Yesterday we wrote about Enterprise 2.0 from the point of view of the Enterprise, the buyer. The conclusion was that the impact of social media on the Enterprise was very big, addressing the very "nature of the firm". This post looks at Enterprise 2.0 from the point of view of the vendor, specifically startups. This is a 30,000 foot view, but we aim to get past the hype to insights you can use in your startup. Further posts in our recently launched Enterprise Chanel will drill into specific market segments, companies and technologies.
- Subscriptions are the best revenue you can get. Subscription revenue is more recession proof than advertising and more predictable than traditional enterprise software licensing. As long as you don't mess up, you will have a low churn rate. Then your new subscriptions drive your revenue growth
- It is much easier to get subscriptions from a business than from consumers. Sure we all love the idea of consumer subscriptions, the potential is enormous. But do this reality check. How many subscriptions do you pay for? How many current subscription costs would you love to eliminate or drastically reduce? What would your really (no, really) agree to pay for every month? We are in a serious consumer recession in the developed markets that may last a while. What was always hard, just got an awful lot harder. Selling to business is much easier, if you focus hard on the next rule.
- The other 80/20 rule. 80% of enterprise IT budgets just "keep the lights on". Only 20% goes to new stuff. I learned this in the technology nuclear winter in 2002, when a 20% cut in IT budgets meant that no (zero, nada) new projects were approved. If you can show how to reduce that 80%, you get a better shot at the 20%. That 80% market is a replacement market. You need to know what cost you are replacing. The incumbents are looking at the 20% budget as well and they have the inside track. You have to attack the 80% to make it big.
- "Parallel replacement" is new. The old enterprise replacement market was based on capital expenditure write offs. If the client bought a $1m license fee over 5 years ago, you had a shot at selling another license fee for something "better, faster, cheaper". In the new enterprise world of SAAS and open source, upfront license fees are the exception rather than the rule. Buyers prefer to hold onto the old stuff a bit longer until they can see either an open source or SAAS alternative. Replacement is always very risky, leaving incumbents in control and startups banging outside the door in frustration. So you need to show that you can run in parallel with the existing solution for a period until you are established enough to be a viable, safe replacement. Step 1 is run in parallel, step 2 is replace. This is what Google Apps and Zoho are doing to Microsoft office (I use both Google Apps and MS Office. Even though I use Office less frequently I own a license, so why delete it? When I get a new laptop I will decide whether I need to buy Office). To play this new parallel replacement game you need to a) offer a free entry point (the Freemium strategy) so you get traction with a low cost of sale and b) you need to show one very clear new value proposition that will tap into that 20% budget for new stuff.
- Have one simple new "blue ocean" value proposition that any business user can understand. You need this to access the 20% of budget going to new stuff. Being "cloudy" is not a value proposition, it is simple]y a way to deliver your value proposition. The incumbent can always launch their SAAS equivalent. Your free entry level just gets you through the door so that you get a chance to upsell to your subscription; free is not a value proposition. You have to show how you will do something really basic such as either a) increase revenue with a low cost of sale or, b) reduce cost on an existing process or c) create strategic sustainable advantage in measurable ways. Most likely you will do this by enabling better collaboration/communication, both within the enterprise but also, more critically, outside the firewall to the "extended enterprise". For a startup, this has to be "blue ocean", a market that has not yet been defined by the incumbents. By its very nature, this means the market size will be very hard to define and there will almost certainly not be recognized external authority that has defined the market size. Smart VC understand that Blue Ocean strategy and precise market size estimates seldom go together.
- SaaS ++ means that Open Source is no longer a problem. Open Source has been great for buyers but it has also taken the entry level market away in most segments and that trend shows no sign of letting up. That is bad news for a startup looking to sell traditional software with a "better, faster, cheaper plus we try harder" replacement pitch. You cannot undersell Open Source. That has forced many ventures with great software and strong teams into the dead-pool. With a "SAAS ++" offering, you can use Open Source as the base, add a bit of new code and bundle it all up with hardware and service in a monthly fee. Unless buyers really want to do all that in-house, using their dwindling internal IT staff, you have a shot at it. SAAS alone however is not a barrier to entry. Anybody can replicate it. Which means (smart) VC will/should pass. You need the "++" bit as well. That is likely to be something to do with viral, communications and network effects that create a growing user base and proprietary data coming from that base. That is the "magic sauce".
