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Mystery: Why are enterprise IT startups vanishing?

Summary: A group of Big Five Vendors now dominate the enterprise IT and SOA space. Where have all the startups gone?

Joe McKendrick

By for Service Oriented |

I few days ago, I described the phenomenon of "cloudwashing" now taking place among SOA vendors as they shift to the hottest trend in the market.

Why the significant drop-off in new software ventures?

But Ron Schmelzer points to an even more disturbing trend -- the pool of new vendors seems to be drying up altogether. Out what was once a highly entrepreneurial, diverse market of enterprise IT (and hence, SOA-focused) vendors has now boiled down to domination by five large vendors.

This is a shame, because the lack of competition has reduced innovation in this sector, he points out. And, to make matters worse, Ron says he has seen "a significant drop-off in new enterprise software venture creation," with no clear reason why this is happening.

But at the same time, many enterprise customers perceive a greater sense of security and less risk by going with big-name vendors.

Where there is new startup activity, it's happening in the cloud and Enterprise 2.0 arena. Ron asks: And if a startup's solution fills a need in your enterprise, is it feasible to go with the solution?  Is it worth the risk?

Startups provide some advantages the Big Five can no longer provide, he adds:

  • It’s easier to get your way with smaller companies hungry for your business
  • It’s easier to negotiate on price
  • It’s easier to get help with your specific implementation from startup companies

The ultimate objective of SOA, and cloud and Enterprise 2.0 for that matter, is flexibility and independence from vendor lock-in solutions. You should be able to readily swap a service, interface, component, application, or system out as your business needs change. Most enterprises don't have anywhere near this kind of agility yet. And there's still plenty of room for startups.

In Ron's words: "Startups, do your part innovating in this space. Enterprises, do your part and implement startup companies’ offerings so that innovation does not come screeching to a halt."

My take:  Could it be that enterprise IT has become so complex and mandate-driven that it's too much for many startups to delve in?  Maybe in a world of social networking and mobile computing, enterprise apps just aren't that much fun? Note the huge surge in iPhone apps, for example -- a simpler and more fun business to get in to. But SOA is fun, isn't it?

Topics: Browser, Enterprise Software, Software, Software Development

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18 comments
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  • RE: Mystery: Why are enterprise IT startups vanishing?

    Also, most of them don't have a channel strategy - they have the syndrome "we build, they come" -

    Now, more than ever - the channel strategy is crucial for survival for start-up - faster you spread the word, better it is - very simple.

    And they are so many options ....

    Dan Gabriel
    dangabriel
    Reply Vote

  • Or maybe it's that the direction is wrong

    Maybe, just maybe, IT has finally grown to the point that we are not chasing every idea some talking head spits out. IT has become a culture of the "next big thing" instead of focusing on the business. The only problem with the cloud approach is that the "next big thing" appraoch is based on tactical advantage that cannot be achieved when you are using the same tech as everyone else.
    happyharry_z
    Reply Vote

  • RE: Mystery: Why are enterprise IT startups vanishing?

    Joe - to me there's no mystery here. The VCs aren't funding startups like they used to, they're hunting for the next Forsquare instead. There are boatloads of enterprise software companies that are seeking Series C and D rounds who will not (or did not) get them. The reason why is because of poor enough projected future returns -- no IPO market, M&A scene in favor of the Big 5.
    kfoeller
    Reply Vote

  • RE: Mystery: Why are enterprise IT startups vanishing?

    I think this has near zero to do with Enterprise IT and almost everything to do with the state of startup liquidity. Startups are have dried up in every market except the extreme growth areas (e.g. social, greentech, etc). If we had a robust IPO market, you'd see a return to enterprise startups.

    That said, as a secondary cause, it will be a while before you see large numbers of enterprise IT startups simply due to being on the backside of a market maturity model. Enterprise software is not in an innovation cycle right now.
    erikhuddleston
    Reply Vote

  • RE: Mystery: Why are enterprise IT startups vanishing?

    I believe there are a few reasons:
    1) Less investors willing to take the risk due to the economy. Less workers willing to take the risk as well. People are holding onto the big corporations right now as they are stable.
    2) Accepted intellectual property laws that stifle personal innovation. As the current workforce is working for the large, and stable corporations they are trapped into agreements where any idea they have is owned by the corporation. The idea (property of the corporation) may or may not be related to the company's end product, nor may it offer the corporation a direct/indirect marker advantage.
    3) Less smart people moving into IT, and more smart people are becoming lawyers. These days people are trying to sue their way into fortune rather than working for it. Lawyers will profit no matter what.

    HINT: This stinks for the GDP.
    sys_engineer
    Reply Vote

  • RE: Mystery: Why are enterprise IT startups vanishing?

    1. Applications all interrelate. You need a full suite of applications. Difficult for a startup.
    2. IT manager buys from a big vendor - no real risk for him or her. IT manager buys from a startup - any failure is his (or hers).
    3. Will the startup succeed in business? If not, where are you, as a customer?
    4. Hard to get venture funding without early success, which is hard to have without backing.
    hselrahc@...
    Reply Vote

  • Companies want a single source

    One of the barriers we find as one of our startups is that customers want a single source. We provide only one tool to do one specific job well. The fact that the big companies have a much inferior tool with the name "risk" in the title makes it a hard sell for us.
    tony@...
    Reply Vote

    • Vertical integration is the name of the game

      Couldn't agree more. Larry Ellison alluded to this
      in the book "Softwar." Many of the facets of IT
      are becoming commodities so the pieces that aren't
      are harder to justify going outside the walled
      garden. The top 5 solution has to be garbage in
      order for a startup (like us) to get a shot.
      MattL24
      Reply Vote

  • SOA = Red Herring

    SOA is not the answer to most IT needs. Sure, there are a few exceptions. But for the far majority of companies, SOA provides very little and a higher cost.

