Enterprise Startups: Why Business Model Innovation is as Important as Product Innovation

The “consumerization” of IT is happening, and enterprise investing is clearly in vogue again. Enterprise software is now being built for users rather than just high-level decision makers, and the resulting impact on product has been profound. Who would have imagined the words “beautiful” or “easy to use” could be used in the same sentence as “enterprise software?”

At the same time, the business model impact has been just as powerful, but is often overlooked. We are strong believers that success in the enterprise requires innovation on both the product and business model side and that the next great enterprise software leaders who will be created over the next decade will win on both fronts.

Over the last seven years since our inception, we have learned many valuable business model lessons investing at every layer of the data center stack in companies like Puppet Labs, Urban Airship, Assistly, KISSMetrics, Duo Security, Loggly and Orchestrate.io, among others. We think a number of these lessons are critical to setting entrepreneurs up for future success:

Marketing Before Sales – The general consensus is that once you start seeing a bunch of users, you immediately hire a sales person to mine those contacts. The reality is that you haven’t yet determined what an actual sales-qualified lead looks like, which is marketing’s job. Specifically, the key is finding the right demand gen person who understands all aspects of the funnel. That person typically is not an expert on the content side, which is perfectly fine. Don’t be afraid to hire a person who is an “A” in demand gen but a “B” in content.

Sales Debugger vs. a Head of Sales – In the early days of Puppet Labs, our VP of Sales used to call himself an “overpaid inside sales guy.”  In other words, he was willing to get his hands dirty and figure out what the right model for the company was. When it’s the right time to hire sales, make sure they are not imposing a model they are comfortable with, but the model that is best for your company. This could also be in the form of a sales engineer or an inside sales contributor in the early days rather than a VP-level hire.

Farmers not Hunters (Initially) – There is nothing wrong with big deals and revenue. In high-velocity models, however, you have hopefully built a groundswell of users from the bottom up. “Farmer” type salespeople can mine these accounts for users that are essentially already sold on your product and thus close bigger deals faster. “Hunter” type salespeople are far more expensive and inefficient since they are basically knocking on doors to drive bigger deals. They also typically take nine months to ramp up.

Users May Not Be Buyers – Understanding this distinction is paramount to building a successful business. This is especially true when the initial product is targeted toward developers, who typically do not pay as much. Urban Airship, for example, initially took off like lightning in a bottle with developers, but the company realized that the CMO was the actual buyer. It is important to understand the right “pay” signal in your funnel and design your pricing to optimize for users vs. buyers.

Think Revenue from Day 1 – No, it’s not all about user growth. This also doesn’t mean revenue at all costs—far from it. However, you have to have an eye toward where potential revenue could come from. If it’s an afterthought, you may be giving the most valuable parts of your product away for free or not designing/testing key features specific to the individual who will actually sign a check.

Don’t Worry About Big Name Logos – Your early adopters don’t have to be big. Find a group that loves what you do and will give you real feedback. The worst scenario is to get trapped by the first handful of big customers and thus head down the expensive enterprise sales paths. It can be addictive, so define the appropriate guardrails with early adopters.

Be Specific – The smaller you are, the more specific your messaging should be. Remember: your product has to sell itself. Don’t look at larger company examples as models. For example, take Splunk’s messaging: “Do more with Big Data,” or RSA Security’s: “Security, Compliance and Risk Management Solutions.” You are probably asking the same question I am—“what the heck does that mean?” Be specific: “Two-factor authentication made easy” or “Simplify log management.” Your users need to immediately get what the product does. You are selling a product, not a brand (yet).

Bottoms Up! – This is essentially the core tenet of high-velocity models and must be embraced from the start. The focus needs to be on departmental or small company sales with an individual easily purchasing a product, to eventually connecting the dots across an organization for a larger deal. Going from top to bottom is way harder, and you would be hard-pressed to find any enterprise companies that have successfully done it. It’s for this reason that we actively look to invest in companies that truly democratize markets.

At True, we are continuing to double down on investing in the enterprise. We strongly believe the industry is going through one of the biggest fundamental shifts since the Internet took off in the 90’s. There are still plenty of untapped opportunities—the entire middleware/semantic layer for the Internet of Things movement, the tools to create and manage the next generation of data applications, the next generation of applications themselves that will provide context around data, the entire landscape of “mobile” enterprise apps, new security models for the API-driven data center and many others.

We are certain and excited about all the product innovation that will come over the next several years. At the same time, it’s important that entrepreneurs don’t also forget to innovate on the business model side to truly enable their products to flourish.