- You need to become a very good financial and data modeler. You will need some old-fashioned face to face relationship selling to get large enterprises to understand your solution, so that the "powers that be" encourage adoption and do not seek to block it. But the business will grow one subscriber at a time and users convert to subscribers one click at a time. Modeling becomes a core competency. Modeling the costs of all the SaaS components (R&D, hardware, infrastructure software, software maintenance, system and data maintenance). Modeling the cost of subscriber acquisition using SEO, SEM, social networking, conversion from free to paid and inside telephone sales in a highly efficient funnel process that delivers the right $ per subscriber. Modeling the revenue growth with multiple what if variable assumptions. Modeling the ROI for your clients at various levels of adoption.
- Most external market size projections do not help your business plan. Forrester Research reports that Enterprise 2.0 will be a $4.6 billion market by 2013. That is not nearly granular enough for a real business plan. You are not really in the Enterprise 2.0 market. Saying "we will get 1% of the $4.6 billion Enterprise 2.0" market is totally meaningless and will simply get you shown the door in the VC office. You are in the market of solving a specific business problem, for a specific type of customer, competing against specific incumbents and startups. That is how you need to build a market size, from the bottom up. This is particularly true for "blue ocean" strategies where the market has not been defined by an incumbent. Building the real world, bottom up market size takes real hard work and detailed market knowledge. Look for a small enough market where you can get 20% and take that to 50% share and then leverage that market to get 10% in another market. Rinse and repeat. It is an old formula, but it works.
- You need VC, they need you but there is a disconnect. Since 2000, most VC have sent any business plan with the word "enterprise" straight to the trash. With good reason. During the nuclear winter, the enterprise IT market was dead as a dodo. Then the big incumbents got into the consolidation game and it looked like you would count enterprise IT vendors on the fingers of one hand. The cost of entry was high, needing expensive sales teams upfront and the revenue was lumpy and unpredictable. Yech. Better to back a few inexpensive developers building a free service that some big vendor would buy and figure out how to monetize. That was a great game for a while. Most VC now view it as in its final innings at best. There is a shortage of buyers, no IPO market, we are in a cyclical downturn for advertising and in a major funk figuring out how social media can be funded by advertising. So VC need Enterprise 2.0. But they have missed the early winners. Very few of the current Enterprise 2.0 startups are venture backed. This is a disconnect. The early players always find it easier to bootstrap than later vendors. Today you need capital to fund the ramp-up and to build distance from competitors as the Enterprise 2.0 market moves from "below the radar" to "early hype" phase, thus dragging more entrants into every category.
- Vertical is not the same as Horizontal. Classic Web 2.0 services such as Delicious, YouTube and Skype are geared at mass markets. Anything that is more niche has tended to be called "vertical". That is confusing. Vertical means a specific industry such as banking, healthcare or manufacturing and sub-sets of those industries. Horizontal (applying to any industry) should mean a set of common and linked features used by a specific type of person in the company (e.g. accounts payable by Finance, CRM by Sales and so on). The general rule of thumb has been for vertical ventures to be bootstrapped and eventually rolled up into larger entities. VC tend to view vertical as too limited. Horizontal on the other hand is big enough.
- Know how to deal with secrecy, structure and control needs. Social Media is about being open, loose, unstructured, informal and fun; no ties allowed. Enterprises are about secrecy, structure and control. Ties show that you are serious and fun is for after work. The ties and fun bit is just style. But secrecy, structure and control is real. If you threaten those, many forces within the enterprise will shut you out. It will be like the red blood cells attacking the foreign virus. On the other hand, if you go along with all the secrecy, structure and control rules of the enterprise you will lose the social media benefits of extended enterprise collaboration and innovation. Many people within enterprises understand this and some of them are in a policy-making position of authority. In general, the trend is towards loose, unstructured, "emergent business networks". So "make the trend your friend", but beware of the very strong forces of opposition and deal positively with their legitimate needs.
