Mark Gritter (markgritter) wrote,
Mark Gritter

Why aren't startups targeting the enterprise?

Jim Goetz of Sequoira Capital says "surprisingly few" startups target large enterprises (as opposed to the consumer or SMB space.) He points out that:
  • There have been significantly more $1B+ "enterprise" company IPOs than consumer IPOs in the past decade.
  • Startups in this space often face only one or two competitors--- the incumbents--- compared with a dozen well-funded startups pursuing the same consumer space.
  • Enterprise infrastructure is ripe for disruption by new technologies and business models.
And yet out of every 100 entrepreneurs they see per week, only about 12 are are focused on the enterprise market.

I found the talk a little disappointing. (The interviewer seemed ill-prepared for this topic and went off on tangents like asking Nir Zuk about his history and company.) Misters Zuk and Goetz did a good job talking about the strengths of targeting the enterprise, and not much (if anything?) about why this doesn't mean more entrepreneurs in that space. (Jump ahead to around 22:00 if you don't care about Palo Alto Networks.)

(Startup idea: real-time on-demand transcript generation. Chop the video into 30-second clips, farm them out to Amazon Turk and merge the resulting text into something that can be read much more quickly than watching the whole 30-minute clip. Look--- it's consumer-focused!)

Part of the reason might just be because the enterprise space is tougher. The sales cycle will be longer, the investment typically higher, and more infrastructure is needed to get started. I joke about wanting my next startup to "fail fast" but realistically I expect enterprise startups to have a seven-year cycle (or more). It takes 2-4 years to build the technology, an another 2-3 to see whether you can grow into a successful company.

Fusion I/O: founded 2006, IPO 2012 (6 years)
Kealia: founded 2001, acquired 2004 (4 years), product released by Sun 2007 (6 years)
Nimble: founded 2008, product launch 2010 (2 years), heading toward IPO in 2014+ (6 years)
Nicira: founded 2007, soft launch 2011 (4 years), acquired 2012 (5 years)
VMware: founded 1998, first product 1999 (1 year), enterprise product in 2001 (3 years), acquired 2004 (6 years)
3PAR: founded 1999, shipping in 2002 (3 years), IPO in 2007 (8 years)

But in addition to taking a longer time to grow, the company needs more to get started. You can't crank out a MVP for (much of) the enterprise space with a tiny team. That means more investment needed up front. If 88% of the entrepreneurs Jim Goetz talked to were targeting the enterprise, how many would he really fund for a two-year development cycle? How many first-time startup CEOs? I suspect the skew he sees is at least partially self-selecting. (The additional funding leads to increased dilution as well--- the founders of the companies above, except Kealia, don't have anywhere near the level of control that Google's or Facebook's founders do.)

A third reason may be that many entrepreneurs simply don't understand the enterprise space. Particularly if they've only worked for startups, and not for large companies, they may have a very consumer and SMB focus just because that's the environment they're familiar with.

Any other ideas?
Tags: startup
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