A few weeks ago Jim Goetz — a leading VC and partner of Sequoia Capital — said it was “shocking” that more entrepreneurs weren’t targeting the enterprise. Goetz’s point: Since 2002, twice as many enterprise startups had $1 billion IPOs as consumer companies.
While he’s right, I can understand the disconnect. I can count on one hand (and still have fingers left over) the number of venture capitalists 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 — it was cheap. 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. (At GoodData, for example, we have more than 100 engineers focused on delivering the capabilities and experience our enterprise customers expect.) 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.” 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 billion1.
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. But 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 — start-ups 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 2012, primarily in sales.
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 dot-com 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.
1: “Gartner Says Worldwide IT Spending On Pace to Surpass $3.6 Trillion in 2012,” press release. July 9, 2012.
2: Transcripts of salesforce.com’s quarterly conference calls with analysts.