Conclusion
What is your position in the Enterprise 2.0 market. Do you work in IT in a large Enterprise? Do you work for a large incumbent Enterprise IT vendor? Do you work for a startup that is going to change the Enterprise world? Are you writing about this rapidly emerging market? Do you have unique insights or research to share? We would love to hear from you in the comments and maybe as a Guest Author. Email us if you're interested in writing for ReadWriteWeb's Enterprise Channel.
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Comments
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excellent post, especially point #11 which maybe most of us social media fellows have problems to understand and built upon it
Posted by: george tziralis | August 21, 2008 2:42 AM
Great Post esp yr point No 3 is right on the money.
Good stuff its refreshing :)
Posted by: Vishal Sharma on Startups | August 21, 2008 4:32 AM
It's nice post, Thank you for give me a new information :)
Posted by: EL Locco | August 21, 2008 5:17 AM
Hi Bernard, good post !
I'm working for a French wiki provider (we turned 4 this summer : http://is.gd/1NcB , we're employee-funded and profitable since the start) and there's a lot of items in your post that matches our current business model :
#1 & #2 : Right on target. Enterprises, especially larger ones, are basically asking for subscritptions. They're looking for a guarantee that the service or the software they're using won't let them down and that someone will be there to help them whenever they need it.
#3 & #4 : Building Open-Source software means that enterprises can try out our products and use them for a few people before starting to think about a full-sized deployment. No entry cost means it is much easier to step into the game. Plus since it is wiki software it plays well with existing files (Word documents) that can be attached to pages, then replaced bit after bit when new documents are created right into wiki pages.
#5 : Companies don't care about nice stuff. They want the stuff they buy to make them more productive. This means they're looking for added value. The professional Open-Source model we're using helps us provide companies with just this : the value we bring (through support, consulting, training...)
#6 : We actually found that most companies (at least the biggest ones) are not yet ready to embrace pure SaaS software distribution models. This is even stronger in France, where an IT department can hardly accept the idea of a business service running outside the corporate firewall.
#7 : Creating processes that make the whole company effective, especially as it starts growing, is hugely important in order not to dilute skills and ultimately revenues.
Another interesting thing related to this point is the way we get new customers : while some customers start small on our Open-Source products and come to us afterwards, some others (specificall big French cmpanies) are used to long-lasting, large-scale buying processes where you have to send a sales guy for a series of appointments before you'll have any chance to close the deal. Learning how to deal with both types of approaches is key.
#8 : This is so true. There is no way an overall market analyst projection will ever help you. What matters isn't the big thing, it is whether there's someone down here willing to pay some money for the product you're offering. Customers are looking for practical answer to their problems, not buzzwords. Plus the subscription model isn't compatible with buzzword-selling the way the software licensing model is.
#9 : We started in 2004 (we were one of the first professional wiki vendors back in the days) and are still employee-funded to this day, which probably confirm the early bird / bootstraping theory.
# 10 : In the case of the products we're offering, horizontal came naturally since collaboration can take place anywhere, at any level within an organization, from the smaller scale (10 people or so) to the widest (50,000+ people). However while this means the potential customer base is wider, it makes it harder to differentiate yourself from competitor's offerings.
# 11 : No company should forget this. One of the very first features that were added to XWiki was the ability to tighly control access rights on the wiki. While this goes against the spirit of open collaboration, virtually every company we were (and we are) talking to are asking for it. Enterprises simply aren't an open collection of people willing to do stuff together. They've got processes and rules and security issues and professional software vendors (even the Enterprise 2.0 ones) need to accept and acknowledge this.
On a related note, one thing every startup trying to make it into the business world should think about is integration with standard enterprise authentication mechanisms. There is no way out of LDAP, at least as of today.
