as “being in a good market with a product that can satisfy that market.” Good market? Gartner Research recently projected companies worldwide will spend $3.6 trillion on technology, including $109 billion on public cloud services. By 2016, enterprise global cloud spending will reach $209 billion.
Now comes the hard part in Marc’s formula, which I define as having a product that’s easy to sell, for a problem that needs to be solved, that can scale quickly, and for which there’s strong enterprise demand. In the enterprise space, “easy to sell” is relative. That’s because many of the dynamics that defined selling to the enterprise in 1999 still apply: New technologies and products have to work with what’s already installed. Large purchases have to be justified. And customers are leery of buying from companies that aren’t ready for primetime.
That’s why today’s enterprise-focused companies -- startups included -- still need dedicated sales reps who can demo a product, explain its value proposition, offer competitive positioning, and traverse customers’ different purchasing processes. As proof, consider salesforce.com, which reported 4,700 new employees between January 2010 and August 20122, primarily in sales, according to the company's earnings reports.
For these reasons, it takes about five years and more than $50 million in funding for a startup to succeed in the enterprise. It also requires a level of maturity and experience that venture capitalists haven’t actively sought out since the dotcom bubble burst.
Building a successful startup is never easy. That’s especially true in the enterprise market, given the upfront costs and tough going just to meet enterprise requirements. To paraphrase Seth Godin: “It takes three years to be an overnight success” in the enterprise space.
That’s three years, lots of money, and the expertise to know what customers want. That might explain why there are so few startups gearing up for the enterprise.
Perhaps the situation isn't quite a dire as we make it sound.... since nearly every large enterprise business once began as a startup at some point.
(Microsoft was a startup that now serves both the consumer and enterprise markets. Oracle was a startup in 1977... Citrix was a startup in 1989... VMware was a startup in 1998...)
Enterprises also have much higher expectations for quality of service than most consumers -- and generally enterprises are paying more than consumers for their services. There are so many reasons why the enterprise market is a more daunting sell.... it's almost a wonder that enterprise startups exist at all.
Perhaps we'll see some interest in longer-term, careful venture funding. One of the lessons of Facebook's IPO has been that going for short-term gains in the consumer space can lead to big-time disappointment.
The enterprise space has a longer lead time for exit of startups but the results are often more predictable -- and far better. (VMware, anyone?)
Hi Mary, I'm not in a position to speculate on what funding is necessary to back a enterprise startup, however as it was pointed out in the blog, there is quite a few external factors that make the investment far more expensive and far more time sensitive than that of a consumer startup.
In today's investment environment, instant gratification seems to rue the day. Investors want in and out and are not so willing to allow a business that needs an extensive maturation process to take place, but rather go for the quick hit. I think an investment bank (although has more patience), is on a far shorter leash than VCs in what risks can be taken.
All is not lost as there are a number of VCs that still can see the larger picture and invest in enterprise startups; they are just few and far between. As you pointed out there will be extremely lucrative rewards for their risks, but again, the enterprise investment must be spectacular in terms of a game changer.
It seems like there are pretty obvious reasons why there aren't as many enterprise startups... it's harder to sell to the enterprise market. What enterprise wants to take a risk on an unreliable startup for any kind of important task?
Points noted, Chris. But what if VCs chose to invest the same amount they've been spending on consumer startups on enterprise ones? Sure, the startups would have to get funding from more VCs, but ultimately, the payoff would be worth it; we'd also see more enterprise technology, and a high tide would lift all boats.
VC's have the same financial ideology that any other investment bank, hedge fund or M&A have, and that is they are willing to take risk but they pull the reigns in on financing projects when there is economic uncertainty. In other words, they choose not to invest, finance or hire during periods of instability, political upheaval, and economic stagnation.
Another contributing factor to the VC's apprehension in putting up huge sums of money on untested or early beta versions of enterprise startups is the financial and time commitment to bring these products to market, as you have pointed out.
From a corporate standpoint, the same notions apply, uncertainty about the tax laws and the current political environment, leave CEOs, CFOs and CIOs all holding their collective breath waiting for some clarity. They won't hire, they aren't open to innovative technology changes that they can't find instant cost savings. Despite the corporate balance sheets being in the best shape they have been in years, they are not in any rush to deplete them on enterprise technology that isn't a true game changer.
Thank you for allowing me to air my view on the present economic climate.
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M2M: Rise of the Machines? Not Yet David Weldon In the 1970 science fiction thriller Colossus: The Forbin Project, two giant supercomputers from the United States and Soviet Union secretly join forces to take control of the collective nuclear might of the two countries. In the film, the two machines discover each other's existence, communicate back-and-forth, share their collective data, and cut their human creators out of the process. It is the ultimate example of machine-to-machine communications, or M2M. CLICK FOR MORE
M2M: Rise of the Machines? Not Yet David Weldon In the 1970 science fiction thriller Colossus: The Forbin Project, two giant supercomputers from the United States and Soviet Union secretly join forces to take control of the collective nuclear might of the two countries. In the film, the two machines discover each other's existence, communicate back-and-forth, share their collective data, and cut their human creators out of the process. It is the ultimate example of machine-to-machine communications, or M2M. CLICK FOR MORE
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