Competing with BigCo: 2018 Edition
One of the most interesting challenges in building an enterprise startup is navigating around, through, under, or over the big tech companies. There’s nothing new about this as doing so goes all the way back to the creation of Silicon Valley and companies like Intel and HP in the shadow of Fairchild, IBM, and GE.
A fascinating aspect of this is how the strategies or challenges in competing with these mega-incumbents oscillate from the mindset of aiming the forces disruption (perhaps overused and not always viewed positively these days) at them all the way to cozying up at all costs.
What is the best way to enter the market when the big companies seem so…big as they do today for the first time in a while?
Is Bigger Better?
The ebb and flow of competitive strategy is closely tied to the perception of strength of incumbents. For example, before Microsoft Windows really caught up, the strategy was about partnering with IBM, the mainframe legacy company. As the 1990’s Microsoft grew up, so to speak, the new theory disruption was all people could talk about. As we know that played out again but with incumbent Microsoft adapting to the rise of the internet.
In fact, as we now know in hindsight, it is exactly when conventional wisdom conflates today’s economic success with forward-looking product innovation that seeds are being planted for the next massive wave of innovation.
In the past two decades of tech disruption theory, one significant bit of learning is just how long disruption takes. While there are a few dramatic cases of seemingly “over-night” disruption to cite, in practice disruption has taken far longer than most originally thought — of course I remain a big believer in change happening slowly, then quickly. What appears to be the case so often is just how profitable technology companies can be after there is a broad consensus that a company or technology has been leap-frogged or at the very least has lost its edge with respect to innovation.
It is this long tail of very high profits that create the image of the unstoppable incumbent. We are in the midst of this right now — a convergence of conventional wisdom that there’s a bubble in startups and a stock market that is richly valuing public companies for fundamentals.
While the tech incumbents are clearly generating massive revenue and profits, nearly all of this comes from products developed long ago. In fact, as we now know in hindsight, it is exactly when conventional wisdom conflates today’s economic success with forward-looking product innovation that seeds are being planted for the next massive wave of innovation.
Big doesn’t mean best in electronics…small companies can contribute significantly to science and technology and when they do they make formidable competitors. –HP Company Newsletter, 1965
Google was formed at time when the incumbents of AOL and even Yahoo were stronger than ever. Facebook came just after the dot com bubble burst. Even the reincarnation of Apple took place after the bubble burst with products being developed as the bubble peaked. And for what it is worth, the PC ecosystem, particularly Windows, was relatively “flat” mired in Windows Vista while Firefox dominated and Google Chrome was appeared (Windows 7 wouldn’t come out for a year after Chrome). In the infrastructure space, the seeds were planted for both AWS and VMWare in the shadow of the dot com bubble.
In an historical context it is highly likely that the next wave of innovation in new technologies and new companies will happen right under the noses of big companies operating at what the public markets think of as peak (earnings) potential.
In fact, HP grew up exploiting this insight. As early as 1965 the company newsletter, Measure, even reminded the relatively new company (IBM was 20 times the size of HP and 50 years public) “[B]ig doesn’t mean best in the electronics industry…small companies can contribute significantly to science and technology and when they do they make formidable competitors”.
What Matters to Incumbents
Why is it that just when large companies seem the most successful there is also the biggest opportunity for small companies to innovate so much and create formidable competition? It does seem counter-intuitive and especially today when so much attention has shifted from the startup world to big companies.
The opportunity exists because when big companies becomes successful is when collective leadership becomes most focused on maintaining success. Leadership tends to see more risk in downside of the current plan and than upside in taking on new things. Importantly, they are also greatly influenced by customers, press, and public markets reinforcing the near-term financial success. The scale of success and accolades really get into leaders’ heads and impact the ability to take on real risk or more importantly to fail to see the futility of piling on more resources to the currently successful products.
On a mass scale product-market fit (PMF) enables this focus on success. While many in a big company might have been around before PMF, chances are most were hired after. They might think of all the difficult meetings and hard choices but in reality these thoughts, as real as they are, take place within the safety zone created by a successful product. As PMF dictates it is incredibly difficult to “mess up” (e.g., “snatch defeat from the jaws of victory” or “break into jail”) but that reality doesn’t stop the company from focusing on the main “levers” of the ongoing business and optimizing for those — all at the expense of doing new things in new ways.
