Enterprise software companies poised to grow more quickly than ever before

Happy New Year everyone!  I blog every day that I work, and this is my first day back in the office. It is good to be back. I’m optimistic that we can all do some good stuff in 2012 – there were a lot of pockets of growth in tech last year and I don’t think the worsening economic climate will change that (although a booming economy would make life easier).

This is a time of year when people take stock, look at trends and make predictions for 2012 and I’ve been reading a lot of what has been written. Figuring out what is going to be big in the next 2-3 years is, after all, my business.

One piece in particular caught my eye, and that was Five Myths of The Enterprise Startup by Aaron Levie, CEO and co-founder of Box.net (a DFJ portfolio company). His overall point is that the enterprise software industry is now being shaped by new forces which are altering the balance of power in favour of startups, and that 2012 will be a great year for new companies in this category.

Perhaps the most exciting thing about these changes is that they enable much faster growth than has historically been possible for enterprise software companies. This in turn sets the stage for much faster value creation, higher valuations and increased interest in the sector from VCs.

The most important change is, perhaps unsurprisingly, the cloud, which has enabled a new business models and go-to-market strategies which get round many of the barriers that previously inhibited growth:

  • Freemium business models
  • Viral distribution
  • Social media
  • Products with implementation cycles that can be measured in minutes

This in turn allows enterprises to buy in a totally new way.  Largely because implementation is easy the costs of discovering and trying out software are in many cases now pretty close to $0.  This means that end users can choose products themselves and IT departments no longer needs to act as gatekeepers, at least not to the same extent.  Sales cycles to end users are typically much shorter and require fewer expensive salespeople and it is this which creates the potential for rapid revenue growth and value creation.

This potential is translating into real excitement about some of the leading enterprise software startups – most notably at box.net and Dropbox, both of which raised very large rounds at (rumoured) huge valuations last year (see here for news on box.net and here for news on Dropbox).

None of this is new at a theoretical level – I first blogged about ‘Edge in adoption’ back in 2007 – but it is only recently that software startups have figured out how to combine all these enablers to good effect and that enterprises are starting to relax their previously rigid procurement processes.  Perhaps the biggest change from software companies is to focus on building great products with great user experiences, especially for new users, as that is the key to unlocking all four of the enablers listed above.

The other exciting thing from a startup perspective is that these developments nullify the advantages that traditional software vendors like Microsoft and Oracle have enjoyed for years.  Relationships with the CIO and account control count for little when the end user is in control and the traditional practice of seeing off startups by promising product developments down the road is much less effective when end users can get up and running with the startup quickly and cheaply.

 

 

 

 

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