July 3, 2009

The future is already here - it is just unevenly distributed. —William Gibson

the enterprise software landscape beckons

 

These days, enterprise software seems to be the doddering fool of the software world that some like to mock and others like to lament. After turning around billions of dollars in return on invested capital for much of the 80s and 90s, enterprise software today has come to be associated with the institutional trauma that conventional cubicle farms inflict on employees. To be sure, consumer-oriented software and Internet startups have led the charge on innovation in recent years for a number of reasons, not the least of which are generational changes and the Darwinian nature of the market. No matter how much enterprise software may have fallen in favor relative to the hot consumer Web startups of today though, I think it is and will be one of the hottest sectors for innovation and investment for a number of reasons:

  • Enterprises still have the money. All the recent attention paid to consumer Web services has reduced the gaping void that used to separate the erstwhile ‘enterprise-grade’ (read serious) and ‘consumer-grade’ (read crappy) services. What hasn’t changed is the access enterprises have to the resources needed to buy these services. The average consumer has become used to cheap or free services that don’t give consumer Web service providers much wiggle room for channels or cross-promotion. The lack of viable business models not based on advertising isn’t helping either. Enterprises, on the other hand, will pay for a reliable, well-managed product or service that is valuable to the business, and in deal sizes that will sustain an ecosystem around the service provider.
  • Traditional enterprise software doesn’t serve Atomized Enterprises. We have seen in some of my earlier posts that Atomized Enterprises are beginning to emerge as a result of several economic, organizational and technological changes. Enterprises in this class must stringently maintain three kinds of discipline for their very survival, and will need a whole new class of software to help them do so. Analytics for RoI tracking, internal chargeback and immersive collaboration are but three kinds of software that aren’t served well enough for atomized enterprises by the traditional enterprise software sector. Atomized Enterprises will realize that attempting to build these on their own isn’t viable or even advisable and will be hungry for vendors that serve this sector.
  • Old enterprise software ≠ enterprise software now. Even if we take Atomized Enterprises out of the picture, the enterprise software market that produced impressive returns on invested capital was built on a set of assumptions that have been disrupted massively by the emergence of open source and software-as-a-service. In particular, open source has commoditized a lot of the lower end functionality that enabled vendors to command high margins on their sales. Not only is innovation pushed further up the value chain, the periodic payment model of software-as-a-service holds vendors accountable for delaying their innovation agenda with a too-long product cycle. Several VCs already realize that this enterprise software market is different than the one 20 years ago, but it bears repeating.
  • Innovation happens worldwide. In past business cycles, investments in enterprise software were done almost entirely in the American technological context. Now, a large contingent of international entrepreneurs from Eastern Europe, Asia and Latin America is better connected to a global pool of capital. Historically, these regions have evolved radically different modes of doing business in the face of severe economic constraints, and these modes are rather underserved with the current enterprise software market. In addition, for areas like mobile technology, India and many Asian countries, uninhibited by an installed base of legacy technology, have leapfrogged corresponding technology in the US. This combination of constrained modes of business and advanced technology open up several opportunities for innovation in enterprise-oriented products and services.

    • Investment interest from a lot of Silicon Valley VC stalwarts may be moving away from software and Internet services to cleantech, biotechnology, medical devices and other capital intensive investment areas. Software and Internet services, however, continue to be a significant investment area for midsize to smaller funds. In so far as software continues to be a viable investment theme, enterprise software is somewhat underappreciated as an investment area. Fundamental structural change in the consumer and market profile for enterprise software is something any good VC should recognize as a good investment opportunity.

June 27, 2008 | Filed Under Investment 

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