From my own personal background, one of the most extreme examples of PMF would have to be Windows. One could debate when fit was established as some might say in 1992 with Windows 3.1 (and Office 4.2, how’s that for naming kids?) when enterprise deployments and shift to client-server were going like gangbusters. Most would say certainly say fit was achieved by the summer of Windows 95.
Thinking about the period from ~1996–2006 it is fascinating to consider all the events in the market that took place: massive international litigation, rise of the internet and web browsers, viruses and worms resulting from connected PCs, dot com bubble, some global economic concerns, and more. Also consider the self-inflicted challenges of four poorly received product releases until Windows XP SP2 and then a 5 year gap until Windows Vista, which wasn’t well-received.
During that time, the Windows business continued to grow considerably and the stock price was up 8-fold in a decade (twice that during the bubble). That certainly puts the idea of PMF in perspective. It also makes it clear just how overwhelming the fear of breaking things might for most people in leadership. Imagine seeing all those problems around you and yet the incredible reinforcement from customers, the press, and public markets. GENIUS!
So where do leaders focus efforts? What are the high-order bits for the company or leadership? What are the topics that everyone is thinking about in all those meetings all the time? It turns out, regardless of the type of product (enterprise v consumer for example) or even industry, operating a company in the midst of PMF drives four main focus areas:
- Monetizing Endpoints (Quantity). If the only thing that matters is PMF, then the only thing that matters after that is the number of end-points your business has. I use the term endpoint here to broadly encompass the ultimate source of money. In the enterprise space it might be seats/devices or for whole-company priced products logos. In the consumer space it is clearly a metric related to ad units seen by customer. That’s it. Nothing else matters. No matter what a company might be saying or doing around vision, roadmaps, and so on, what matters more than anything is the count of places where money can be collected.
- Optimizing Pricing (Price). The next metric is how much money is collected at each of those endpoints, which can be CPC, per-seat, per-VM, and so on. The setting and optimizing of pricing is something that becomes the most important role on the business side of large companies — it is even one of the 4 P’s for MBAs. The reason should be obvious, but a penny here and a penny there multiplied by a quantity like 100M pretty quickly adds up to real money. In particular the most obvious thing about selling at scale is the well-known strategy that the easiest money to earn is to collect an extra dollar from an existing customers versus doing all the work to find a new customer, which plays right into managing, allocating, and compensating sales resources. The dominant motion is to “deliver more value” to customers and either hope to maintain pricing in the face of competition or raise pricing in mature markets.
- Enhancing Bundles (Bundles). In a startup, there’s one product. By the time a company reaches PMF the product almost certainly has expanded (organically or otherwise) and crosses into several categories. In fact, one of the signs of a maturing PMF is that the product has come to absorb adjacent categories or redefined a category to be the combination of one or more categories — again often talked about as “delivering value”. This bundling turns out to be incredibly helpful for scale as the product team is actually making a single suite. Sales has one motion. All the marketing is driving demand for a single product. Collectively the whole motion for growth is then a focus on feeding the bundle — everyone wants more stuff in the bundle and the bundle to be bigger, I mean to have more value. Big companies for the most part talk about their bundles and occasionally dip into constituent or adjacent “modules” usually to claim credit for innovation. To know if something is a bundle or product, one simply needs to look at what the sales people are selling and what customers are buying. The vast majority of enterprise software economics can be allocated to a small number of bundles or suites. The most important aspect of bundles never actually discussed is the steep decline in usage of modules from the anchor product through the long tail. This puts massive pressure on pricing, and is even worse in SaaS where customers have the knowledge of their own usage.
