Defending the (Enterprise) Unicorn

The unicorn is under attack. Not a day goes by now where the tech press is not publishing a “Who will be the first dead unicorn” story. Every tech conference contains lots of fireside chats where we opine about the overfunding of late stage companies. We also seem to now be drawing parallels between what we are seeing in 2015 and what we saw in 2000-2001.

 

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So while everyone is freaking out. I would like to write a defense for some of these unicorns and more specifically for the Enterprise unicorns. But first some caveats. I am not saying that all Enterprise unicorns are all huge winners and I am not saying that some of the Enterprise unicorns are not potentially overvalued. I am also not saying Enterprise tech companies are not immune to dying or being sold for scrap. Indeed, while Webvan and Pets.com were B2C companies and became the poster children for Web 1.0 bubble, There was plenty of Enterprise tech carnage to go around. Remember these names: Ariba, CommerceOne, Epiphany, i2? I don’t need to go on, it is too painful.

So with those caveats, let me lay out 5 reasons why there is no overarching crisis in Enterprise Tech valuations.

1. Enterprise Tech valuations are high, but not as high as B2C tech companies.

The really big private company valuations – the so called decacorns- are Consumer plays. Uber, Xoami, Snapchat, Pinterest, AirbNB, Flipkart all have valuations over $10B. The only pure Enterprise company in the $10B plus club in Palantir. And that is a very special and secretive company. Dropbox is a 50/50 play and valued at $10B.

2. Even if B2B Tech companies are overvalued, a Web 1.0 meltdown won’t happen.

This is is the most interesting thing about the unicorn attack phenomenon. I believe that unlike 2001, Enterprise tech companies are real businesses with great recurring revenue and many happy referenceable customers. In 2001, companies bought a lot of “exchange and procurement “ software from CommerceOne, but few if any every got live and the chance for repeat customers and new customers from references dried up real quick.

If Enterprise unicorns are slightly overvalued, it will not really disrupt their business. The investors, founders and employees will all make a little less money. Even the late stage investors appear to be protected by so called ratchet clauses. So in the end. if valuations are toohigh, I don’t think we have a fundamental problem.

The only risk here is that companies might be raising too much money at high valuations and not moving towards businesses with strong gross margins, acceptable customer acquisition costs and high customer retention rates. But the Enterprise SaaS model is getting well proven and I think highly valued Enterprise tech management teams understand this and are not making the types of mistakes that we saw in the first meltdown.

3. Enterprise Tech SaaS business models are inherently strong and will stand the test of time.

Enterprise SaaS is a great business model.  Contracts are typically annual commitments and renewal rates tend to be quite high. Modern Enterprise SaaS is easier to implement, time to value is quick and enterprise customers are not fickle as consumers. Ie – they don’t change their technology stacks very often. The bottom line is SaaS companies have predictable repeating revenue which makes a great business.

Secondly, gross margins tend to be good. The business is pretty simple. You charge customers  for usage. Your cost to deliver that service tends to be predictable and has high economies of scale. Most Enterprise Saas is multi tenant, so you make the software once, run it in a single or few instances. So at worst , costs scale with revenue, but more likely marginal costs drop as you add customers. That is very good!  Also, they don’t run our their data centers anymore, they run on Amazon or Azure or Salesforce. We don’t have big upfront expenses to get our business going, because we just rent compute and storage.

Customer acquisition costs can be high, but nowhere near the high costs in consumer tech ( see Fanduel or Draftkings). There are now well established models to acquire customers without blowing your bankroll and with proper investment in customer success teams, you can keep and expand customers for a decade. That makes for great margins.

Not only is this model, way better than the on premise model software model, it is much simpler that the B2C tech models that exist. Don’t get me wrong, I would love to have a advertising model like Google or Facebook, but Consumer Tech business models do not offer the type of predictable revenue and solid margins that Enterprise Tech does.

4.The trend to replace on premise software and hardware is irreversible and we are still early in the cycle in most categories

Enterprise Tech Unicorns are largely SaaS plays replacing or extending functionality provided by  on premise software vendors. The on premise software model is hopelessly broken  In those models, customers pay for a perpetual licenses and then pay about 20% per year in “maintenance fees”. Customers are also heavily incented to pre-buy software and even buy ‘all you eat” licenses. This led to a ton of shelfware, where many,many licenses go unused. The on premise software model was also famous for long expensive implementations, where time to value was measured in decades. The old model was famously inflexible. Even if you got the software implemented in was incredibly difficult to upgrade due to the massive complexity of a traditional on premise software/hardware stack. Lastly, the on premise software model is an incredibly insecure environment where tracking and applying multiple patches to many layers of the software stack lead most companies to have long periods of time where known vulnerabilities remain unpatched.

Enterprise SaaS solves almost all the problems caused by on premise software and with the possible exception of CRM software, most categories are early in adoption/replacement cycle.

5. Almost all traditional Large Enterprise players are not well positioned to compete with Enterprise SaaS.

The new Enterprise unicorns largely compete to replace solutions from Old tech – IBM, HP, Oracle, SAP, Cisco and Microsoft. With one notable exception, these companies are not well positioned to compete in SaaS organically. They have typical innovator’s dilemma problems and their size and age makes them less than nimble competitors. They also typically have little large data center, cloud experience and have difficulty attracted the employees with the skill set to compete in the new world.

