The enterprise has changed the game for venture capitalists. Sequoia Capital Partner Jim Goetz implied as much earlier this year at TechCrunch Disrupt when he said it was “shocking” that more entrepreneurs weren’t targeting the enterprise.
His point: The past 10 years have produced twice as many enterprise-focused IPOs worth $1 billion more than consumer IPOs.
But before you decide to go after the enterprise market, be warned. VCs expect more from their portfolio companies than ever before.
Let’s flash back to Sept. 15, 2008. It was the day Lehman Brothers filed for bankruptcy, and the day GoodData began raising money for our first round of funding. In the months that followed, VCs cancelled previously announced funds, dramatically pared back investments and—in the case of Sequoia Capital—issued its now-famous “presentation of doom” to its portfolio companies, explaining why they had to cut costs.
Later, as the economic climate began to improve, I watched venture capitalists crack open their wallets. With a handful of exceptions, they focused on different aspects of the consumer market. That’s because the consumer space was sexy and—thanks to innovations like Amazon Web Services (AWS) —it was cheap. Using AWS, a handful of engineers working on a shoestring could write apps, such as Instagram and Meebo, then sell their companies months later for a healthy profit for their investors.
While many of those small investments yielded nice returns, few were blockbusters. Facebook’s purchase of Instagram is the exception, but even that deal has been affected by Facebook’s disappointing stock performance. Still, VCs have not lost their appetite for blockbuster successes.
It’s especially true for the enterprise market, where VCs want to see a well thought-out business model, a clearly articulated value proposition, founders with relevant enterprise experience, and a product or service that finds the product/market fit sweet spot. They also want to see a track record of growth. (GoodData raised a $25 million Series C round in July that was dramatically easier after pointing to 600% revenue growth and tripling the number of our customers last year.)
Credit the high upfront costs of starting an enterprise company for VCs’ concerns.
That’s because startups in the enterprise market need an army of highly expert developers to create an enterprise-hardened platform and apps that meet stringent corporate demands.
At GoodData, for example, we have more than 100 engineers focused on delivering the capabilities and user experience our enterprise customers expect. And forget about courting customers with something that’s merely “cool,” like nifty effects from your mobile phone’s camera.
In the enterprise space, finding the right product/market fit means having a product that’s easy to sell, solves a business-critical problem, scales quickly and for which there’s strong enterprise demand.
But in the enterprise space, “easy to sell” is a relative term because many of the dynamics that defined selling to the enterprise in 1999 still apply: Anything that’s purchased has to work with what’s already installed. Large purchases have to be justified. And customers are leery of buying from companies that aren’t ready for primetime.
It’s why today’s enterprise-focused companies—startups included—still need dedicated sales reps who can demo a product, explain its value proposition, offer competitive positioning and know how to traverse customers’ different purchasing processes.
For proof, consider Salesforce.com, which reported 4,700 new employees between January 2010 and August 2012, primarily in sales.
For these reasons, it takes about five years and close to $100 million in funding for a startup to succeed in the enterprise.
It’s no wonder VCs expect more these days from their portfolio companies.
GoodData CEO and founder Roman Stanek can be reached via e-mail at email@example.com. He tweets at @gooddata.