- Operating Efficiency (Margin). Finally, all of these have a cost side of the ledger and it is no surprise but operating at efficiency becomes a massive focus. The internal view is that this is all about allocating resources to new and important things but almost all the time any savings are funneled right back into executing on the mainline product and revenue stream. In fact, even if there are rogue forces somewhere (creative product people that dream up something new, marketing with an idea for customers with a product variant, sales people with a new channel approach) the ability to get all of the other parts of the team aligned to make such an idea a success is rather constrained. If you’ve ever tried to allocate resources away from engineering or sales of a successful product the you know the immediate reaction is dire straights of unmet roadmaps, low product quality, or unfilled quota.
One can almost think of the overall gross profitability of a company to simply be Q*P*M for each of the bundles, and most companies have just one bundle that matters.
Where does innovation fit in this “framework”? First and foremost, innovation is viewed through the lens of working on each of these items. At the extreme for example, most internal rewards (financial or otherwise) are given to people for saving money or making the team more efficient. Marketing people get promoted for coming up with a new way to explain the existing products. Engineering is focused on optimization and likely integration across components of the growing product bundle. And of course finance is modeling how to raise prices without actually being seen as raising prices. That’s what innovation is — and that isn’t being cynical but it is precisely what the company is asking of everyone. The goal is definitely growth, but growth that comes from changing as little as possible.
Big companies will always debate the amount of innovation going on and will point to supporting evidence within a bundle, but a quick trip to a company web site will make it abundantly clear where the focus is and that is on the massive bundles and how much those cost. Regardless, any of that innovation is taking place within the context of an existing business and is thus incremental and “just a feature”. That’s why every startup looks like a feature to big companies.
In the heyday of Microsoft bundles, the entirety of the company could be distilled down into the metric of dollars per PC, $/PC. This was a basic view of endpoints (PC) and pricing ($) where the $s came from the Windows OEM royalty plus either the Office royalty (for individuals and small business) or the enterprise agreement subscription which even rolled up all of Windows into one number instead of two (this EA included most everything the company sold to a corporation). While there were lots of reports focused on revenue from sales of individual servers (SQL, Exchange, file/print) those were directly correlated with the EA $/PC. If you were to dive into CRM for a big customer the first thing you’d want to know is how many PCs. The health of a geography was measured by PC sales and so on.
One can almost think of the overall gross profitability of a company to simply be Q*P*M for each of the bundles, and most companies have just one bundle that matters.
Today’s Enterprise Endpoints
Today startups are facing massive technology companies in varying degrees of extreme PMF — which is why the public markets are valuing these companies so highly. The markets know that in the foreseeable future, it is highly unlikely these companies can do very much to break the flow of profits.
This is very different, though, than looking to these companies for what comes next or where the next big thing is going to be. Yet as we see these are often conflated. If history is any lesson, the next big thing will almost certainly come from a new company building a new product in a new way (editor note, Apple was essentially a brand new company in 1998).
In order to ground a discussion of what is going on at each of the big companies I hear about the most from founders, it is worth taking a look at the current status of PMF and where the focus areas might be for each of Google, Apple, Amazon, Microsoft, and Adobe.
On the one hand, many continue to speak of boredom or a frustration that we’re not getting to the next big thing fast enough (AI, ML, Autonomy to name three). Benedict Evans of Andreessen Horowitz does a great job describing this “lull” through the lens of traditional S-curves. On the other hand, the big companies spend a lot of time showing off all the special projects, incubations, and side businesses as either the next big thing or related to the core business. Because of the relative boredom with search, iPhones, cloud, office, and so on we pay too much attention to the latest connected speaker, feature-enhanced-with-AI, AR goggles, or laptop when these have little chance of materially impacting the main business one way or another, or for that matter transforming into the next big stand alone bundle/business.
Some of the most exciting exceptions to this pattern of decline center around flawlessly executed acquisitions.
It is easy to get too cynical about the great work being done at big tech companies simply because history has not been very kind to them — of course the number of data points is exceedingly small so generalizations are risky. The number of cases of organic transition from one platform to another in technology is exceedingly small. Consider that IBM never made it off the mainframe as the core platform. Windows and Intel remains steadfastly all about the desktop computing architecture.
