On Building Great Enterprise Software Companies

July 29, 2010

The truth about Enterprise Software Startups

There was considerable buzz around a guest post on TechCrunch by Box.net CEO, “Enterprise Software is Sexy Again”. I read it a few days ago and wanted to respond right away — in a very positive way — because it did strike a chord with my own perspective. I was too busy to note down my thoughts right then, and am only able to do so now. It turned out that the space of a couple of days and a re-read of the article brought my opinion around quite a bit. I thought it would be interesting to lay out both perspectives — complimentary and critical — and through that, expound on my core ideas about this as a venture capitalist at a expansion stage fund that mostly targets enterprise-class software vendors.

The reason I liked the post right away was that it pointed out that the incumbent enterprise behemoths like SAP, Oracle, Microsoft are not invulnerable. On the contrary, with plenty of innovation, agility and a winning culture, younger companies can take on these giants and take away a fair share of market from them. This has been our investment premise at OpenView all along: we like to invest in companies that are solving huge problems with an innovative approach or distinctive business models. Moreover, many of our portfolio companies have been doing that for a while, even before companies like Box.net or others mentioned in the articles were even founded.

This leads to my disagreement with the article. Firstly, VCs had never shied away from enterprise software companies. Even before Aaron decided to take that “less traveled” path of founding companies that would sell to enterprises (because I do not think that Box.net is an enterprise software company), the team that would eventually form OpenView were already investing in enterprise software companies like PlateSpin, ExactTarget etc., and we knew of many other investors who were equally convinced.

Even as the Web 2.0 and social media explosion reached its feverish peaks, OpenView team still diligently looked around the world (not just in Silicon Valley, as many would expect) to look for solid software companies that have great economics, regardless of whether they sell to enterprises or SMB. Turns out that many of those companies are enterprise software companies, like Loyalty Lab (www.loyaltylab.com) , like Balihoo (www.balihoo.com), among others. We also honed our ability to provide these companies with significant support, via the strategic consulting services that OpenView Labs offer. Through this work, we also learned about the challenges facing these companies as they grow by competing against large incumbents or breaking open a new market, or even market category. This is where I find the article lacking — it never really comes around to the fact that building and selling enterprise software is incredibly hard, capital-intensive, and the work might not be that sexy at all!

First point — capital requirements: I have written before about how SaaS companies require a lot of capital upfront for sales and marketing costs due to their pricing model and subscription-based billing. While this eventually turns profitable and from then on the company is really generating more and more revenue every year, to get there many companies burn through a lot of capital. Cases in point are Salesforce.com and SuccessFactors. The few companies that are mentioned in the articles have all raised considerable amount of venture capital funding as well. I think it is very clear here.

Second point — it is very hard to figure out the right business model. What is the right sales structure? What are the right marketing channels and strategies? Freemium can only take you so far in terms of getting lots of customers (mostly non-paying). How to find the most cost-effective way to acquire customers besides just purely relying on word of mouth? Even a company with such a pervasive product like Google needs a sales team (a very big one, in fact), so how can a start up avoid the difficult routes of trying selling into the enterprise? Sexy software, easy to use interface aside, someone still needs to prospect, to negotiate deals and close them eventually, and it is usually the very last steps that trip vendors up while selling to enterprises.

Third point — the work is hard! Nobody understands what you do, unless you sell to everyone — the mass consumers, the SMB as well as the enterprise like Box.net. Well, then really you don’t have a market segment that you want to focus on, which really leads me to question the business model(s). In the case you just sell to enterprises, scaling products up from a working prototype to enterprise level requires lots of expertise and time, many failures and not a lot of recognition until you have become a relatively large company. The cloud-based architecture might help with application delivery, but service delivery — which is always a large component of most enterprise sales — is even more challenging for small organizations with limited resources.

To conclude, I am glad that Aaron wrote about the opportunity for Enterprise Software companies today, and that positive note still strikes a chord with me, but I think entrepreneurs, CEOs and venture capitalists should know that it is much harder than that to succeed.

Chief Business Officer at UserTesting

Tien Anh joined UserTesting in 2015 after extensive financial and strategic experiences at OpenView, where he was an investor and advisor to a global portfolio of fast-growing enterprise SaaS companies. Until 2021, he led the Finance, IT, and Business Intelligence team as CFO of UserTesting. He currently leads initiatives for long term growth investments as Chief Business Officer at UserTesting.