I must say, Microsoft is the exception here. Their Bing and former Hotmail consumer products gave them some great cloud DNA and they have done a decent job with Office365, Azure and Dynamics. So don’t count them out.

But other than Microsoft, Old Tech is not likely to outcompete Enterprise unicorns. And in fact, their large cash hoard and slow growth rates make them ideal acquirers of Enterprise Unicorns. ( See Eloqua, Taleo, Responsys, SuccesFactors). Stock buybacks can’t buy you top line growth, so stay tuned for a more robust M&A market.

So there you have it. Enterprise Unicorns are in good shape at a macro level. Quit fretting, If you want to worry, go worry that Snapchat’s $16B valuation in a company without a reliable revenue model. Leave the Enterprise Unicorns alone. They will be just fine.

I hope Aaron Levie is wrong, but I am worried he is right!

Enterprise End Users deserve both Security/Compliance and Beautiful Simple to use Apps.

aaron-levie-drew-houston

For those of it who missed it Drew Houston of Dropbox and Aaron Levie of Box got into a little war of words this past week. Competition is good for the market and I admire both these companies, but some of things Aaron Levie said worried me a little.

Here is what he said.

“I don’t think it( meaning Dropbox) will work at scale in the enterprise.  There are a lot more security, compliance and legal measures that need to be ironed out.”

We then went on to suggest that Google Apps is not enterprise ready

“Google Apps has millions of small businesses, but Microsoft is what is becoming the standard in the Fortune 500 and larger enterprises. That’s just because the DNA of the companies are just very different.”

Here is the problem I have with these statements. Aaron is suggesting that there are two kinds of enterprise companies with two different kinds of DNA. He is suggesting that companies like Microsoft and Box understand the enterprise security, compliance and legal issues and then there are consumer or user focused companies like Google and Dropbox who do not.

There is certainly ample evidence that this divide has existing for some time. Enterprise applications have long erred on the side of security/compliance. Up until recently applications were procured by the CIO’s office and enterprise software companies treated the needs of IT ahead of users. Users have hated Enterprise applications for a long time. If you have ever used SAP,  or Siebiel, you know what I am talking about. If you have ever walked up to the counter of an airline to change your flight and watched the person make about 500 keystrokes  to get you an option, you know how bad enterprise software has been. That SAP or reservation system is secure and compliant, but users hate it.

There is also evidence that application companies that focus on end users have been dismissive of enterprise needs. Up until recently, Apple was the poster child for this unfortunate approach. Steve Jobs did not like designing products for CIOs or corporate middlemen. Users loved Macs, but Microsoft won this segment handily. End user focused companies have had difficulty valuing enterprise requirements. Their engineering teams don’t like working on the boring plumbing issues that large enterprises need. They want to focus on design and end user features, but they don’t want to hear about developing an API to interface with multiple Single Sign On solutions.

Aaron Levie was saying that Box and Microsoft get the Enterprise, while Google and Dropbox do not. He is saying that the features that users love about Google and Dropbox cannot be used by enterprise.

BUT, I personally hope that enterprise end users won’t have to face this false choice between – compliant, secure apps OR user oriented apps. The users of Fortune 500 companies should get both a beautiful user experience and a secure/compliant environment.

When Aaron says companies have a certain DNA, he seems to be implying that these companies cannot change and that Enterprise users will forever be faced with a choice between applications that security and compliance professionals love and applications that end users love.  We simply can’t allow that to happen. We are in the process of a huge application shift that is seeing enterprises trade in their old on premise apps for cloud/mobile apps. We should aspire to the consumer grade usability standards as we make this shift. If we don’t, we will have failed our enterprise end users.

I think we have made some progress in this area. Traditional enterprise companies are improving their design teams. Take a look at Microsoft’s mobile Outlook app. It is arguably the best mobile email client. Great design. And despite what Aaron says Google and Dropbox have made great strides in building scalable enterprise IT feature sets. When I was at Google, we bought Postini for $625M to add granular policy control and archiving feature sets that IT needed. Facebook and LinkedIn have recently launched programs that enable enterprise users to utilize their technology for corporate use. Look for them to add these enterprise IT features. And even Apple has seen the light. The iPhone has added enterprise features and Apple created a partnership with IBM to help them with Enterprise requirements

So, I call on all cloud based B2B tech companies to ponder this question and achieve excellence in both areas.

If you have end user design DNA. then you need to acquire the enterprise skills. You need to learn about Directory integrations, Single Sign On Systems and Mobile Device Management solutions.  You need to learn about Granular Policy Control and Archiving capabilities. And you need to learn about compliance rules of different countries and industries and help your customers meet those compliance requirements. You can’t just rely on your outstanding design and tell the CIO/CSO/CCO that their requirements are secondary.

If you have a lot of enterprise DNA, you must get out from selling and servicing the IT department predominantly. Ultimately your customers are your end users, not the CIO.  Do not rely on the CIO or compliance office to select your apps and then foist them on end users. Hire some designers, especially mobile designers and value and prioritize end user simplicity and beautiful design.
Come on people. Its 2015! I am getting same day delivery at my house. I press a button on my mobile phone and a driver shows up. We have robots, drones, wearable computers and pretty soon my car is going to drive itself. Please don’t tell me we can’t build beautiful enterprise apps that are secure and compliant!