Some of the most exciting exceptions to this pattern of decline center around flawlessly executed acquisitions. Consider the role YouTube has played in establishing an entire new base of monetizable endpoints for Google or the role of Instagram (and WhatsApp) at Facebook. These products yielded new endpoints that have revenue associated with them. Well-executed M&A continues to be the highest likelihood for creating new monetizable endpoints. In fact, it is almost always the case that new technologies and products developed organically will get folded into existing bundles, simply because they are often developed adjacent to the existing business. Of course the challenge is in executing M&A, which itself has massive challenges.
With this has background we can briefly explore the state of the business at Google, Apple, Amazon AWS, Microsoft, and Adobe.
Google is amazing in that it has the largest number of end-points across search, YouTube, Android, Gmail, Maps, Chrome, ChromeOS, and Google Cloud (platform and suite). It is well understood that 90% of Google’s revenue comes from advertising (note that the remaining revenue is $10B). The amazing growth seen in advertising comes from precisely the efforts around optimizing pricing, operating efficiency, and adding more to the ad-product bundle offered to advertisers.
All of this has taken place while the global usage of PC/desktop browsing is shrinking relative to mobile, which conventional wisdom dictated would be the disruption of Google. The question that is difficult to answer from the outside is just how much an Android endpoint contributes to Google from advertising compared to an Apple endpoint compared to a desktop, since Google earns no material revenue from the end-point itself.
So much of what we follow and discuss about Google is interesting and exciting but is built under the assumption that it helps drive more searches or more use of Android. One could really ask though, given PMF are these efforts winning new customers or delivering incrementally more monetizable searches, or simply engaging (or re-winning) existing customers and usage? A lot of what goes on is probably double or triple counted as “helping” — for decades at IBM simply doing work on a mainframe was a justified project. It is really worth noting just how much of Google overall happens under the umbrella of machine learning which in turn will help search, when it could be in practice what helps search the most is pricing optimization and making sure the browser-based queries on a phone are highly monetizable regardless of platform.
One of the things that happens in a big company is that everyone outside the core team executing on PMF is what I would say is the “great justification”. Teams go to great lengths to say how they contribute to or support the main business, without actually working on the team or taking direction from it. My experience is that this is an illusion in the early stages and in the late stages the sources of great internal conflict. The truth is neither is right because in the case of PMF, the ability to substantially impact the business is over-stated by most parties. [Note, this was added after first publishing as it got dropped in the edit cycle.]
This challenge is why there is a divergence of dialog inside Google where the talk is about Search and monetizing endpoints and outside where the dialog is about almost everything else (except at earnings time).
Google Cloud is a massive opportunity and addressable market, but also an early one especially for Google. In terms of aggregate monetizable end-points (across client and cloud) it is second to Office/Azure, due in large part because it has done so well in education (and startups) where it has majority share. In the business enterprise, Global 2000, one could reasonably argue Google Cloud has not yet achieved PMF and so will operate closer to a startup, which is great for them.
For startups, there are two significant opportunities. First is choosing to host on Google Cloud as Google has shown a significant interest in working with and listening to startups who choose Google Cloud. Second, there’s a lot of room in G-Suite to fill in missing capabilities and to integrate across the suite, though one does need to weigh this opportunity against the incredible footprint of the Office 365 opportunity to do the same (below) which is too often not fully appreciated in early stage startups until selling to established enterprises really begins.
Apple
Apple seems to be a company that for some goes through waves of being the “most innovative company ever” to just “grinding out more of the same incremental devices”, and often this happens within the span of a few months. If you put aside the rumors or Wall St craziness looking at supply chain or launch dates, Apple appears to be the strongest business with the most upside for the foreseeable future. This is counter to many people that think the iPhone is at the end of a cycle and Apple is not visibly in the next big thing of AR, autonomy, or ML (to pick a couple of next big things). Keeping in mind the start of this post which is the tendency to under-estimate just how much business there is at the tail end of PMF and also how long the tail can turn out to be, Apple is really just starting.
