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.
The amount of capital required for initial product to initial customer traction is definitely less. Further, that amount has become more a function of customer size and length of sales cycle than development cost. One one end of the spectrum you have SMB customers who are “small and fast”; they can be sold quickly on simple solutions and do not require sophisticated integration. On the other end, “big and slow” large enterprises require sophisticated solutions and long, relationship-intensive sales cycles.
In either case, development is a smaller part of the equation than it was 10 years ago; and for SMB solutions, this effect is amplified.
Add to this that SAAS companies can quickly get traction and validation from SMBs while maintaining an eye toward moving up the food chain. I predict you will see a flowering of SAAS vendors that cost very little (less than $50k) to start that have ambitions to move from SMB validation to enterprise dominance.
by Lateef
on September 16, 2010
I totally agree that there remain a number of substantial opportunities on the enterprise side of things (we’re focused on the “internet of things” space, integrating the physical world with people, systems, and business processes). We had no problem raising a reasonably good sized Series A round (all angels + founder funding), and I expect the same to be true for a planned growth round early next year. As long as you can bring a solution with real, demonstrable value to the enterprise customer, they’ll buy.
by Rick Bullotta
on September 16, 2010
Spot on! This is precisely the opportunity we’re seizing at Publish2.com… to become the new Associated Press for the 21st century. Very glad to see that investors are recognizing such non-consumer B2B ventures.
by Robert Young
on September 16, 2010
All fair enough but overall enterprise web companies will require more capital than consumer web companies not least because very few have solved the problem of needing the expensive sales guy.
by Sam Simon
on September 16, 2010
Spot on. Nice to see this space given some of the credit it deserves!
by David Fishman
on September 16, 2010
Great, timely post. As an entrepreneur at a consumer web start-up working to make inroads into the enterprise this post provides useful context. We’re finding outcomes with consumers — while still helpful proof points — are, not surprisingly, not as effective sales tools as outcomes demonstrated in the enterprise. Therefore, our first foray into the enterprise becomes small-scale pilots to prove outcomes, which of course lengthens the sales cycle longer than we’d like. …But maybe we just need to sell better.
by Matt M.
on September 17, 2010
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by Another Wave of Infrastructure Apps: Cloud «
on October 5, 2010
As an employee at a large enterprise (F100, 30,000+ employees) I am trying very hard to bring some SaaS solutions into the place for my team. One of the barriers of entry I keep findings is our legal and security groups express significant concerns when data is stored in “the cloud”. They are concerned about the exposure we as a company would have due to a data breach or an employee of the SaaS provider or cloud provider tampering with the data. Also, it seems many SaaS providers don’t have mechanisms for payments beyond credit card. Most procurement departments are not comfortable using employee credit cards for recurring subscriptions.
Finally, the SaaS providers, especially when they are small don’t have the legal experience or resources to deal with the contract requirements our company expects. Technically, I am not even supposed to sign up for “Free Trials” on these sites because at some point during the sign up, I am accepting terms that our legal dept. did not review.
I think bigger companies need help in realizing the value these providers provide from a cost savings, functionality and time to market perspective and adapt their policies in kind. On the other hand I think startups need help working through all these loopholes.
by AJ
on January 17, 2012