At some point, we stopped calling Tom Sawyer-style distractibility either animal spirits or a discipline problem. We started to call it sick, even...”
CSNY - Almost Cut My Hair
One of my favorite songs ever, Crosby at his most defiant/paranoid. From the new live record.
Next Era is SaaS by Tom Tunguz
There is plenty of noise in the market and predictive is starting to take on the taint of social and Big Data when it comes to SaaS and enterprise software. The truth is that many of these predictive tools are not very smart and we are a long way from technology that produces useful results in a business context.
But here is the important thing about all of that product goodness — it didn’t come at a cost that breaks the magic of Twitter.
Contrast it to other products that continue to get bloated and heavy with clunky features. The posterchild is Microsoft Office but they are hardly the only ones. Actually most mature products (and early stage ones too) fall into this time honored trap.
One of things I admire most about Twitter, the product is their discipline to add new things while keeping things remarkably simple. Simple & magical enough to inform, entertain, connect and delight hundreds of millions of people.
When I read this, my mind immediately jumped to Salesforce and many other enterprise class business software platforms. For example, I cannot tell you the number of times I spoke with salespeople that said they refuse to use their company deployed CRM system. It is too complicated and doesn’t add any value to what they do day in and day out.
At the same time, you have IT groups that take said software, twist and turn it into something customized for their company based on mountains of specifications. The result is some software Frankenstein which does not serve the needs of the people it was meant for to begin with.
I admire Twitter and the faith they had in their users and themselves to keep the product true to its core. In some ways, it is easier to do for a broad consumer technology. Though more difficult to do, we are doing the same with Enhatch for the enterprise market. But it takes a strong core belief in simplicity and a deep understanding of the root problem you are solving for your customers.
While the post is about a formula for SaaS solutions that can grow big in the SMB world (still painfully hard to achieve), this part about what it takes for an enterprise SaaS company to get to scale is interesting. 500 is still tough to get to in Enterprise, but definitely realistic when you think of all the large companies out there, even if you just focus on one vertical market.
A History Lesson in CRM via CRMOutsiders
I talk to plenty of folks that use Salesforce as their CRM platform. Many of these people, especially in the larger enterprises, are under the impression that Salesforce can handle everything, including mobile.
I have seen this record play before however. At Siebel, we built some really awesome technology and had more functionality packed in than anyone else in our space. We tried to be all things to all people across all industries. The trouble is such an approach eventually creates really complex software that is hard to use, harder to maintain, and offers the lowest common denominator of functionality compared with a more targeted solution.
I am a huge believer in a mobile-only future for the enterprise. But the reality is that future is way ahead of where enterprises are today. Also, who knows that hardware and platforms are going to be prevalent in a decade? As the quote so eloquently states, technology and business needs move too quickly to simply think one monolithic end-to-end suite can handle everything from a business software perspective.
This is why I believe the enterprise tech market offers so much opportunity for startups and entrepreneurs. However large the Oracle’s, SAP’s, Salesforces’s of the world become, there will always be gaping wide holes that are ready to be filled by nimbler startups using the latest and greatest technology to help enterprises and build a massive market. So game on!
Google beefs up its enterprise chops via Fortune
Google has yet to fully capitalize on the value of its growing presence in the enterprise market. If they can capture mobile and email however, that will go a long way in making a dent in Microsoft’s dominance.
Does enterprise software inherently become commoditized over time? That point was made several weeks ago on Twitter and it was no surprise that the person quoted was Fred Wilson from Union Square Ventures. I had heard the same point made by Fred in previous discussions which I previously just brushed off as his investment bias. As his thesis is tied to network effects businesses, his expertise and experience align more to the consumer side of technology. I think it is time however to revisit this issue before people start to take his point as a de facto truth.
Let’s face it, all technology over time becomes a commodity. When the iPhone first came out, it was novel and nothing came close in the market. Six years later, there are numerous options for smartphones that are as good or better than the iPhone. The same could be said of web browsers, email clients, note taking mobile apps, practically any category of software or hardware that was once innovative. Eventually a market becomes saturated with competitors offering similar products and features that are often better than what was offered by the first movers.
What is the difference then between those products that become market leaders and those that are left fighting for scraps? Often it comes down to execution and constant product iteration. In certain instances it will be strong branding. And in some cases, it is virality that spreads the word. For the most part though, it is usually a combination of these three elements that contributes to the rapid growth of a business.
To achieve market dominance however usually requires something else to keep competitors at bay. This is what people refer to as barriers to entry. Sometimes it is a patented technology and other times it is a business model that takes advantage of market irregularities or particular business arrangements. For example, Microsoft used its leverage with the operating system to spread into productivity suites and other areas of consumer and business software.
Then there are network effects businesses that Fred favors. The best examples are social networks where the value of the networks grows rapidly as more join. Messaging apps are experiencing the same growth characteristics. The advantage of such a dynamic is that they can rapidly scale because people get “locked in” to the network, meaning that it would be hard to get the same level of value on another service. Everyone they know is already part of an deeply invested in the existing network.
So are enterprise tech companies forever cursed to wage feature and function battles of ever more commoditized offerings? Or can they also take advantage of barriers to entry or some other means to remain distinctive and poised for healthy growth?
The answer is of course enterprise tech companies can build large scale businesses that are both defensible and differentiated. In fact, I would reject wholesale any notion that enterprise tech is somehow “commoditized” by its very nature. Such arguments ignore the realities of enterprise sales, the marketing dynamics and channels, and the fact that the companies and industries have their own unique idiosyncrasies that make any such assumptions of commoditization completely unfounded.
