Startups Ready to Disrupt Enterprise

“Smart shares” work as an investment vehicle because they’re about disruption. They’re about investing in private pre-IPO startups before they grow.

And some of the best startups to get smart shares in are ones that disrupt.

Consider this is a tale of two very different startup markets. One revolves around consumers. The other revolves around businesses.

In consumer-facing markets, painfully inefficient sectors face a fearsome onslaught of disruptive startups offering either much better or much cheaper products.

But that’s not the case in the enterprise space, which is lagging. That’s bad news for companies searching for ways to save or become more efficient. But it’s great news for early investors.

Disruptive technologies and innovative business models in healthcare, energy, construction, aerospace and a host of other industries are just being developed. And the opportunities are just as big, if not bigger, than the consumer markets.

So why the lag? Why haven’t startups already solved enterprise-related problems with the same gusto and ingenuity we so admire in consumer-facing startups?

Founders of consumer-facing companies strive for viral growth, where demand spreads like wildfire through word of mouth, and where their products become wildly popular and widely praised… make headlines… and ignite the value of their startups.

But enterprise companies don’t see viral growth. The numbers aren’t there. Potential enterprise users number in the thousands, not in the tens of millions or hundreds of millions of users who can be drawn to a consumer product.

Facebook has 2.32 billion monthly active users. Alibaba has nearly 600 million shoppers. Amazon – more than 300 million. JD.com – around 300 million.

I also believe one of the biggest reasons enterprise startups haven’t made the impact that consumer startups have is that most consumer-facing startup founders solve problems that vex them personally. The range is huge: It may be a eHarmony-like service that came up short. Or the hassle of getting a dress hemmed. Or the frustration of having to spend more than $100 for a decent pair of jeans. Or the loss of a loved one to a devastating disease.

These startups have great promise and upside. And as varied as they are, none belong to the enterprise side of things.

Another factor slowing enterprise-level disruption is that companies oftentimes have more complicated needs than individuals. Products typically have to be more sophisticated and versatile.

Let’s take smart outlets, for example, and compare the investment opportunity in the consumer and enterprise spaces.

If a smart outlet designed for houses is faster or cheaper or cooler than other outlets and catches the fancy of consumers, it can lead to massive sales. And as a bonus, it doesn’t have to be nearly as sophisticated as one designed to manage power usage in an office building.

The bar is much higher for enterprise-level smart outlets. The good ones should allow building managers to filter by device or appliance types, rooms, floors, regions of a building, departments, or any combination of these. It’s harder to do. But if done right, it could save building managers thousands of dollars per floor, per year and could lead to large buyers (responsible for thousands of buildings each) lining up to buy them.

They’re both great investment opportunities in their own way.

But, even taking into account the longer sales cycles of enterprise marketing, I’d take the smart outlets used in commercial buildings.

Because one large customer could have buildings across the country, it’s easier to scale geographically. Customers would be just as finicky but at least fewer in number… thousands versus millions. And while the sales cycle is elongated, the churn would be less, and it would be much harder for competitive products to steal customers.

It’s easy to see a homeowner making the decision to drop one product for another that’s slightly cheaper. But a corporate customer is unlikely to do that unless it becomes absolutely necessary.

Don’t get me wrong, enterprise markets are very competitive. Startups won’t be able to waltz in and dominate. Corporate and industrial customers have very specific and challenging needs.

But many of these are multitrillion-dollar markets that have not undergone any serious transformation. Startups and investment dollars are moving into these “boring” sectors in increasing numbers. First Stage Investor is poring over opportunities in this space. In fact, we just recommended a smart outlet company for office buildings that has immense potential.

Let’s face it, most of the obvious (and biggest) opportunities in the consumer space have already been tackled. It’s enterprise’s turn now. And most of the biggest opportunities can still be tapped by startups and the investors who back them.

Good investing,

Andy Gordon

Co-Founder, Early Investing