The Death of Enterprise Software?
Enterprise startups are becoming an endangered species. Here's why we should care and how a reinvented "spin-in" model can reinvigorate innovation in the software industry.
By Bruce Cleveland, InterWest Partners
May 19, 2009
The startup has been the innovation pipeline that fuels growth and returns for enterprise IT and software providers. Yet despite the need for innovative enterprise software solutions, there has been a dearth of venture funding for new enterprise-oriented software companies during this decade. Consequently, the enterprise software innovation pipeline is drying up.
Given the current challenges associated with the traditional venture capital business model, the reluctance to invest in enterprise software startups, and the pressures faced by the large software brands, I believe there is a unique opportunity for the venture community and major vendors to come together using a modified version of the classic "spin-in" model. The result could be a new era of innovation for enterprise software.
The Challenges Facing Enterprise Startups
According to VentureSource, from a high of 506 enterprise-oriented software startups securing a Seed or Series A round in 2000, only 201 new enterprise-oriented software startups were funded in 2008 and the vast majority of those used a SaaS, PaaS, or IaaS business model. Very few traditional model enterprise-oriented software companies were funded at all, the notable exception being in enterprise search and analytics.
Why? Enterprise IT - the target market for these solutions - and the incumbent enterprise IT software providers (e.g. Oracle, SAP, MS, IBM, etc.) have conspired to build a virtually impenetrable gauntlet for startup software companies to overcome. If you - the startup that is - are not part of a "blessed" corporate architectural standard you will find selling your innovative enterprise software solution a very tough slog. You will bear the burden of extended sales cycles, high sales costs and increasingly smaller budgets already spoken for by the big brands.
Those few companies that do manage to make it with breakthrough technology are quickly threatened by the incumbents. You are either compelled to sell the company at a time when the multiple for the management team and venture firm is potentially uninteresting or face increasingly greater sales risks as the big brands use their internal relationships to raise "fear, uncertainty and doubt" (FUD) about the long term prospects of your company and products. This, in turn, causes you to have to make bigger discounts with correspondingly lower margins, endure longer sales cycles, etc. until you give up and either sell out or call it quits. This phenomenon isn't restricted to just small startups. Even larger enterprise software companies have had a difficult time surviving; look at what happened with PeopleSoft, Siebel and Hyperion.
Innovation Stagnation Sets In
Ironically, one of the problems that plague large software companies is their ability to innovate and bring new products to market tends to be inversely related to their success and growth. That is, the bigger they get the less innovative they become. There are two primary reasons for this perplexing phenomenon.
The first is that existing customers place increasingly significant demands upon the company's product resources to provide bug fixes and deliver enhancements to current product lines. Over time, maintenance and product revenues from existing customers dwarf new customer revenue so companies must invest the majority of their resources to secure these revenue sources, leaving few resources for new product initiatives.
Given the current challenges associated with the traditional venture capital business model, the reluctance to invest in enterprise software startups, and the pressures faced by the large software brands, I believe there is a unique opportunity for the venture community and major vendors to come together using a modified version of the classic "spin-in" model. The result could be a new era of innovation for enterprise software.
The Challenges Facing Enterprise Startups
According to VentureSource, from a high of 506 enterprise-oriented software startups securing a Seed or Series A round in 2000, only 201 new enterprise-oriented software startups were funded in 2008 and the vast majority of those used a SaaS, PaaS, or IaaS business model. Very few traditional model enterprise-oriented software companies were funded at all, the notable exception being in enterprise search and analytics.
Why? Enterprise IT - the target market for these solutions - and the incumbent enterprise IT software providers (e.g. Oracle, SAP, MS, IBM, etc.) have conspired to build a virtually impenetrable gauntlet for startup software companies to overcome. If you - the startup that is - are not part of a "blessed" corporate architectural standard you will find selling your innovative enterprise software solution a very tough slog. You will bear the burden of extended sales cycles, high sales costs and increasingly smaller budgets already spoken for by the big brands.
Those few companies that do manage to make it with breakthrough technology are quickly threatened by the incumbents. You are either compelled to sell the company at a time when the multiple for the management team and venture firm is potentially uninteresting or face increasingly greater sales risks as the big brands use their internal relationships to raise "fear, uncertainty and doubt" (FUD) about the long term prospects of your company and products. This, in turn, causes you to have to make bigger discounts with correspondingly lower margins, endure longer sales cycles, etc. until you give up and either sell out or call it quits. This phenomenon isn't restricted to just small startups. Even larger enterprise software companies have had a difficult time surviving; look at what happened with PeopleSoft, Siebel and Hyperion.
Innovation Stagnation Sets In
Ironically, one of the problems that plague large software companies is their ability to innovate and bring new products to market tends to be inversely related to their success and growth. That is, the bigger they get the less innovative they become. There are two primary reasons for this perplexing phenomenon.
The first is that existing customers place increasingly significant demands upon the company's product resources to provide bug fixes and deliver enhancements to current product lines. Over time, maintenance and product revenues from existing customers dwarf new customer revenue so companies must invest the majority of their resources to secure these revenue sources, leaving few resources for new product initiatives.
