Is Enterprise Software…dead?
“We aren’t considering investing in enterprise software anymore” recently said a venture capitalists at a recent public gathering.
Will venture capitalists stop invest in ‘traditional’ enterprise software startups? This is what one may think when listening to many of them nowadays. This is highly unlikely though, and here’s why.
The YouTube deal must have rung the bell: VCs are getting crazy about consumer web. But some venture capitalists tend to forget the bulk of top software exits come from enterprise applications. One may present them with the best enterprise software company, some venture capitalists come up with answers like: “Investing in enterprise software is like investing in automotive companies: the big players are already there“. So, would enterprise software innovation be..dead? Obviously not as the automotive industry still is the sector that patents most innovations, even today. About enterprise software, no wonder it’s an episodic state of mind.
True, enterprise software has become a lot tougher than it used to be: unless you build something on cutting-edge, patented technology, or unless you find a really juicy niche you can exploit without too many predators noticing, it’s gotten tougher to go out of the wood and fight with the big guys with no other sound differentiating competitive advantage or unique selling point than your entrepreneurial energy.
However, I believe the ‘automotive industry comparison’ conveyed by some venture capitalists is biased by the craze around the few web apps everybody’s talking about: Facebook, Twitter, and soon pownce. In the aftermath of the YouTube acquisition, everybody’s been watching everybody: which major player is going to make the next purchase and blow the whistle of the next Internet software consolidation? My opinion on consumer web apps is that there’s something ‘magical’ about getting a massive number of people use your service. I guess anyone without a deep sense of consumers would have found hard putting the YouTube success in equations @ business planning stage for instance. And frankly, my intuition suggests me that many consumer startups are to die, short of cash, in the next 2 / 3 years. Think of a US$ 1000 investment (in other words, peanuts): how do you see most consumer startups paying US$ 1000 back? The one consumer web startups to survive the upcoming consolidation (500+ video on demand startups and counting…) will be declared ‘the fittest’ and economically most viable to succeed in the ‘next web’.
Back to enterprise software, I believe it’s a business a lot easier to put in equations. True, Siebel or Dynamics aren’t as sexy business as Flickr or Twitter. Nonetheless, you don’t need to be a genius to build a product (you need good engineering) that fits a sound market demand (good marketing) and which you can sell (you need good sales talents); whilst although you may build a consumer product that fits a demand, there’s still something irrational about creating a buzz – at least that’s my opinion.
On top of this, new business models such as software on demand, or as a Service (Software as a Service) have enabled new types of players, such as SalesForce.com, to emerge and result in deep & slow reshaping of the competitive landscape. Software as a Service, as opposed to the licensing model, allow companies to pay over time and hence avoid the pain of a down payment. Venture capitalists seem a lot keener on exploring enterprise SaaS though. Good news.
Finally, day in day out, it seems the very best venture capitalists remain pragmatic and don’t abide by the ‘automotive industry comparison’ related above. As an epitome, Sofinnova Partners, a top venture capital shop located in Paris & San Francisco, recently invested in collaborative enterprise software startup blueKiwi that intends to go at loggerheads with IBM’s collaborative tools by packaging a ‘BlueKiwi for Sharepoint‘ enterprise 2.0 suite no-brainer bundle in partnership with Microsoft (needless to say, blueKiwi is an IDEAS company). Business as usual? Not at all: the blueKiwi deal announces the come back of Sofinnova Partners in the field of enterprise software, after a 4-year strong blackout. My call is that this move will set the trend for years to come in the venture capital industry (at least in Europe) when VCs realize how many beautiful companies develop products that aren’t just enterprise software but enterprise enablers, and how many consumer web companies are just Enron-like null pointer exceptions.
LikeRelated posts:
Business intelligence, Business strategy, CIO, CRM, ERP, Entrepreneurship, Europe, Finance, Google, Internet, MNC, Microsoft, SME, Silicon Valley, Software, USA, Venture Capital, Video, VoIP, marketing, media, user-generated content
I think these types of industries will always remain. Sure there is a boom in consumer-services right now, but eventually these start-ups will grow to be more mature and need software to manage their companies. That is, if you believe in the traditional life-cycle model.
On the other hand, you could argue that a lot of small companies prefer to stay small and/or are acquired by larger companies, with enterprise-systems in place.
Still as growth stabilises, companies will focus on efficiency and require software to manage that process.
Enterprise Software sure is an interesting field, but not only for Venture Capitalists: Private Equity might participate too, when there will be a market consolidation one day.
In Germany we do have only one true global player (SAP) but thousands of small software companies.
So the question is: What will happen? Will we see mergers among existing companies or will there be lots of new startups that grow fast and become market leaders?
If I were engaged in Private Equity, I would watch carefully enterprise software companies. But if I were in the Venture Capital business, I would still go on social communities, probably….;-)
A great test-case to see if there’s still hope for for enterprise software is the Netsuite-IPO
Thx Vince, VERY interesting! Fancy write something about Netsuite if you’re familiar with the case (I’m not)?