May, 2007

  • May 8, 2007
  • Do we still need venture capitalists in the software industry?  Sounds like a no-brainer but the question also reflects the disruption that is taking place in enterprise software that was initiated by salesforce.com and accelerated with its unveiling of a company incubator in San Mateo.

    For the record, I think there will always be a place for VC’s and their money, but it is also true that their position, and possibly their power, may be diminished — or possibly enhanced by the incubator concept. 

    First, the good news.  The introduction of salesforce.com’s incubator has finally put a floor under the innovation and entrepreneurship processes.  In the years leading up to the bursting of the Internet bubble it was common for entrepreneurs to get funding for ideas that lacked business plans — and maybe even prototypes — with the result that everything came crashing down like a house of cards the first time a breeze came up. 

    Instead, I suspect that the incubator might become an essential part of the process that leads up to getting funding, analogous to the Bachelor’s degree requirements that most graduate schools have.  How a new company does in an incubator setting might become a core requirement for anyone who considers investing in a new company. 

    More importantly, if done correctly, an incubator experience should be able to get first time entrepreneurs some basic business experience that many may lack.  So, all in all, I could easily see a time when an incubator experience becomes a standard part of the way that VC’s evaluate potential investments.  I also think it’s possible that VC success rates will improve because many of the mistakes that young companies with inexperienced management teams fall into could be weeded out earlier.

    Nevertheless, to get back to the original question, the full answer is a little different.  If an incubator is the only difference in the entrepreneurship process, then it is quite likely that emerging companies will still need VC money because an awful lot of it goes to things that are not strictly related to building a product like rent, marketing and building a sales force. 

    As it turns out, the incubator concept has been around for a long time and the single important difference here is that in addition to providing all sorts of business nurturing, the incubator in San Mateo tries to standardize products on a platform and tool set that make it possible to standardize the way the applications are eventually marketed and sold. It is this innovation that sets the new incubator apart because it changes the marketing and sales paradigm, removing economic friction and the need for at least some of the capital required to overcome it.

    Labor is still one of the biggest parts of a company’s outlays and sales burns cash like there’s no tomorrow.  If you are building a conventional business the cash that drives the sales and marketing team during the ramp-up process has to come from somewhere and that place has traditionally been the venture capital community.  The natural question then becomes, what alternatives does an entrepreneur have other than building a sales force?  The answer is already in front of us in the form of what salesforce.com calls the AppExchange.

    An online commerce device like the AppExchange can do a lot to reduce or eliminate the costs associated with selling software. For example, it greatly reduces the need to build out a sales and marketing component of a business.  It remains to be seen how profits will be affected but it is possible that enterprise software can be just was profitable at a lower price point if costs (e.g. sales overhead) can be driven out of a product’s price. 

    Purists might say that a sales force is required to bring new product ideas into a market but maybe not or at least not so much.  Expensive sales and marketing drives up prices and is essential only if there is no other means of penetrating a market.  The alternative is to greatly reduce friction caused by sales and marketing to the point that a price is so low that a buyer can afford to try a product and discard it if it fails to meet one or more key needs.

    Some people might find this to be wasteful but it is exactly the approach that early adopters have used for decades.  In his early books like “Crossing the Chasm,” Geoffrey Moore made the point that early adopters tended to be companies with lots of resources that can afford to experiment with innovative products (and possibly throw them away) and in many cases help the vendor articulate its true value proposition.

    The ability to pay for the costs associated with that kind of innovation means early adopters get the first benefits and is one reason they gain great market advantage when they adopt new technologies.  Imagine what might happen though if the cost of trying an innovative idea drops.  In that scenario, potentially any company could be an early adopter with far reaching impacts on competition.

    Inevitably, we come back to the original question — are VC’s still necessary?  The answer is yes, but this business is changing significantly, even for VC’s and it is possible that VC’s will need to change their models in the same ways that software companies are in the middle of changing theirs.  In the not too distant future, a venture capitalist might look a lot more like salesforce.com than any of the firms on Sand Hill Road.

    Published: 17 years ago


    Well, it didn’t look like a garage, that’s all I can say. It was clean and freshly painted and if you believe the stories in the press, recently exorcised to remove the ghosts of Siebel.  It was Salesforce.com’s incubator, the closest thing I have found to my New Garage concept.

    For several years now, I have been saying that on-demand platform technologies would change many things including how companies are formed and how new products are built and I used the analogy of going back to the garage since that’s where innovators have historically gotten their starts.  Yesterday I was at salesforce.com’s self-described incubator to get a look at how they updated this idea for 21st century Hewlett’s and Packard’s and I have to say, it looks pretty cool.

    If you aren’t familiar with the incubator yet, it’s a pretty simple idea.  Just as the name implies, it is a place for nascent companies to go to build new products as well as themselves and to refine their ideas.  It is also a place where more established companies have congregated to jump-start their on-demand strategies and roughly half of the first class of incubator companies fit the latter categorization.

    In broad terms the importance of the incubator goes way beyond anything that is technologically related.  In my mind it’s mostly about social capital formation.  Let me explain.

