Thinking Outside the Consumer Web Box
There has been a lot of passionate discussion recently about the rise of super angel investing and the changing VC landscape. Most, if not all, of the discussion has centered on consumer web companies because of the dramatically lower cost models.
So what about the entrepreneur focused on solutions for the enterprise? Where are the seed stage investors in this world?
Despite the negative stigma associated with the word “enterprise,” there is a HUGE untapped opportunity here given the dramatic growth in data and the changing infrastructure required to handle it. The good news is that capital efficiency exists in the enterprise world as well for the exact same reasons that it exists in the consumer world – lower development, operational, and distribution costs.
I tend to segment the enterprise world in three categories from an investment standpoint. Note that many of the companies I reference as examples are True portfolio companies that initially embodied the capital efficiency philosophy.
- SaaS 2.0 Apps – The first generation of SaaS apps raised close to $40M in pre-IPO equity and needed close to $50M in revenue to reach profitability. The early stages required minimum rounds of $5-$7M just to get going because of the high capex costs involved with hosting. With infrastructure and development costs becoming essentially commoditized, we are seeing a whole host of the next generation SaaS companies requiring far less capital that are ripe to disrupt the first generation of SaaS. Examples are Socialcast for collaboration or Assistly for customer service.
- Infrastructure “Apps” – We are seeing a whole new wave of infrastructure software apps delivered as services built on top of existing cloud architectures like Amazon. As with SaaS apps, old infrastructure solutions are being completely reinvented as lower cost SaaS solutions. Examples include Loggly for log management, Scio Security for security authentication, Twilio for communication apps or Urban Airship for push notifications.
- Open Source – Open source still represents a powerful mechanism for driving core infrastructure software in the enterprise at a low cost. The key is building something compelling enough to gain rapid enterprise adoption and ultimately be commercialized. PuppetLabs is an obvious example here as well as up and comers like Riptano.
If you look at any of the above three categories, seed investments on the order $.5 to $2.5M are totally valid to build product and gain traction in a market. In fact, all have the opportunity to become large “enterprise” software companies as well even if some would never describe themselves that way. Certainly, in many cases a lot of capital would be required over time to get from A (initial product) to Z (selling big deals in the enterprise), but getting from A (initial product) to B (initial customer traction) should require far less.
Ultimately, it’s time for entrepreneurs and seed investors to start taking advantage of this next wave of “enterprise” opportunities.