    Accounting went through this same scenario a few decades ago. Lot of companies started to farm out their accounting needs. The companies suffered, and most was brought back in-house. Quite a few accounting firms remain today, but they have changed their focus considerably and provide more than just standard accounting. IT is much different and will not be able to make this transition.

    Individual companies need to realize their need, and stop trying to get the "best bank for their buck". Might as well farm out the CEO too, if that's what they think the solution is.
    Narg
    Reply Vote

  • Size Matters

    Big companies like to use big companies for vendors. So, the big 5 vendors are what you see when you hang out with the fortune 500 crowd. Just about any sized company can stand to benefit from IT enterprise software. Those IT start ups that are trying to compete directly with the big five have an inherent flaw in their business plan. If you want to start a company, then your competition had better not be 1000 times your size or greater.
    gengstrand
    Reply Vote

  • RE: Mystery: Why are enterprise IT startups vanishing?

    Hate to say it - This isn't an IT trend alone. Manufacturing and innovation are altogether shrinking: The Information Technology and Innovation Foundation examined 40 countries over the last decade in terms of progress and innovation overall. The U.S. ranked last. Last year patent issues dropped 2.3% whereas foreign based patents grew by 6%. Venture capital investment is down to 12 billion from 22 last year.

    Let's face it: There is much more cash to be made shuffling around paper and financial instruments producing exactly absolutely nothing of value (being very prestigious at the same time) than to actually invest in tangible (or intellectual) property. If some shmock can come up with a new derivative Ponzi scheme and make as much in 6 months than what might take a solid business 2, 3 years - why bother? Tax laws encourage migration of manufacturing to third world countries.

    So, no, this isn't an IT phenomenon at all. It is part of the current American economic model and incentive system.
    rernst99@...
    Reply Vote

    • well put! it is a layered issue

      your point - disincentives for technology business in the USA - is the top cause for decline. It is not that entrepreneurs are dwindling away. They just have other priorities than technology. It is a serious value system problem. People believe the economic fundamentals have changed. But they have not! Improvements in sight only on the generational time scale IF the value system will be changed tomorrow.

      Next level down is investment climate. The TalkBacks #3, 4 and 5 are reporting on the issue. Middle class is deteriorating and the chances for self-funded entrepreneurs are lowering. No food - no dance is true even for Superman!

      The third level down has something to do with purchasing power. TalkBack #7 and a couple of others noticed that. It has something to do with deteriorating technical expertise, while demand increases. If you don't know what you are doing, you go for safe avenues. And it is an accelerating trend in the USA. No talent is an issue of attitude. The lack of attitude is linked to work ethics and the incentives mentioned in the cause number one.

      The fourth level is about internal industry dynamics. The time for startups in SOA is probably gone. We don't have a bunch of soap manufacturing startups today. Though, a couple of hundreds years ago soap was all rush. It is time to move along to the next ideas. SOA instruments have become to complex for a startup (there is a TalkBack entry on that). The existent solutions sufficiently cover the most issues people have. It is a playground for elephants.

      The fifth level is internal startup capabilities. But who cares about it? Consider a blog as an idea's startup. The "Mystery: Why are enterprise IT startups vanishing?" lacks insight so badly, but it's OK... Who cares about it? ;)
      incidental reader
      Reply Vote

  • RE: Mystery: Why are enterprise IT startups vanishing?

    because... u just can't startup a living and take all the
    risks just to feed sharks and the like. hate to say it,
    but this kind of game where i am the game doesn't thrill
    me any more. it's not that fun.
    spinin
    Reply Vote

  • Asked and Answered

    From the article:
    Startups provide some advantages the Big Five can no longer provide, he adds:

    * It?s easier to get your way with smaller companies hungry for your business
    * It?s easier to negotiate on price
    * It?s easier to get help with your specific implementation from startup companies


    This explains why a client might like a small startup as asupplier. But these are all negatives from the standpoint of a entrepreneur or venture capitalist looking to enter the market. These all act to limit the amount of money you could hope to gain from entering the market. After going through the effort of making a new service, you will have clients that know they can muscle you around - isn't this a disincentive to anyone thinking about entering this market?
    RobertFolkerts
    Reply Vote

    • Prefer to muscle the customer around

      I cannot see how fulfilling customer needs would be a disincentive as long as the cash flow is there. Certainly 'customer last' attitudes are not going to woo a client. Why exactly is serving customer needs a negative?
      rernst99@...
      Reply Vote

      • it is about scaling

        Whole-rounded investor is a rare item. Many investors are one-trick-pony dudes. They don't know better value creation. The recent transcendent mantra was SCALING as a value creation, risk management tool and the way of life. If you stick with a customer, you don't scale.
        incidental reader
        Reply Vote

  • Shake up of the market

    just like there use to be many different car makers now there are the big 3.

    just like there were many isdn service providers there are now less.

    the market opens opportunity and then becomes saturated with less profit to be had. the companies making less profit get gobbled up with a merger to increase efficiency. as these main companies grow through mergers there is economy of scale production which makes it harder for startups to enter the market.

    it is the law of the capitalistic jungle
    markcnz
    Reply Vote

  • You can only fool some of the people all of the time

    The rest just suddenly wake up, see that the Emperor's naked and realise that SOA was just a mirage cooked up by marketers.
    tonymcs@...
    Reply Vote
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