Apple has consistently proven more masterful at monetizing endpoints and optimizing pricing than anyone either imagines or gives them credit for innovating. The massive dollars per end-point and margins are without peer. In addition, the ecosystem around the phone (Watch, TV, cloud, iPad, MacBook, AirPod, accessories) are all price/margin/attach leaders. Once you’re in the ecosystem you are paying a lot every year and a lot of people aspire to join the ecosystem. Apple is one of the few companies that brilliantly avoids product bundles and masterfully executes on a multi-product strategy where each product makes money at volume, on its own (compared to say Pixel or Xbox). While Apple only has 12–15% global shipment share of phones, it commands almost all of the profits (this might sound familiar if you study PCs).
Where Apple is losing in emerging/developing markets, also happens to be where so far there is little money to be made — even more interesting it isn’t even clear in many of those massive markets how much of a search advertising market there is or will be. The most interesting question for Apple will continue to be growing share (in phones and in other devices), but with so much share to choose from and such an aspirational brand it is not difficult to see the opportunity.
As a reminder, although the focus is on Apple as a consumer company along the way it Apple has become an enterprise player in developed markets with little enterprise sales motions, though this is somewhat of a quiet giant within Apple as there has been so much success in delivering enterprise ready devices while maintaining pricing.
Amazon AWS
AWS is clearly one of the most amazing products to enter the technology world and one that has changed how everything works. In terms of moving from product to bundle or suite, simple products (EC2, S3) have rapidly grown into a massive product suite. Amazon’s culture and product development approach, along with the base product, enable rapid addition of new cloud services. Watching AWS evolve one can also see the extreme focus on pricing and how waves of cuts have then slowed followed by more deliberate pricing actions — this is the effort of a maturing business.
That said there are aspects of enterprise business that are just starting to catch up to Amazon (and create the opportunity for Microsoft). In particular, as much as enterprises love product bundles for simplicity and clarity, they also want all of the pieces to work well together in a 1+1>2 manner. This doesn’t always fit with how Amazon tends to think of their businesses as loosely coupled. In addition, Amazon has an opportunity to beef up and commit to a deeper notion of a product roadmap, not just for what is on the way but when and how all the efforts are related. Again, this runs a little counter to how AWS grew up.
A recent example of this is the new AWS single sign-on product. Will Amazon develop this to the depth of Microsoft’s AD or the breadth and depth of Okta? Is this the start of a depth commitment to enterprise roadmaps and architecture or another new service within a broad suite? While the team on SSO is no doubt committed, succeeding in the enterprise requires an entire organization to remain committed over time. That’s why there’s an opportunity for a whole public company that began as a startup to come to lead in the space.
This dynamic is awfully familiar to me as it is precisely what Microsoft grew up into in the late 1990’s as it morphed from a consumer company to an enterprise company. These aspects of AWS create significant opportunities for startups — any time there is a bundle where there are seams or missing capabilities there is an opportunity for a company. A big opportunity exists on AWS because of the relative depth of some of the services — while some are industry leading and incredibly rich in capabilities, others are less so (if at all) and some seem to be moving at a much slower pace. This again follows from the way modules of the AWS suite are created and introduced, but does represent an opportunity to be become a leader for a workload or category.
Microsoft
Microsoft has two main enterprise businesses (bundles): the enterprise laptop, Office 365 on Windows, and the enterprise data center, Azure.
When it comes to the enterprise laptop endpoint, Microsoft has done great moving everyone from Office 3 year subscriptions to Office 365 subscriptions which include operating key Microsoft services in the cloud (AD, Exchange). For the vast majority of people using a laptop and doing work in Word, Excel, PowerPoint and Outlook their daily routine goes unchanged while IT gets out of the business of keeping global data centers running, patched, updated, etc. It accomplished this while significantly increasing the revenue per endpoint (albeit with higher costs) compared to the multi-year agreements previously. Because running a data center for productivity is not the highest priority in a company, this is a huge positive for customers. Along with pricing, Office 365 continues to execute on an strategy of extreme bundling with at least 30 modules if I counted correctly. With the recent announcement of Microsoft 365, the company is adding in Windows (and security) to the subscription bundle (and presumably another tier of enterprise pricing).
Microsoft’s focus on bundling capabilities tends to make startups nervous, but in fact the nature of how capabilities are added to bundles makes for big opportunities for startups who deliver best of breed technologies for new categories.
