Why is it that so many enterprise software startups continue to be structured as “mini-me” clones of Oracle (or pick your favorite large, established software vendor)? In a world of agile development processes, alternative distribution channels and customers accustomed to employing open source software that demands “self-help” evaluations, you would think that new business models would emerge. Instead, we see these very small companies, most of who have yet to reach cash flow break-even, adopt an extremely costly customer-facing organization (direct sales and support) paralleled by a rigid, long product development and release cycle. This seems particularly true in the data warehouse/business intelligence sector that our company, veloGraf Systems, is targeting.
My observation is that these companies are caught up in a vicious cycle based on the unproven premise that success in this space demands $20-50 million in capital. Assuming that is true, then only VCs who can (and must just because of the mechanics of large funds) write large checks invest in this sector. Having committed big sums and believing they are competing with large, established enterprise software vendors, these VCs insist on bringing in executives whose first reaction to the apparent chaos in many early-stage companies is to build a structure that reflects the large organization from which they have been recruited. A self-fulfilling prophesy. The burn rate takes off, the organization becomes less nimble and even more funding is required to build competitive sales and engineering organizations. Maybe I’m just showing my age and having a flashback to a database startup I ran using this model during the Internet bubble era but I found several contemporary exemplars of this approach while undertaking a quick competitive analysis exercise recently.
Of course, at the other extreme, there are the open source enterprise software startups who practice the “build-it-and-they-shall-come” model on the presumption that if you simply make enough noise tweeting about your cool technology and preaching to the converted cognoscenti, the sales will materialize. While usually practitioners of agile product development, startups operating under this scenario frequently lack a disciplined customer development process so critical to converting technology interest to product revenues.
Somewhere between the Oracle “mini-me” model and the freewheeling “cool-tech” approach is a business model that acknowledges the need for structure and experience but avoids a heavy-handed approach of jamming an inflexible large-company organization into a small startup. As I noted in earlier posts, I believe Steve Blank‘s agile customer development process and Eric Ries‘ lean startup principles can be applied to an enterprise software startup. With the right discipline exercised by the leadership team and investors, capital requirements can easily be half of Oracle “mini-me” model and quite likely even less. Even more interesting is that a lean startup with a differentiated product that is cash flow positive without the burden of an expensive, field-based direct sales organization potentially has a higher value to an acquirer looking to extend its product portfolio.