    With the plethora of application tools now available, an innovative person with an idea can bang out an application or even a system in a very short time and the fact that there are nearly 600 applications in the AppExchange is testament to that fact.  True, many of the AppExchange applications may not have been built using the Salesforce tools, but there are quite a few that have.  However these applications have been built it is not the building that determines success or failure of a venture it’s at least equally about things like company structure, culture, and approaches to marketing and sales and a lot of other things.  That’s where social capital comes in.

    Social capital encompasses all the other things that you need to build a successful company — the contacts and networks, the best practices for sales and marketing, strategies for accessing and using limited capital resources and a lot more.  Innovators, especially those doing it all for the first time face a daunting challenge of assembling their networks and tapping into these soft tools for company formation and success. 

    The salesforce.com platform is now ubiquitous and global and it is a shrewd play by the company to begin deploying incubators (more are in development).  Without incubators or some other mechanism to nurture emerging companies in the pre-VC phase of life, there could be an embarrassingly long list of good applications that never made it to the big time as developers would inevitably discover that building an application is not the same as building a company.

    For the record there are 32 companies in the first incubator who each paid twenty thousand bucks for the privilege.  In exchange they get a desk, access to all the tools and a lot of help grappling with ideas — technical and business oriented — that some have rarely dealt with before.  The close quarters foster inter-company cooperation and idea sharing.

    Surprisingly many of the companies don’t qualify as start-ups they have names like Bluewolf, Centive, Eloqua, Pervasive, and Xactly.  Companies like this take advantage of the incubator to get a ringside seat at the hub of the on-demand world and to rub elbows and trade ideas with the people who make the secret sauce.  The knowledge they pick up at the incubator can be invaluable. 

    For example, Centive, a compensation management company got a head start embedding Adobe Flex tools in their product thanks to its membership in the incubator.  That got the company some valuable PR when Salesforce.com and Adobe announced their alliance a week ago.  Everyone can use a little help in the social capital formation area but I expect that, over time, established companies like Centive will be the rarities at the incubators and more companies like Portaga (travel services) and StakeWare (battling global warming) and InsideView (sales effectiveness) will take their places.   

    I also think that the incubator concept will prove itself here in the US but I suspect its greatest impact will be in other parts of the world where the cost of traditional innovation — computers, operating systems, middleware, databases, and more — are too high to enable the kind of dynamic entrepreneurship we are seeing in San Mateo.  This will likely result in new applications for the global market but it will also fuel the emergence of local software companies with solutions tailored to local market needs.

    The more I think of it, the more I wonder what might have happened to the Internet bubble if the incubator had been in place at the beginning of the decade.  Alternatively, you wonder if we all might now just pick up where we left off.

    Published: 17 years ago


    That line was used by Bette Davis in the 1949 movie “Beyond the Forest” and was reprised by Edward Albee in (I think) the opening line of his play, “Who’s Afraid of Virginia Woolf,” which was made famous by Elizabeth Taylor in the film version circa 1966.  In any event, it was all I could think of when visiting a web site to buy a T-shirt for my wife. 

    The T-shirt was advertised in the women’s magazine, “Marie Claire” and it is part of a campaign to feed hungry kids, the idea being that the exorbitantly priced article would generate profits to accomplish the goal.  My wife is a sweetheart about stuff like this and she suggested it as a gift for Mothers Day or her birthday — the two run together.  So I said fine.

    I dutifully followed the directions printed in the magazine and went to the web site where I ran into Bette Davis and Elizabeth Taylor.

    Now, I am a guy and like many guys I know I can’t buy for women because I need hard data — measurements, not sizes that are so flexible they are the economist’s definition of fungible (sorry, you’ll have to look that one up).  But I figured I was on solid ground needing only to order a size small T-shirt, even I could do that, I reasoned, but I was only partly right.

    The magazine referred me to a place on the web site that — surprise! — didn’t exist, the “charity link.” 

    Ok, I said, this is a women’s magazine and I am probably just exhibiting normal male pattern blindness which recurs whenever I have to do something that should be logical but is not.  It also perfectly complements my male pattern deafness (which seems most acute whenever the Red Sox are on), so, my solution was to go to the site map.  Unfortunately, the site map deals mostly with astrological forecasts from what I can see and I didn’t need one in the same way Bob Dylan never needed a weatherman, but I digress.

    Eventually, I found the link I needed hiding behind some other word like “donations” and found the T-shirt only to discover that TO ORDER you need to call an 800 number.  So much for e-commerce.

    I made the call and got right through to an operator who was only interested in my credit card and the size and it took a few questions to realize that this number only dealt with the one specific T-shirt despite all the other stuff you could theoretically purchase on the web page that referred me to this destination. 

    Ok, I surrendered, gave them my numbers and shipping address and we were done, or so I thought.  Foolishly, though, I thought I would give them the benefit of my CRM knowledge and maybe make a few select comments in their customer service or comment areas to help them improve the shopping experience, but even in that I was disappointed.  Customer service was essentially outbound, you could manipulate your subscription and other stuff but the magazine was clearly not interested in establishing a pen pal relationship with its customers. 

    Ditto for comments, if you want to make a comment you need to be a member.  Wanna register?  No, thanks, I have a day job writing a blog and other CRM related stuff and I must get to it.  Hearst Publications, are you listening?

    What a dump.

    Published: 17 years ago