The core challenge Microsoft faces of course is that the number of end-points is flat to shrinking — laptops are a replacement market and receiving less and less attention from individuals. However, and this is where the long tail fits in, the laptops being used matter tons and so won’t be replaced for a long while. This gives Microsoft a lot of pricing freedom (and also an extreme level of PMF, so little to worry about in terms of the product — in fact one might argue that product changes are mostly unwanted).
Microsoft’s focus on bundling capabilities tends to make startups nervous, but in fact the nature of how capabilities are added to bundles makes for big opportunities for startups who deliver best of breed technologies for new categories.
Azure enables a replay of the Office 365 “transition” but this time for enterprise server workloads. While AWS was around for several years, Azure and enterprise customers needed some time to “mature” together. With enterprises (finally) fully on board with moving to cloud there’s a massive opportunity to Azure.
Enterprise customers have two motions in terms of cloud: building new applications and migrating existing applications. This steady-state is always the case with enterprise IT. What’s super interesting is how different these play out over the long term relative to strategic value. Early in the transition to client/server computing many customers embarked on “porting” of critical applications from mainframes while other applications were built natively for client/server. It turned out the porting side took disproportionate time and effort while at the same time forced a sort of “backwards-looking” architecture which then resulted in “new” client-server apps that were more fragile, less scalable, and worse to use. This same process played out again with the arrival of the browser and so tools like ActiveX than attempted to emulate client/server versus HTML, script, and loosely coupled services ended up occupying a lot of bandwidth.
A big part of Azure’s challenge is seeing the opportunity in “porting” existing solutions to Azure versus newly developed solutions, and in particular hybrid cloud architectures. These can end up being sort of like the ActiveX of the cloud era and in the meantime leading edge customers are looking to AWS primarily as well as Google cloud. Like any hybrid or cross-platform solution, the appeal is obvious but the technical challenges and complexity prove to be fairly predictable.
This split is very similar to how the internet played out with startups, leading edge innovation, and the public internet building on the Linux and Open Source foundation and the internal IT efforts building out on Windows leading to a split between innovation and revenue until AWS, and the ISV ecosystem supported by those.
Similar to Google cloud, the opportunity for startups is working with Azure as a platform of choice. There is high likelihood that some F500/G2000 customers will be standardizing on Azure (and Office 365) and thus selling into those customers will require Azure. Given that so much of Microsoft’s motion is porting, either enterprise solutions or Microsoft’s own existing server products, the opportunity to do new things in new ways (even using Azure as a base substrate) is significant. A good example of this is Microsoft Azure Databricks.
Adobe
Adobe is important to discuss for several reasons. Wall Street has been fascinated with and rewarded Adobe’s “transition to the cloud” which for all practical purposes looks very much like the Office 365 transition (without email). Adobe took licensed and expensive client applications and developed the licensing and delivery mechanism to charge a subscription. Because the vast majority of costs are the local PC, the margins are very high and thus this becomes an effective way for price optimization. At the same time the number of endpoints goes up because you bring most customers to be current, and especially for Adobe, as reducing piracy (license sharing/reuse) drives a higher number of units. A win all around.
We should not, however, lose sight of the fact that the number of designers (endpoints) is still a relatively fixed number not growing very quickly, which is probably why Adobe stopped reporting subscriber details. The bundle for Creative Cloud rivals that of Office in number of modules as well, and continues to grow. A key part of growth is to upsell individual customers within a company to the enterprise product, which is again primarily the value of the client apps (Photoshop, Illustrator, Premier) along with some level of cloud collaboration service. Within the creative community, the idea of best of breed (e.g. Vimeo, Dropbox, Sketch, Figma, etc.) is showing how difficult it is for the bundle to expand depth usage beyond the anchor tenants. This best of breed creates a good deal of space for new approaches for creatives. One example of this is OnShape, which is taking a new approach to CAD.