Thanks for sharing your insights, I hope you'll keep going. I'll be following the Enterprise channel closely.
Posted by: Guillaume Lerouge | August 21, 2008 6:10 AM
I almost skipped over this post because of the annoying term Enterprise 2.0, but in spite of that, it's excellent. Nice job, especially #3.
Posted by: Wilkes Joiner
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August 21, 2008 7:09 AM
Hi Bernard,
Thank you for this post.
It describes exactly how start-ups have to present themselves during a crisis period. This article could have been written in 2002.
As to me, your post means we are going through another financial recession... See you in 2 years.
Posted by: stetoscope | August 21, 2008 7:28 AM
great article.
Posted by: Jahmon | August 21, 2008 8:41 AM
Great post. #7 is also important to appease the business analysts in large enterprises. I work in a large enterprise and we've knocked vendors out of consideration because the prospects of them being around in 3-5 years were not evident. You should be able to give a companies business analyst some solvency.
Another thing for new Enterprise startups is that you should understand that enterprises buy new systems in cycles. If your targeting an enterprise find out when their fiscal year starts and hit them up about 5-7 months before, generally that's when planning is started done if you want your system to be part of the budget. Then don't expect them to actually purchase anything until their Annual report has been released, and be ready to respond.
Lastly if you sales team can't grab useful positioning information from SEC fillings they aren't trying hard enough.
Posted by: Shawn McCollum | August 21, 2008 9:27 AM
Thanks for this second nice Big picture of Startup challenge! Also for presenting me the Blue Oceau Strategy concept.
Geoffroi
Posted by: Geoffroi Garon | August 21, 2008 10:14 AM
Thank you for this great information regarding Enterprise 2.0
i am also interested in the 20/80 rule or the pareto's rule, which i feel is very true in each field.
Posted by: United Voices | August 21, 2008 11:15 AM
First and foremost, I'd like to say I'm glad to see this subject being discussed. I look forward to next posts and I have some thoughts I'd like to share.
In my opinion, hoping that wikis, blogs and social networks will change enteprises to enteprises 2.0 is wrong. Why? Because they are not new in there. These are optimizations rather than revolutionary changes. Wikis are a nice way to share information within organization, but the same has been achieved for years by sharing files over corporate LAN. Social networks existed in companies for years in the form of e-mail and, to lesser extent, IM.
The key characteristics of software used in companies today is focusing on the company itself. We've got accounting systems, CRMs, VRMs and lots of other examples which share a common view on the world - the enteprise is in the center and all it sees besides itself are other entities directly cooperating with it. We all know that in reality a toy produced in China goes through 5 or more entities before it reaches the customer, therefore knowledge the company has about it's market is drastically limited. If I'd be a retailer and I see that sales of a given product fall flat - how long it takes until this information reaches somebody who can find out why is it happening? A week? A month? Or even longer? Current organization of economy is a lot like trying to control a robot on Mars from Earth - it's possible, but delays waste time/money. Each entity in supply chain between manufacturer and final consumer creates some information and at the same time loses some of what it got from it's vendor. The system is self-organizing, but definetely it does not use available resources efficiently. The game Google started few years ago - to organize existing knowledge and make it easier share it - has just begun and has huge potential.
Enterprises 2.0 will need to change their perception of what they are. They are not center of the world contacting with their customers through "neighbours". Each company is a part of an ecosystem and the key to new revolution in terms of productivity is embracing this fact. What is needed is social network on steroids. Not just me and my friends, but rather me and friends of my friends of my friends... Of course, processing all the information from the entire supply chain is not feasible, therefore filtering, classifying and automated merging of information is going to be needed to make this usable solution. Data portability vs. company secrecy is the fight which will decide how fast we can reach new level of cooperation between companies in global economy. It's on now.
I focus on manufacturing in this comment because I think the revolution will happen in there rather than in services, as the potential for growth lies in limiting the resources wasted now because the enterprise does not see the whole picture. It's not about increasing the amout of goods which are being produced. It's about savings which can be made by producing or not producing them at the right time.
