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Consumer Internet startups are all the rage these days. But while the opportunity is vast, so is the competition. Most consumer sectors are already overfunded, and the game tends to be “winner-take-most-or-all.”
What if there were a different market for talented consumer Internet entrepreneurs to pursue? Say, a segment with less competition, the potential for multiple winners and customers who are willing to pay up front on six figure contracts.
There is: The Enterprise 2.0 market. And the good news is that not only is it underfunded, but it had been somewhat neglected until the recent success of companies like Jigsaw.com, an El Dorado Ventures portfolio company that was acquired last year by Salesforce.com.
The ubiquity of cloud computing and always-on connectivity that is driving the growth of the consumer Internet is having the same effect on the enterprise – only without the hype.
Furthermore, with the so-called “Consumerization of the Enterprise,” Internet entrepreneurs with consumer-centric backgrounds have exactly the right experience to thrive in the Enterprise 2.0 space.
With multiple Enterprise 2.0 companies already in our portfolio, we have a lot of firsthand experience with what works in this space. We’ve come up with five common components of a successful Enterprise 2.0 startup, which may sound suspiciously like they were stolen from a consumer Internet business plan. They are:
Lead with product
Just like in the consumer space, the user experience is job 1. Time to Value (TTV) is the new ROI: How quickly does the new user get more value from the product than the effort put in? Your goal: Delight the user immediately.
TripIt (acquired by Concur) is a good example. Sign-up in just a couple clicks and you’re effortlessly building and sharing travel itineraries. During your first experience with the product, you find multiple new and valuable ways to use it beyond your initial expectations.
Leverage cheap existing infrastructure
This may be the biggest change in the development of software for the enterprise: You no longer need to start coding from scratch. Instead, you can leverage the same tools the consumer companies use, such as Ruby, PHP, Cloud IaaS and PaaS, open-source infrastructure and management tools, as well as virtualization.
Because you’re using industry-standard tools to build your product, Service Level Agreements (SLAs) don’t need to be as extensive as they used to be. When you need more performance, use virtualization to scale horizontally, not proprietary coding.
Constantly improve your product by incorporating real-time user input, and iterate often. Annual releases are so last decade.
The evolution of sales
Here’s the typical evolution of your selling process, in three simple steps:
- Phase One: The app is free for a trial period and delivered over the web (obviously). You must delight the user here, or it’s game over – you’ll never get to the next two phases. In Phase One, you also penetrate the enterprise and set the stage for later growth.
- Phase Two: The next step in the evolution is inside sales, preferably in a lower-cost region than Silicon Valley. Upsell existing customers on additional features, usage or capacity.
- Phase Three: Hire a direct sales force to sell the value of your product to larger enterprises. This is the least consumer-centric aspect, but it’s also where you’ll find those six-figure deals.
The biggest mistake Enterprise 2.0 startups make is trying to succeed without phases two and three. Everyone thinks they are different and shouldn’t have to do inside and direct sales, but in our experience, almost everyone actually does. Software has always been sold to enterprises and will continue to be sold for the foreseeable future.
Don’t skimp on the secret sauce
The second-biggest change associated with Enterprise 2.0 is that it is quickly freeing workers from having to use boring, poorly designed software because it was handed down from on high. Give your software a personality. Use game mechanics and make it fun. Build a community around user-generated content. Leverage existing platforms to meet your future users where they already are: Salesforce.com’s AppExchange, Google Apps Marketplace, Intuit Marketplace, LinkedIn. Publish APIs so that others can leverage your platform. Monetize the data flowing through your product.
While not every business will be able to incorporate all of this “sauce,” the ones that do tend to help increase their customer adoption (and often their valuation!). Yammer is a good example of an Enterprise 2.0 startup leveraging social networking techniques first pioneered by consumer Internet startups. Their secret sauce has led to broad enterprise adoption and heady valuations.
Squeeze the buck
With today’s low-cost tools, you can launch and get traction for less than $1 million in start-up capital. That should get you as far as having paying customers providing meaningful feedback. It should also give you a good sense of your Customer Acquisition Cost (CAC). Both of these will provide the validation you need to raise your first substantial institutional funding.
Scott Irwin is a General Partner at El Dorado Ventures with a lifelong love of software and technology. He is currently bullish on small startups’ ability to disrupt the stodgy enterprise software market.
Tom Peterson is a General Partner at El Dorado Ventures. A reformed telecom investor, Tom is currently enamored of lean startups and using game mechanics to drive user behavior.