The Underhyped Enterprise Market and Consumerization of Enterprise

Summary: There remains a lot of potential in applying consumer product thinking and culture to enterprise problems. It will continue to change how we work in dramatic ways.

At TechCrunch Disrupt, Jim Goetz of Sequoia said:

“It’s shocking we don’t see more engineers and entrepreneurs interested in enterprise” the Sequoia Capital partner said earlier this week at the TechCrunch Disrupt conference in San Francisco.

Twice as many enterprise startups have become billion-dollar companies compared to consumer startups, he says.

“At Sequoia, upwards of a hundred entrepreneurs a week present and if we’re lucky, maybe a dozen of them are focusing on the enterprise,” he told Disrupt attendees. “In the last 10 years, there have been 56 IPOs in the enterprise space that have gotten north of a billion [dollars in market capitalization] and just 23 in consumer.” …

Goetz said the enterprise IPO market will stay hot for at least a couple more years.

Enterprise remains an “enormous opportunity” because companies are spending about $500 billion a year with legacy enterprise companies and those budgets are ripe for the plucking.

“We believe most will be disrupted in the next decade,” he says…

“The business model, thanks to Marc Benioff, is now a weapon for all of you,” he said, referring to cloud software and subscription billing.

And an earlier TechCrunch story on Peter Fenton of Benchmark pointed out just how fundamental a shift is happening around the consumerization of enterprise:

Marc Andreessen and Ben Horowitz have made it clear that software has begun to eat the world, a belief that is reflected in their own investment thesis, which focuses almost exclusively on promising software startups.

But it’s not the old software model that is consuming the planet. When we talk about this not-to-be-underestimated change in software companies, we’re talking about the consumerization of enterprise

The truth is that we’re seeing a fundamental shift from sales-driven companies to product-driven companies. The companies that are leading the way there (Fenton cites Dropbox and, of course, portfolio companies Zendesk and New Reliclet this consumer and product focus permeate (read: define) the culture of their companies.

“It’s a fundamentally different value system,” he says. “These companies don’t try to sell to non-users.”…

The cloud has lowered the barriers to scale, making enterprise solutions instantly horizontal and global, providing an increasing number of access points to much larger markets. Fenton says that he’s been keen on finding smart, product-focused entrepreneurs and either turning them on to enterprise opportunities or backing those already beginning to focus there. There’s a much greater opportunity for those companies to reach scale than it is for their sales-driven counterparts.

On a similar theme, Doug Pepper of Interwest highlighted  earlier this year the  attractiveness of solid SaaS business models:

So, why are SaaS companies so attractive to public market investors and trading up in the aftermarket? I asked that question of a friend at a hedge fund that invests in IPOs. Here is his response (I bolded what I believe are his key points):

  • SaaS companies are driven less by media hype and more by the investor appetite for attractive recurring revenue business models offered by the SaaS platform.
  • These companies are growing rapidly as a result of customers shifting functions away from in-house solutions to more flexible and enhanced platforms that help increase revenues, improve productivity and reduce costs.
  • Investors are not concerned by the lack of GAAP earnings, because there is a comfort driven by the 90-95% customer retention rates and an understanding that investing capital back in the business makes sense during the early phase of adoption.
  • These factors lead to more defensible businesses that make for attractive takeout candidates.

In a nutshell, he is reiterating what Bill Gurley noted in his excellent post about what constitutes high quality revenue. In this case, SaaS companies solve critical problems for enterprises and generate sustainable and predictable recurring revenue with rapid growth.

One comment

  1. Pingback: The rise of enterprise marketing - Chris Dixon

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