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For the Love of God People, Enterprise Software Is Not Dead

There has been a lot of talk recently including a number of blog posts (such as this one, this one, and this one) that enterprise software is “dead” with the implication that investing in enterprise software is akin to throwing good money after bad.  The basic thesis is that a combination of market saturation, customer fatigue, and open source has doomed enterprise software to be a rather uninteresting and unprofitable IT backwater for the foreseeable future.

While there is no doubt that major changes are underway in enterprise software and that many of the old business models in the industry are under assault, it is anything but dead.  In fact, it would be impossible for anyone closely following the enterprise software space to credibly say that it is “dead” due to the wide range of important core technical innovations occurring in the space as well as the major platform and business model transitions in process.

Change Is A Good Thing
At a core technical level, there are a number of very interesting trends underway including Service Oriented Architectures, Data Abstraction, and Message Aware Networking (to name a few) many of which I laid out my recent “Top 10 Trends in software" posts.

Most of the enterprise software critics would probably concede these trends and instead would maintain that the real issue is that the traditional business model of enterprise software (large per seat license fees, huge professional services bills, and heavy long term maintenance contracts) is no longer sustainable and that no clear replacement has emerged.

These critics are correct that the old enterprise software model is highly challenged these days, but it’s not like there are no clear replacements for that model.  For example, Software as a Service (SaaS) is quickly gaining acceptance as not only a viable way to deliver software but as a viable way to grow a profitable business.  In fact, rightly or wrongly, SaaS-based software companies such as, Concur, and Websense are some of the most richly valued software stocks in the stock market right now.  Other viable models include appliance-based software and open-source (aka services/maintenance revenues).   The point is that just because seat licenses for shrink-wrapped disks are dead that doesn’t mean that the whole industry is irrevocably screwed.

Fact is, there is plenty of demand for good enterprise software out there, vendors just need to re-architect their business models and market approach so that they can deliver their software in a way that best meets the needs of customers while conforming with the new business realities of the market.

Stratify Makes The Change
For example, one of my venture investments, a company called Stratify, was having a very hard time growing its business a couple years ago.  Stratify had fantastic unstructured data management software, but was selling it as a generic infrastructure software platform to large enterprises.  This software generally cost $500K-$1M and then customers had to spend more money customizing it.  They also had to dedicate resources to maintaining the software.  The result for Stratify was a very long sales cycles, very uneven sales, and a very small set of prospects that could even afford the investment required.  In many ways I’d say that Stratify suffered from all of the major ills that are leading many to condemn enterprise software: long sales cycles, expensive direct sales forces, and limited market opportunity.

To its credit, Stratify realized this two years ago, but rather than throw in the towel they thought very hard about what core assets they had and how they could better deliver them to customers.  As it turned out, Stratify refocused the business away from being a generic licensed infrastructure platform to being a vertically focused SaaS platform for unstructured data management.  The company decided to focus its efforts on a particular vertical space, legal “eDiscovery”, where unstructured data management was a critical business need.  Instead of selling $1M licenses, Stratify switched to selling a hosted service that lawyers could use for each specific legal case.  Costs are tied to the amount of information that the system must manage for each case.  This made Stratify an easy purchase for lawyers: they could be up and running in a matter of a few days for each case without having to make any long term commitments and it allowed Stratify to sell to its software very qucikly and in easy to swallow bite size increments.

These days Stratify is growing like a weed and kicking ass with its legal eDiscovery service.  It still has its core enterprise software platform (that’s what its eDiscovery service is based on) but it only sells it by request.   Granted, Stratify is lucky to have successfully made the transition and there are plenty of other enterprise software companies in a similar position to Stratify that failed to make the switch (and whose deaths are now contributing to the whole “enterprise software is dead” attitude), but the lesson here is that enterprise software isn’t dead it’s just very different now and requires different approaches to be successful.

Thus, to invest in enterprise software these days you not only have to understand the technology trends, but to understand the business trends such as SaaS and Open Source. Once you understand these trends and move to apply them it’s readily apparent that the space is anything but dead.

Bad Mouthing May Actually Be A Good Thing
The really funny thing is that being declared a “dead” investment space by Silicon Valley conventional wisdom is probably the best thing that has ever happened to Enterprise Software.  Just look at consumer internet deals, they were declared “dead” a few years ago and now are white hot.

In fact, it seems as if many of the people declaring the enterprise software space “dead” are the same consumer internet investing refugees that magically became software investors overnight in late 2000 early 2001.  They are all piling back into the consumer space now, only to be playing catch up to the few consumer guys who stuck to their guns and never left.  By the time these nomads get up to speed, the space will be so overheated that they will get their hats handed to them again and then probably retreat back to software saying all the while saying "consumer internet is dead".  Thank god for them: the world needs the 3rd and 4th quartiles.

See you guys in 3 years!

June 10, 2005 in Software, Venture Capital | Permalink


Legal Disclaimer

The thoughts and opinions on this blog are mine and mine alone and not affiliated in any way with Inductive Capital LP, San Andreas Capital LLC, or any other company I am involved with. Nothing written in this blog should be considered investment, tax, legal,financial or any other kind of advice. These writings, misinformed as they may be, are just my personal opinions.