The wrong argument: Enterprise v. Consumer startups

I don’t know about you, but the recent schadenfraude about the pending failure of early-stage consumer startups puzzles me. Only a small number of the new technology companies created in a given year produce the vast bulk of returns. So why is anyone surprised many of the seed stage consumer tech will fail?

This should not be a dark mark for young entrepreneurs. The current rounds of investment did not, for example, burn tens, even hundreds of billions of dollars building business model-free telecom companies and result in tens of thousands of layoffs on the way to crashing the stock market.

Before herds of tech entrepreneurs and investors make a student body left to the enterprise, it might be worth considering a few things:

  • Consumer spending accounts for 70 percent of the entire US GDP. As economies develop around the world, this trend appears again and again. Remember what Willie Sutton said about why he robbed banks.
  • Unlike many consumer plays, building compelling enterprise technology franchises can take years before you have an ounce of real feedback by paying customers.  Failing fast and recalibrating isn’t such a bad thing for an entrepreneur.
  • Because of very high switching costs, displacing enterprise tech incumbents is not trivial. It takes a different kind of mindset, timing, and determination. As a traveler in the enterprise infrastructure market, I have the scars to prove it.

Successful models in the consumer space have included the “localization of everything,” forms of ecommerce, and social networks and communication. The enterprise market has been driven by the shift from client-server to cloud and Software-as-a-Service (SaaS).  Both segments have taken to mobility like a duck to water.

I am an enterprise guy, and my market is nourished by attractive powerful cash flows, solvent customers, and the “innovator’s dilemma.” My compatriots are constantly inserting into transitions and transformations in the technology life cycle, which, believe it or not, can be decade-long periods. To illustrate, the still dominant interface to the networking industry (where I spent the last 15 years) is the venerable Command Line Interface (CLI), a user technology perfected by the Digital Equipment Corporation when the Valley was still a bunch of fruit orchards prowled by Brachiosaurus herds.

More significantly, the catalysts for the consumer and enterprise technology markets are beginning to merge. There are two, over-riding reasons for this:

  1. Consumers and businesses alike increasingly refuse to abide poor end user experience: whether it’s financial services application or a data center management systems
  2. Business model change are jumping firewalls

We all know about the consumerization of IT, but what has been less well discussed are the business model shifts. Much of the efficiency, choice, and superior user experience found in consumer markets have made or are making their way to the enterprise market.

We see this in an array of categories: Consumer ecommerce led by Amazon has taken hold in the enterprise by buying platforms like Ariba and Emptoris; social networks such Facebook and Twitter become business collaboration platforms such as Jive and Yammer.

The lines between business and consumer technologies are not only fading, they are cross-pollinating. Perhaps the best example is Amazon, which started out as an online bookseller, then moved to the Wal-Mart of the Web and has rapidly become a major supplier of IT to businesses of all sizes through its clouding computing division, Amazon Web Services (AWS). Interestingly, like a lot of consumer technologies, AWS actually has gotten less expensive over time.

Bad ideas or poor execution dies. So what? It’s been a hallmark of our industry to “burn out rather than fade away.” Moreover, poor first attempts lead to better, later innovations.  Remember the Apple Newton, Sony MagicLink, and Go PDAs — all miserable failures. Yet only a few years later, a modem company in Salt Lake City came out with the Palm Pilot, and mobile computing was never the same.

There are a lot of good reasons to focus on the enterprise market. The computing model is going through the most dramatic shift in 30 years, and hundreds of billions of dollars per year are at sake. But there are no reasons not to purse the even larger consumer markets.  Entrepreneurs it’s not a crime to fail. It’s only a crime not to try. And as large numbers run over to the enterprise, remember the sage words of Warren Buffett: “Be fearful when others are greedy, and be greedy when others are fearful.”


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