Enterprise startups against the big guys: CxO Talk 7

On CxO Talk, episode 7, co-host Vala Afshar (absent this week due to travel) and I welcome venture capitalist Evangelos Simoudis. Evangelos is senior managing director at Trident Capital, where he invests in late stage and growth companies, with a focus on enterprise applications.

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Here is the entire video conversation:

The conversation starts with the venture business and how Evangelos’ firm approaches investing. It is interesting to note that his firm sees about one thousand companies each year, but invests in fewer than ten. Yes, it's competitive! If you are interested in this topic, watch the video interview, because Evangelos discusses the venture capital business in some detail.

Cloud disruption

Many cloud advocates believe startups (and newly-public companies) will disrupt existing enterprise software vendors, by offering narrowly-focused products that are more innovative, cheaper, easier to use, and faster to deploy. According to this perspective, enterprise buyers will increasingly use pre-built, cloud-to-cloud integrations to weave these new, focused products together into a seamless mosaic of software from different vendors. 

Evangelos has invested in companies, such as PivotLink and Host Analytics, which are taking advantage of this trend. Given all the vendor hype from startups on this issue, I asked Evangelos for his thoughts (which I have edited):

For new applications at the periphery, there is a great opportunity for change, especially in areas where new core systems are being developed. Systems of engagement are an example, because the enterprise does not yet have incumbent vendors for these systems at the core. Therefore, there is opportunity for new companies to provide such systems.

Evangelos continues that business units and functional departments are leading the way in this disruptive cloud transition. Departments such as marketing, sales, and the CFO's office are open to new tools and technologies that support innovation and improvement in their parts of the company: "A startup with the appropriate solution, that is clearly differentiated, can inject itself into departments in the enterprise."

This "new class of applications," as Evangelos terms it, can "enter the enterprise by means of the business unit." He notes that these applications must integrate with core enterprise systems, which helps shrink the scope of established systems. Consequently, innovative and cost-effective startups have an opportunity to replace functionality that legacy vendors supplied in the past.

Evangelos correctly points out that large companies do not lightly make the decision to replace core systems, which is a significant barrier to smaller vendors that want to displace incumbents:

Large companies will not rip out and replace core functionality with new systems even if the new software does not have the same functionality. However, the purview of core systems is shrinking, supplemented by these new systems coming to market.

Although startups face obstacles when selling to the core processes of large companies, opportunity exists when large organizations create new processes; for example, when large companies add processes to embed social computing and mobility into everyday operations. 

In smaller organizations, cloud startups can more easily become the new system of record because there are fewer large legacy systems in place. Today, smaller companies are more likely to adopt cloud vendors as their core systems. 

Salesforce.com and the disruptive cloud

In response to a question from Twitter, we discussed the nature of salesforce.com's disruption in the enterprise, particularly when the company started. Evangelos explains that salesforce.com created a new business model around sales force automation and contact management, rather than actually disrupting the business process itself:

Salesforce.com showed that cloud could be done with large scale and different economics than in the past. Absolutely innovation. Cloud applications would not have existed until salesforce.com showed the way. They created an entire industry.

To enable the business model, salesforce.com created important technology innovations including multi-tenancy and the zero footprint client, which allowed them to create scale at low cost.

Final thoughts

This episode of CxO Talk raises fundamental issues about the nature of innovation and cloud disruption in enterprise software. Evangelos Simoudis is an experienced entrepreneur and a highly informed VC investor, so his views are worth considerable attention.

As the show closes, both Evangelos and I acknowledge a debt of gratitude to the Enterprise Irregulars; we both feel privileged to participate in the group and be members. 

Also read:

• Enterprise software wars: 5 points of advice for CIOs
• Marketing and IT tensions: 'CxO Talk' debuts today
• CxO Talk episode 1: Guy Kawasaki on influence for APEs
• CxO Talk episode two: Big data, analytics, and HR technology
• CxO Talk: Microsoft, Salesforce.com, CRM, and the science of hugging
• CxO Talk: Gartner says 'provide and pray' collaboration won't work