Adobe’s marketing cloud is interesting because it represents an entire new, somewhat adjacent, business to Creative Cloud that began and has grown through acquisition. Marketing cloud, recently renamed Experience Cloud, is a bundle aimed at the end-to-end customer experience. This cloud was $550M last quarter (big!) but considering the addressable market and early stage of the business has not grown as quickly as the conversion of Creative customers to subscriptions (and remains ~30% of Adobe top line). There’s a lot of price and bundle optimization taking place in this business. Recently the single marketing cloud split to two distinct bundles and subsequently was rebranded as a broader “experience”. This seems to be evidence of still progressing towards PMF and thus opportunity for new technologies, products, and companies. It is worth noting that Adobe’s CEO described this past quarter by saying “what’s changing actually is we’re targeting a much larger opportunity in the enterprise”. The fragmentation and breadth of this space is why Adobe feels there is an opportunity and historically this area has been a great place to be a startup, especially considering M&A.
Opportunity
Even in the midst of growing market capitalization, the opportunity to invent and innovate is at the highest levels our industry has seen in many years. It is not just the rise of the cloud or machine learning causing enterprise customers to re-think the way software impacts business and customers. It is also the reality that the mega companies we pay so much attention to are themselves in the midst of transitions.
It might seem to some that the barriers to success are too high and the incumbents too powerful, but as I hope this demonstrated these companies have a lot to focus on for their existing businesses and products. They are likely to continue down the very paths that are right out in front of us, and history provides validation that this will be the case.
Most of all, what the past 20 years of post internet software has told us is that just when conventional wisdom is saying there is the least amount of opportunity, it is in fact exactly the right time to be doing new things in new ways on the platforms and technologies we know will be ubiquitous in a few short years.
While there is no magic to navigating the big companies, there are things that have been shown to be successful through these times of change and worth keep front and center as you build:
- Create an endpoint (and a job). The most important thing in the enterprise is about becoming an endpoint company. An endpoint can be a critical piece of infrastructure or something used by a broad set of employees. The most enduring products become someone’s job (or associated with a job function) within the enterprise.
- Fill in a seam. The product/service bundles from the big companies either have or create seams that are often difficult for these companies to fill. There are products that surface that are used to manage and monitor infrastructure at a higher level than the platforms provide. There are also productivity tools that “span” clouds provided by multiple vendors. These opportunities arise because enterprise bundles tend to focus on modules and not the space between modules.
- Build a better mousetrap. Customers will always wrestle with the pendulum between “best of breed” and “free in the bundle” products. The further away from the core anchor of a bundle something gets the more likely there is an opportunity for creative innovation and better tools.
- Bring a unique point of view. One of the biggest advantages a new product has is that it does not have to start from the perspective of existing customers paying for some existing workload. There’s a chance to redefine solutions, often at an entirely new or higher level abstraction — you can be the new company with a new product not a repositioning of existing technology or an old product with some new technology added in.
- Partner deliberately. The footprint of the big companies often creates a FOMO that drives founders to want to partner. The feeling is natural and who can resist the temptation to riding on the coattails of a multi-thousand person sales effort. It is times like this when the big companies are deep down their paths of PMF and optimizing that partnering can be the most challenging. The most fantastic post about this is pmarca’s The Moby Dick theory of big companies so please read this. There are plenty of amazing opportunities but an equal number of traps and pitfalls so best to be deliberate and follow the thoughts in the post.
- Recognize that enterprise is a huge market. It is always worth a gentle reminder that the enterprise software world is enormous. There are enormous players but even the biggest no longer commands anything close to dominant share of spend. A great way to look at this is to make a pie chart for the average sales or marketing person and recognize how many vendors have an opportunity to sell mission critical software to that individual across personal productivity, sales or marketing specific functions, talent/recruiting/HR, finance/accounting, and so on. One early stage company I was working with spends over $700/month per person on software and it goes to a dozen vendors. There’s a lot of opportunity.
While you are building something new along these lines, the existing companies will be doubling down on their focus on their existing business looking at their existing businesses and optimizing pricing optimization, bundle expansion, endpoint penetration, and margin efficiency.
Most of all, what the past 20 years of post internet software has told us is that just when conventional wisdom is saying there is the least amount of opportunity, it is in fact exactly the right time to be doing new things in new ways on the platforms and technologies we know will be ubiquitous in a few short years.
Author note: Some companies mentioned are investments of Andreessen Horowitz.