Posted by: Robert Janeczek | August 21, 2008 5:10 PM
Coupling "secrecy, structure and control" with any sort of collaborative features is really key for your product to be appetizing to businesses. And it IS tricky, but done well... well, we're banking on it anyway.
It's not limited to the big enterprise corporate types though -- business of any size have the same issues.
Great post!
Posted by: Tara Kelly
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August 22, 2008 2:10 AM
We're observing and validating many of the B2B strategies described in this excellent post. Point #1 and #2 have been valid for many years since we chose our pricing and business model (since 2001). #5 is a sound reminder for the marketing managers to stay focus on value proposition and not just buzz-words. Last, #6 is a natural evolution of web app, SaaS, and open-source: Developers build and Imitators copy.
Posted by: Ad Manager | August 22, 2008 10:15 AM
#11 is perfect! This is what I deal with every day in a large corporation trying to implement Web2.0-ish technologies.
Posted by: k3rm1t.openid.org
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August 22, 2008 11:01 AM
Kudos to the Cloud Crowd for Re-Inventing the Wheel!
One thing 30 years in the IT industry has taught me is that the more things change, the more they stay the same. Another is that the only memory we seem to access is short-term. Yet another is that techno-marketeers rely on that, so they can put labels like "revolutionary" and "innovative" on platforms, products and services that are mere re-inventions of the wheel ... and often poor copies at that.
A good example is all the buzz about "Cloud Computing" in general and "SaaS" (software as a service) in particular:
http://tinyurl.com/6let8x
Both terms are bogus. The only true cloud computing takes place in aircraft. What they're actually referring to by "the cloud" is a large-scale and often remotely located and managed computing platform. We have had those since the dawn of electronic IT. IBM calls them "mainframes":
http://tinyurl.com/5kdhcb
The only innovation offered by today's cloud crowd is actually more of a speculation, i.e. that server farms can deliver the same solid performance as Big Iron. And even that's not original. Anyone remember Datapoint's ARCnet, or DEC's VAXclusters? Whatever happened to those guys, anyway...?
And as for SaaS, selling the sizzle while keeping the steak is a marketing ploy most rightfully accredited to society's oldest profession. Its first application in IT was (and for many still is) known as the "service bureau". And I don't mean the contemporary service bureau (mis)conception labelled "Service 2.0" by a Wikipedia contributor whose historical perspective is apparently constrained to four years:
http://tinyurl.com/5fpb8e
Instead, I mean the computer service bureau industry that spawned ADAPSO (the Association of Data Processing Service Organizations) in 1960, and whose chronology comprises a notable portion of the IEEE's "Annals of the History of Computing":
http://tinyurl.com/5lvjdl
So ... for any of you slide rule-toting, pocket-protected keypunch-card cowboys who may be just coming out of a 40-year coma, let me give you a quick IT update:
1. "Mainframe" is now "Cloud" (with concomitant ethereal substance).
2. "Terminal" is now "Web Browser" (with much cooler games, and infinitely more distractions).
3. "Service Bureau" is now "SaaS" (but app upgrades are just as painful, and custom mods equally elusive).
4. Most IT buzzwords boil down to techno-hyped BS (just as they always have).
Bruce Arnold, Web Design Miami Florida
http://www.PervasivePersuasion.com
Posted by: WebDesignMiami | August 23, 2008 3:09 AM
Great comment from Robert Janeczek (#11).
Unfortunately, people (including me) have been trying to make this vision happen at least since the mid-1990's. I still think it will happen, but it runs into roadblocks not only at the boundaries of companies, but also at the boundaries of departments within companies.
Needs a different mindset, like open source manufacturing and distribution. Which I think is also happening. But not in big enterprises. (Which I think gets back to Bernard's previous article about the firm...)
Posted by: Bob Haugen | August 23, 2008 4:13 AM
Thank you for a very interesting article.
Posted by: Nivell Rayda | August 23, 2008 11:26 AM