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Enterprise Startups: Hype vs. Reality

I find it simultaneously strange and predictable that the current hype around enterprise startups began in earnest only in Q2 of this year. Several things to clarify about that statement: (1) “strange” because favorable endemic trends supporting enterprise were clear well before this year; (2) “predictable” because the larger media / tech community only really gets going on a topic once the public markets and acquirers seem to “weigh in”; and (3) “hype” because this fervor has been driven largely by the journalistic community.

Let me be clear that I’m not denigrating venture / tech thought leaders for chiming in on a topic now that eyeballs demand it, nor tech-coverage bloggers for doing their job. A number of VCs have been presciently focused on the space for years (cf. Kevin Spain of Emergence & David Skok of Matrix). And many tech bloggers have sounded off on the space with valuable insight. But a few hundred SAI / TechCrunch articles a true market trend does not always make. I think today, a good deal of recent enterprise infatuation is shallow or misplaced.

Looking back on IPOs over the last year or so, and roughly categorizing them into enterprise vs. consumer, it’s clear why we’re now so sweet on the former. Let’s take a look at some IPOs and their performance as of about a week ago:

Maybe not the definitive list, but the point is clear. The divide in performance is staggering. Kayak is about the only winner in the consumer category here (reinforced by its recent sale to Priceline). And even that company is somewhat of a hybrid, with nearly half its sales driven from rev share deals with OTAs. Combine this with $20B+ in enterprise M&A activity YTD and you can see why enterprise favoritism in the media was a foregone conclusion. This leads us to our central question: How much of this excitement is well-placed, and how much of it is truly hype?

In my view, about half. To look at exits / stock performance over the past year and write off consumer startups (not uncommon in some form these days) is where  enterprise fanfare has simply departed from reality. There are a number of factors we can point to in explaining the success of recent enterprise exits. Usually, demand for enterprise services is signaled with cash rather than usership, obviating lengthy pre-monetization user base building periods. Often this cash comes in via recurring monthly contracts, which offer better visibility to both legacy tech players freshly acquisitive in an effort to maintain market share and public market investors (and underwriters!). Most of the time, even uses of proceeds (e.g. R&D for the frequent feature updates that SaaS products need) are clearer. These features, however, aren’t so new and have come with some trade-offs (e.g. lower margins vs. software, more frequent update requirements, etc.). Nor do they protect from many of the issues that have plagued recent consumer IPOs: a few glossed-over business flaws (Groupon, Zynga) or the harsh shift from private to public valuation (Facebook).

The truly exciting enterprise trends are defined by emerging technologies hitting stride, new blood in the corporate board room and an aging oligarchy of IT giants. The endemic trends supporting enterprise today are just now coming into full force and warrant the enthusiasm they’ve received. Reduction of development costs due to cloud infrastructure, the incorporation of faster data storage & processing technologies, the corporate need to chase both consumer & employee into new platforms like mobile / social, and the list goes on; these are the reasons I believe the next decade will be a special time in enterprise investing.