Savvy entrepreneurs and venture investors tend to “think big”, meaning that they build companies that go after big markets and especially those with incumbents that are ripe for disruption. As a venture capital investor, on the top of my list for 2014? Enterprise software, a $120 billion dollar market dominated by a small handful of very large and 20+ year-old vendors. Due to the profound technological shifts of SaaS and mobile, these giants are incredibly vulnerable to disruption and are starting to come under siege by a new generation of scrappy, forward-thinking challengers. The stakes in this war are enormous. To underscore the scale, consider that four of the largest players (Microsoft, IBM, Oracle and SAP) account for more than $750 billion dollars of market capitalization.
A Brief Enterprise History
Enterprise apps have traditionally been big, heavy solutions. They took months to install and cost many millions of dollars. As a result, the IT departments that bought them were risk averse and wanted a ton of hand-holding. Which the big incumbents were only too happy to provide in the form of legions of sales reps and consultants. After all, long sales cycles allowed not only for higher prices (and profits) but also raised the cost of market entry beyond the reach of most startups, creating quite effective defensive “moats” around the biggest pools of customer money. Today, things look a lot less daunting for startups building their solutions on SaaS architectures. Because apps can be delivered entirely over the Internet and paid for with a credit card, customers can go live in a matter of minutes, without requiring any approvals from IT or Finance, completely bypassing these traditional gatekeepers and the moats built around them. Challengers like Salesforce.com, Workday and SugarCRM have seized on this opportunity to rapidly build large businesses with billions in shareholder value.
Transforming These Challenges Into Opportunities
While the big incumbents are focused on defending the front-gate of the IT/Finance purchasing process, SaaS startups can market directly to a business’ end-users, using channels like Google Ads, content marketing, social media and even viral marketing. Instead of aiming for a big enterprise sale, the name of the game for these campaigns is to secure small initial sales, even as small as a single seat and perhaps only a couple hundred dollars in revenue. These initial wins allow you to get your foot in the door and put your product in the hands of actual business users, “landing” the first wave of your attack behind the wall and setting you up to then “expand” from within as you prove your product’s value. Prove your solutions ROI in actual use at your customer’s business and you’ll find them opening the gates for you, inviting you in for that big multi-million dollars enterprise sale instead of leaving you to languish in the morass of trials, pilots and proof of concepts.
Mobile Devices: Start Small, And Build From Within
How to get that first initial sale? With the large vendors spending billions on marketing, a new vendor needs an angle to get attention and differentiate from the incumbents. One “wedge” that one that we’re seeing being put to great effect right now is a laser-focus on mobile devices.
Mobile apps are a recent phenomenon in the enterprise. After some false starts in the early 2000s, mobile finally burst onto the scene in a meaningful way with the launch of the original iPad in early 2010 and has started to massively accelerate in the last year or two towards becoming the dominant platform for business computing as a whole. But by and large, mobile has caught the legacy vendors flat-footed, creating an opportunity for fast moving new entrants.
Almost overnight, the iPad’s intuitive touch-based interface has raised users’ expectations for usability by an order of magnitude. And with those end users now increasingly driving the purchasing decisions, what they want matters. Fast moving and design-focused innovators like Box, Evernote, Selligy and Yammer have capitalized on this shift, rapidly capturing market share by coming to market with well designed, mobile-optimized applications that leave the incumbents’ offerings in the dust. As mobile begins to increasingly dominate as the primary means for employees to interact with their company’s business applications and content, there will be massive opportunities for mobile-savvy new entrants to pick off the legacy players who aren’t able to adapt quickly enough.
Tying It All Together
SaaS’s powerful, Internet-enabled architecture is inexorably moving the power away from the middlemen in the central IT and Finance functions and into the hands of the business users. Those users are moving to mobile devices and want applications that are easy to use and optimized for those new platforms. And increasingly, they’re also the ones making the buying decisions, not the traditional gatekeepers of IT and Finance. The elaborate defenses, so carefully constructed by the large vendors, are crumbling – creating unprecedented opportunities for entrepreneurs bold enough to go attack their empires with new, modern solutions. As a user of enterprise applications and as a venture investor, I find these changes profoundly exciting. At DFJ we believe that technology has the potential to transform nearly every aspect of business, unlocking massive economic value for both the customers and the technology vendors in the process. If you’re thinking big and have an idea for attacking part of the massive market for enterprise software, we want to hear from you.
— Josh Stein, DFJ Partner