Biz software startups less 'sexy' but future rosier

Investors may view consumer tech startups more favorably but enterprise-facing software developers have better long-term scalability and profitability prospects, observers note.
Written by Jamie Yap, Contributor

Enterprise software startups might be less "sexy" than consumer tech ones, but they make up for it in terms of long-term profitability and scalability, which would in turn make them better funding or acquisition targets, market observers say.

Jeffrey Paine, founding partner of Golden Gate Ventures and director of startup accelerator Founder Institute Singapore, for one, said most investors tend to view consumer tech startups as "sexier".

Michael Yoshikami, CEO and founder of investment consultancy firm Destination Wealth Management, went on to say that investors and venture capitalists tend to lean more toward consumer-based startups since the potential payoff can occur more quickly and the funding required is far lower when compared to enterprise software companies.

He noted that software companies require significant resources to develop and test their products and many such businesses fail simply because they fail to secure funds for these purposes.

Enterprise software market "very large"
That said, Paine believes software startups are on the rise globally as it is a lucrative market. He noted that so long as the overall global economy is buoyant and Fortune 1000 companies continue to spend money on IT systems and software, the market for enterprise software is "very large".

He also pointed out that both enterprise and consumer segments have equal appeal in the sense that investors will still judge by the companies' executive team, product market wins and overall traction before deciding to pump money into their businesses.

Yoshikami added that enterprise software companies have a more consistent growth engine than consumer startups because sales are less dependent on people's sentiments and are driven more by business upgrade cycles.

Conversely, entering the consumer market might be easy enough, but the failure rate is also very high, he said. "Isolated instances of huge profits from consumer startups tend to skew perceptions and impact general thinking. Clearly, not all software companies will bear fruit [to the tune of] Instagram's acquisition by Facebook."

Bernard Lunn, Switzerland-based software entrepreneur and co-founder of CapitalMarkets.com, agreed. He said while it is "dead easy" for consumer tech startups to get their Web sites up and running and receive investments, these aspects do not equate to success as a business.

Rather, revenue, profits, and scalability are the defining characteristics, he argued.

With that in mind, targeting the enterprise customer is "much easier" to generate earlier revenues and profitability whereas consumer-centric businesses may have to wait longer to reach massive scale, Lunn stated. By the time the enterprise software startup acquires its third customer, it could well be in a good market position despite the lack of investments, he added.

The entrepreneur added that just because there are big, dominant players such as IBM and Microsoft in the market, this does not mean that startups will not be able to break into the industry.

"That's not how enterprise software startups work. They keep their ambitions limited to solving one specific problem that is ignored or not addressed by the big players. They [then] grow from there over time and establish a real market presence," he explained.

Lim Kuo-Yi, CEO of Infocomm Investment in Singapore, concurred: "History has shown--and continues to show--that the new needs [of enterprises] present themselves as opportunities best exploited by startups. The [successful ones] are those able to focus on one area, innovate and execute a lot faster than others."

Challenges in funding, getting clients
Beyond financing challenges, he said software startups will need to excel in sales execution. This means not only getting early adopters on board, but also winning customers that they can use as references to drive sales and scalability to enter mainstream status.

Lunn also observed that the biggest hurdle would be in getting the first client. "It's incredibly hard. Every potential customer is saying [your product] looks very interesting and they love the demo, but they'll wait until somebody else [uses it]," he said.

The only way enterprise software startups can get around this issue is to provide "service and dedication beyond the call of duty" for the first customer, he said, adding that things get easier with subsequent customers and once revenue starts pouring in.

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