Starting a New Chapter for the Software Industry
Just came back from a venture capital conference hosted by Longworth Ventures in Boston, all in all it was a very good experience and having the opportunity to sit on a panel featuring fellow Irregulars Rod Boothby, Ismael Ghalimi, and Zolie Erdos was a highlight, especially considering that the panel was moderated by newly minted Irregular Andrew McAfee (aka “Probie”).
In my discussions with the Boston area venture capitalists I was left with the impression that this whole “2.0″ thing is something that isn’t widely grasped outside of the Valley. At the risk of not making the best of friends with some VCs that I will actually have to sit on the other side of the table from and convince them to fund my new company, allow me to expand.
Of course I am making a generalization here because clearly there are VCs like Brad Feld and Fred Wilson that clearly get the impact of web 2.0 both on the consumer and enterprise sides of the industry and they aren’t located in Palo Alto, and to be fair I think there are quite a few VCs in the Valley that either don’t get it or don’t believe it’s meaningful to the degree that I do. However, what I am trying to suggest is that the volume of the conversation is a much more amplified where I live and work, which is reflected in the fact that all 4 panelists were from Palo Alto, and it would have been 5 if Ross Mayfield didn’t have to cancel at the last minute. Think about that for a minute, a panel discussion at a Boston VC conference and all the panelists are from the other side of the country.
I left SAP recently with a couple of observations that I am using to inform my decisions about where my new company goes:
1) Direct enterprise selling sucks, is highly inefficient, and makes you do unnatural things in your product strategy in order to drive higher deal sizes
2) Large enterprise software vendors are not the future. The whack-a-mole selling model where a handful of vendors (172 public companies in hardware and software) are fighting it out over approximately 50,000 business customers just can’t be the future! There are 38 million businesses in the U.S. alone that have less than 10 employees, there just has to be a way to grow our collective markets by appealing to these business users and I’m pretty confident in saying that it isn’t going to come from SAP, Oracle, or IBM.
3) The SOA-ification of big enterprise products has attacked a technical dimension, not an economic or business model one. In a somewhat bizarre turn of events, the historical strength of market leading business applications, the integrated suite approach, is being turned from an advantage into a liability. It’s like if you went into the Gap and wanted to buy a pair of jeans but because of the way the Gap was structured and how they merchandised, they would only sell you a pair of jeans, socks, underwear, shirt, jacket, and a hat… and when you told the salesperson that you just wanted a pair of jeans they said “but we are selling you a pair of jeans”.
4) Big enterprise software has historically been a product driven development process, not a user driven approach. Just look at the fact that all these companies have applications “products” and “modules” and “components” instead of something more logical, like “process portfolios” that map to what people actually do in their jobs. Furthermore, there is a big disconnect between what users do and what vendors build for the simple reason that no vendor except Salesforce.com (more on that later) is selling to people who actually use their software, they are selling to people who buy and implement software for other people in the organization. Traditional enterprise vendors will tell you very convincingly that they are all about process, buuuuttt what do they actually sell you? Applications.
5) Lastly, and most importantly, there are no new big killer apps that are going to be built for today’s enterprise. Global business has spent the last 40 years automating every corporate function that is worth automating, and then they automated it again through “process reengineering” and once more when that didn’t work out quite like everyone thought. Today’s enterprise software market is about finding gaps and filling them, linking products in new ways, and leveraging more value out of IT investments that have already been made. I think the consumer side of the business is a fantastically rich opportunity landscape and if I were building a company today the company my team is building will straddle both worlds.
So getting back to the Boston area VCs, the reason I felt a disconnect with this group is that they were still thinking in the enterprise 1.0 mindset while fully acknowledging that most of the artifacts of the 1.0 version are antiquated. It takes a massive jump in mindset to believe that a company can exist by:
1) Building applications from other people’s stuff (OPS). There is a proliferation of web services being driven by all players in the market but they are largely looking at this as the mechanics for how to build and manage their own products. I look at the growing repository of web services and see a company that exist to package these services as components for new “meta-apps” or applications that users themselves are creating and publishing.
2) The “departmental sell” strategy is thrown around as essentially a downsized version of the traditional enterprise sell. In reality, the departmental sell is all about selling to people who use your software, actually use it in the sense of sitting down in front of it and really using it. This is one half of the substantial innovation that Salesforce.com brought to the market, the other half being that they figured out how to do this with profitable unit economics.
2a) The closed loop process of seeing and hearing from actual users can inform a product development roadmap in ways that the traditional approach never could. As an added benefit, seeing in realtime what people are using, in terms of functionality, means that you can strip out the crap that didn’t work to your user’s satisfaction and wasn’t adopted. Wow.
3) Living on top of the idea that a software service can be built by and for it’s users featuring services that are built and supplied through other vendors, and sold through a channel(s) that doesn’t feature a bag carrying salesperson.
It’s an incredibly frightening thing to leave the safety of a very large company like SAP for a company that doesn’t qualify for a Cogenz beta account (Niall said he’s take care of us!), but I am comforted by the fundamental belief that the enterprise software industry is undergoing radical change that has little to do with technology alone. In other words, the company may not succeed but I know that the principles that we are building on put us in the very forefront of where this business is going and we will all be better off for it. My big concern at the moment, aside from delivering a product, is finding the right investor syndicate that not only believes in what we do but is capable of putting aside a lot of historical experience while we all learn how to do business at the beginning of a new chapter.