Organizations will spend $1.3 trillion worldwide on enterprise software and services this year. If you’re an entrepreneur building a next-generation software company, you’re no doubt wondering: How do I get my piece of the pie?
It’s not easy. In today’s fast-moving market, where the predominant SaaS delivery model means customers can easily churn away to a competitor, building a standout company of lasting value is extremely challenging. But many of today’s current software-industry leaders – newly public companies like Marketo, WorkDay, and Tableau with multibillion-dollar market caps, and fast-growing stars like Box, Dropbox, and Atlassian, which are next on the IPO list – can teach budding entrepreneurs a lot about how to build a global software powerhouse. What have these companies done right to get “into the game” against aging but still-entrenched incumbents such as Microsoft, Oracle, and SAP? I believe these companies, are, very simply, making the right plays.
In a series of blog posts over the next few months, I’ll introduce what I call the Software Entrepreneur’s Playbook, outlining a variety of essential building blocks every software company needs for a shot at the big time. Some of these essential plays include the following:
- Cloud—How do I leverage the cloud to optimize the delivery and support of my product?
- Freemium Business Model – How do I allow customers to use a free version of my product before buying?
- Big Data – How do I use data and predictive analytics to make end-users more productive?
- Mobility – How do I build a killer product for a mobile world?
- Design UI/UX – How do I make my product actually enjoyable for customers to use?
- Customer Success – How do I ensure customers derive true value with my product and don’t churn?
According to research firm Gartner, the market for cloud-based, SaaS software is expected to grow 21.4% this year; Gartner pegs non-SaaS software growth at just 5%, or not much more than GDP. But in addition to delivering their product via the cloud, software companies today must be much more focused on their products’ usability. Gone are the days of creating complex, on-premise bloatware and then charging millions to install and maintain it. (Yes, that distant wail is the sound of highly paid SAP consultants crying over their soon-to-be lost, multi-year contracts.) Now, enterprise customers want affordable, flexible, Web-centric and easy-to-use software they can access anywhere—including on mobile devices—that mimics the services they use in their daily lives, from Facebook to Netflix to Amazon.
The bottom line: If you’re building a software company that doesn’t meet this high bar, it will be very hard to become a multibillion-dollar enterprise.
Box is one enterprise company that’s made all the right plays. First, it’s a fully cloud-based service. Second, it nailed the freemium model. Box gives users 10 gigabytes of free storage, which has encouraged thousands of new users to adopt the company’s product every day. Next, Box uses big-data analytics to fine-tune its services. For example, the company analyzes data to find out when a significant number of employees at a company are using Box. When a company reaches critical mass, Box has a sales person contact the IT department to up-sell them on premium Box services.
Of course, Box’s product is also simple to use and works seamlessly on mobile. Finally, Box puts a tremendous focus on customer success, with a large team focused solely on making sure customers are happy and don’t desert them for another collaboration service such as DropBox. All of these moves will help Box generate revenues of more than $100 million this year. With a $2 billion valuation, the company is expected to go public in the next few months.
Atlassian, which sells popular software-development and collaboration tools, is another standout player ticking off the right plays. The long-bootstrapped software company was founded in Australia in 2002 and quickly saw its business grow world-wide, thanks partly to its very well-designed and easy-to-use products including Jira, Confluence and Hipchat. In fact, Atlassian’s products were so intuitive that even non-technical users adopted them to facilitate collaboration in their workplaces. In addition, the company used free, 30-day trials to facilitate widespread product adoption and demonstrate value quickly to customers. By the time a free trial ended, it was a no-brainer for many users to convert to becoming paying customers. In other words, Atlassian’s products were ‘bought’, or sought-after because of their great value, not just ‘sold’ by an aggressive salesforce. This combination of plays has yielded incredible success for Atlassian, as its products are now ubiquitous inside both huge Fortune 500 companies and smaller firms. The firm is expected to file for an IPO later this year.
Stars like Box and Atlassian aren’t just going after the old guard. They’re also taking on newer SaaS heavyweights such as Salesforce.com and NetSuite, which came of age post-Internet and sell products that could be considered as big and complex as some of the traditional software packages they’ve successfully supplanted. In fact, many SaaS products, not just those from Salesforce.com, are complicated, require too much training, and aren’t mobile-friendly or well designed. This has opened the door for newer, more innovative market entrants. These new players are also winning because they can leverage today’s dirt-cheap—or free—development tools, computing infrastructure and Internet bandwidth, advantages that weren’t available to the earliest SaaS players.
There’s over $1 trillion up for grabs in the enterprise software market. If you make the right plays, you can come out on top. If you fumble the ball by neglecting some of the basic rules, however, you’ll fall behind your opponents and sink in the standings. My next post will explore the first step in building a software company today: using big data and predictive analytics to make your end-users more productive.
Roger Lee is a general partner with Battery Ventures in Menlo Park, Calif. A version of this post originally ran in Forbes.