If we take the market for customer relationship management software (CRM), that alone has huge variations and permutations. One could look at CRM as oversaturated and lacking innovation, but in fact doing a search on “CRM” + “choose_an_industry” yields quite a few vertical offerings. Even when it comes to horizontal solutions, CRM is such a broad area covering sales, marketing, service, and any other customer facing function and entity, that specialties have from just one certain aspects of CRM, such as lead management or email tools or field service automation. Then that does not even consider areas of integration, data quality, analytics, ETL tools, and various technically oriented solutions for managing CRM. In other words, there are many areas in which to specialize and become the “best-in-class”.
This speaks to what makes enterprise technology such a fascinating and dynamic market. A startup can quickly create a sizeable business by targeting just a small slice of a broader market. Instead of trying to be a generic CRM solution or HCM product, you can be CRM for car dealerships or HCM for contingency workforces. Some of these slices might be small, but it is a start that could lead to other opportunities. Many started as a niche and then broadened out to become a platform for many functions or branched out to other verticals. And even a small slice can itself be a large billion dollar market, one that can be dominated by one main solution provider which has built up a network and industry expertise that creates that defensible wall against competitors.
That being said, from an investor standpoint I can understand Fred’s point. VC’s are not looking for modest exits in the tens of millions, they need those proverbial unicorn deals to provide the types of returns LP’s expect. That means many high quality early-stage enterprise tech startups may get passed over as “not defensible” or “not a large enough market” or “too niche” by investors. A consumer service or app has to be immediately understandable if it is going to have any chance to grow, and by extension such startups are easier for investors to evaluate. Enterprise tech startups however require more in depth knowledge and industry expertise in order to fully appreciate the opportunity.
For enterprise tech entrepreneurs, I would say stick to your guns and do not get discouraged. There are plenty of investors that focus on enterprise and understand well the market dynamics and potential upside. But more importantly, find that niche in which you can drill down into and own your slice of the pie. It is much easier to expand and go after the land grab if you can specialize and become the experts in a particular industry segment or core functionality. Creating product which exploits that deep knowledge and building a network within a segment will provide the type of defensible and uniquely differentiated solution that prevents you from being merely another “me too” commodity vendor.
I had an interesting conversation the other week about what takes an enterprise tech startup from modest growth to hyper-growth. By hyper-growth, I mean that proverbial hockey stick growth that every startup yearns for. Very few ever reach that stage, so it was interesting to hear the thoughts from someone that has “been there, done that” in some recent hyper-growth SaaS startups.
The first point is that many recent high growth startups did content marketing really well. This is a bit of fluid term as managing and distribution of marketing messages and assets has always been a common practice. Before the Web and the Internet, it was whitepapers and product brochures sent direct mail or distributed at trade shows. Now it’s blog posts and social media and infographics. An entire series of posts could dwell on this topic alone, but the point here is that developing high quality content does have an appreciable impact on growth if you are consistent and focused on the approach.
The second point though was the more interesting one, which he referred to as the Asian Flying Carp analogy. If you have not heard, it is a breed of fish from various regions of Asia that was imported to the US some decades back. The problem is that they are an invasive species which is prone to overtaking major freshwater lakes. The other characteristic is that they tend to “fly” out of the water when they are startled. There is even a unique fishing tournament that takes advantage of the fish’s flying tactics.
Anyway, the thing about these fish is that because they can “fly”, they could actually “jump” into other nearby ponds and water sources. Once they have found themselves in the new ecosystem, they quickly take it over. In many ways, that is what the fastest growing B2B tech companies have been able to exploit. They find some way through some aspect of their product and opportunistic market dynamics to naturally “jump” into other companies and spread quickly.
Some may say this is simply an element of viral marketing or what growth hacking attempts to achieve. While there are similarities, they are not the same thing. I would call it inevitability marketing instead in that the process to develop your “flying fish” is going to be much more deliberate and built upon a platform that presents the jumping process as the default option. In other words, the customer would only have one realistic choice even if other options were available. This reminds me of the beginnings of Seamless, which secured enough relationships on the corporate side with their food ordering system, that when they approached restaurants, it was a no-brainer for the restaurant owner or franchise. That is why I say this is “inevitable”.
The other element of this however that needs to function is “the jump”. The product has to be nearly stupid easy to order to spread quickly and take over the ecosystem. That was how Salesforce was able to break through into large enterprises when Siebel was the de facto CRM standard. It was easy for any rep to sign up and use immediately as it was cloud and setup was easy. This began a chain reaction where other reps and managers became interested enough to try it for themselves and their teams. File sharing apps are another example of how creating something simple can lead to fast adoption inside an organization.
These examples of “the jump” are internal, but the even more powerful dynamic is jumping wholesale into completely separate organizations. This can be company to company, company to partners, partners to customers, or any other permutation. In many ways, this is the operational underpinnings of networks effects but for the B2B world. As more companies are added , it becomes more valuable of a platform for those companies. However whereas in a typical network effects business all the nodes of the network aggregate up to build the value of the entire network, in this case the value tends to form around clusters. When enough of these clusters connect however, you could eventually control an entire industry.
Not all businesses will have the “flying fish” built in or accommodate such a model naturally. There have been plenty of B2B tech startups that grew massive in other ways. This also does not mean that selling B2B tech is not slog. The flying fish in just a number of strategic options that could help accelerate sales growth, but startups still need to do a ton of leg work to make the strategy work and to tweak it over time. If you do find your flying fish though, you could be in for a sweet ride ahead.
The discussion of design and user experience is starting to have an impact on buyers of enterprise technology. It is not something that is happening overnight. But as more and more enterprises grapple with the insurgence of outside apps breaking through into the enterprise via mobile apps and accessing sensitive corporate data, they are starting to realize the importance of design in convincing users to engage with internal apps.