Software: Competing With The Goliaths
I hosted a panel at TiECON 2007 this past Saturday (May 19th, 2007) on how a new crop of startups is bucking conventional wisdom by taking on goliaths like Oracle, Microsoft and SAP head-on in their core markets. After the last tech bust, it was pretty well accepted in Silicon Valley that software innovation was moribund at best, and that the integrated software stacks and vast sales forces of the software giants left only tiny niches available for startups to exploit.
Quelle surprise, then, that companies like Zimbra, MuleSoft and Coupa Software, (full disclosure: I'm on the board of Coupa) three of our panelists, are enjoying success in markets long considered carved up by the goliaths. Zimbra is an alternative to Microsoft Exchange, MuleSoft to the Enterprise Application Integration (EAI) offerings from Oracle, Microsoft, IBM, BEA, etc., and Coupa is an SME procurement software solution. Asheem Chandna, Partner at Greylock, and Peter Fenton (moderator), General Partner at Benchmark, rounded out the panel.
The companies on the panel, and Asheem's recently IPO'd investment, SourceFire, had several things in common, besides passion and drive:
- All were open source, and not just because it's cool. Being open source has enabled each company to build a vibrant user community that evangelizes their product, and lets users "try before they buy", reducing sales costs dramatically. It also protects them from low-end competition, since the open source version is free, and who can undercut that price?
- Open source isn't merely a euphemism for "incumbent's product, dumbed down, for less". Each of these companies is innovating across multiple dimensions: simplicity, ease of use, new ways for users to collaborate, incorporation of new data integration protocols ... And Coupa, for instance, even offers two versions - a free open-source version, and a richer commercially licensed version.
- Each company focused maniacally on making their customers happy, whether by ensuring a high quality, delightfully easy to use product, or by giving great after-sales service. Lead-gen was not a huge focus for our panelists, largely because word of mouth and the Internet generated high quality - and highly qualified - leads. As a direct corollary, SG&A (primarily S), which can be over 40% of revenue for a large old-style software company, was targeted to be under 20% for these startups.
- Not a single panelist worried about incumbents throwing FUD and stealing customers. Indeed, the consensus seemed to be that the incumbents have morphed their software businesses to be cash cows, and are too busy milking support revenue to innovate or worry about startup competition.
- It appears that CIOs are more than willing to try startups again; one surprising fact was that all three companies on the panel report healthy adoption in the Higher Education vertical, without any direct targeting. And they're also seeing international users coming to them without the benefit of expensive global sales forces
- Customer engagements during the sales cycle were refreshingly short, probably because the customers were not being shoe-horned into one-size-fits-all solutions and had tried downloaded or hosted (both, for Coupa) editions of the software.
- Ironically, despite apparently having given up on innovation, software giants face the innovator's dilemma of startups beginning with a clean sheet of paper and the latest technology being able to undercut the giants on price while still delivering better and more robust functionality in a simple and easy to use product. The startups, in other words, are delivering more for less
- All of these companies have built world-class products with very small teams, usually tiny compared to the product teams at the behemoths they compete with. So they're actually delivering more with less too.
Three cheers for contrarian entrepreneurs and VCs with the pluck to bet on them!
