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Scaling Enterprise Software Companies is Harder than Ever

Girls can do anything!

There is a common misconception within the startup community that building companies is easier than ever. Part of the argument is the amazingly cheap costs of infrastructure available with cloud infrastructures such as AWS or Google Cloud, the relatively easy access to early stage capital as well as the free distribution and commercialization channels available to any company. More importantly, this argument has been fueled by some large exits recently experienced by small companies such as Instagram or Whatsapp in the consumer space.

When we think about this argument, we can is about 75% true. If we divide the process of building a company between early stage (building) and late stage (scaling) and then we segment that universe between consumer and enterprise solutions. We can arrive to the following conclusions:

  • Starting a consumer software company is easier than ever before
  • Starting an enterprise software company is easier than ever before
  • Scaling a consumer company is easier than ever before
  • Scaling an enterprise software company is HARDER than ever before

scaling

To illustrate this thesis let’s take a look at the latest round of IPOs in the enterprise software space. Recent analysis showed some outstanding metrics about the new wave of enterprise software companies:

  • Average time from starting to IPO:5 years
  • Average amount of capital raised: $110M
  • Average number of employees: >560
  • Average number of sales and marketing employees: >180
  • Average revenue: $70M

As you can see, those metrics describe the difficult and challenging process of scaling an enterprise software company which highly contrast with the cheaper and easier way to get it off the ground. Without getting into a detailed analysis of the factors that contribute to this phenomenon, we can list a few usual suspects:

Markets are Bigger

The size of the enterprise software markets have drastically expanded over the last few years. As a consequence, companies need to capture a bigger size of the market to be relevant on any particular space which results in a harder endeavor compared to the equivalent task a few years ago.

Markets are Global

Today, enterprise software is a global business. The commoditization and globalization of distribution channels as well as the flexible global trading laws, have allowed customers in emerging economies to have access to the same enterprise software solutions than their peers in first world economies. As a consequence, every scalable enterprise software companies is faced with the challenge of acquiring customers in emerging markets which results in large sales and marketing operations.

Requirements are More Complex

With the evolution of enterprise software comes the complexity on the requirements of new solutions. As businesses have evolved they have faced more complex business dynamics that are rarely addressed by default in enterprise software packages. In order to acquire those types of customers, enterprise software companies need to spend more and more time and resources providing the right levels of customizations of their solutions.

Markets are More Competitive

Because starting an enterprise software company is relatively easy, you find a lot of early stage (post-seed, pre-Series A) companies in any segment of the market. As a result, competition is constantly intense which requires companies to deploy the right level of resources to stay competitive. Additionally, newcomers in the space always lower the price and try to simplify the customer acquisition model which poses new challenges for companies in growth mode.

I hope some of the factors below make sense. The enterprise software space is more exciting than ever but, as mentioned before, I often think there is a strong misconception about efforts that take to fully scale a modern enterprise software business. Reading this, you have to ask yourself: are you sure you don’t want to build a messaging application? ;)

 
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Posted by on September 2, 2014 in Uncategorized

 

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