The Wall Street Journal survey of the top 50 VC-backed companies of the year is out. The #1 company is a provider of VOIP technology for telecom companies. The top 3 companies are all providers of business software to technology or telecom companies. Interestingly, the #1 company last year, a provider of healthcare cost information to consumers, is not even in the list this year.
Are consumer-oriented technology businesses too sexy to be successful in today’s market?
Everyone wants to be the next Facebook or Google, or even the next Instagram or Pinterest – a company that captures the fancy of consumers and has them signing up in large numbers to use the service. But, success is determined by a very simple metric in the world of business that gets measured sooner or later: does the business make money? By that yardstick, the jury is definitely out on the vast majority of consumer oriented businesses that seem enamored by the drive to acquire subscribers and head for a high-profile Instagram-style exit.
There’s a flurry of activity in the start-up space, and it’s all good. Good ideas are finding financial backers easier than ever before, and it’s conceivable that in the near future a brand new business can become a billion dollar business in a year or less. But that’s when the journey begins. As the amplitude of subscriber growth peaks, that of profitability and cash flow may be following an inverse relationship. Pretty soon, the resources needed to support a vast and finicky subscriber base starts overtaking any real money-making opportunity and nervous VC’s start looking for the exit door. The trials and tribulations of Facebook, related primarily to the revenue model of the company, demonstrate how a high subscriber base isn’t necessarily the ticket to high and sustained profitability. In sharp contrast, LinkedIn, a somewhat unsexy social media company that could be characterized by many very simply as a resume service for professionals and recruiters, is much more profitable; and in the opinion of pundits, far more sustainable over the long term.
Does your business even need to be in a startup hotspot to be attractive ?
It is sexy to be seen as a Silicon Valley tech start-up that has raised series A funding. When I see the announcements about startups in blogs and newsletters, everyone talks about how much money they have raised, as though that is the end in itself – a badge of honor that presumably puts an immediate stamp of success on the business. I learn very little about the number and type of clients, the revenue quality, or the profitability of the company. What ever happened to the good old-fashioned approach to entrepreneurship?: start small, acquire customers, show profit, and raise capital to expand? The current cycle seems to be almost in reverse order.
Back to the question of location. I work in healthcare and one of the most prominent and successful companies in the space today is Epic, a privately-held giant in medical software that’s located, improbably enough, in a small town – Verona, Wisconsin – it’s about as far away as you can get from the Silicon Valley hype and hubris. Epic’s software is considered best in class for small and large medical groups, and is the leader in the field of electronic medical records. Sound sexy? If it doesn’t, consider this: the Founder and CEO of Epic was recently listed as one of the 400 richest Americans today.
Enterprise vs. Consumer: Sexy or Successful?
There’s a $500 billion enterprise software market out there today. I have argued in my previous columns that enterprise clients can be more stable and profitable compared to fickle consumers who want everything for free and will readily drop using a service on a whim. The dying stars of yesterday’s hot internet properties, like MySpace, are ample evidence of this. But, enterprise clients are difficult to understand, hard to acquire, and impossible to win over with fancy user interfaces. Enterprise clients are all about value, and if your product offers value, they will pay good money for it. Epic’s software is recognized as best in class, and clients will often wait in line for Epic to schedule an implementation because of the company’s full order book.
Now, this is not about making a case for young entrepreneurs to stay away from consumer-oriented business and focus only on enterprise business. The argument I’m making is simply this: don’t get caught up in the glamour of Facebook or Instagram. Instead, follow the money. Some of the most profitable businesses – think SAP, IBM, Cisco – are virtually invisible to the public at large, but effectively run large parts of the digital ecosystem that make it possible for businesses to run efficiently, communicate with one other, and buy and sell seamlessly over a digital medium. There are also plenty of little nooks and crannies in the world of business – “white spaces” waiting to be exploited, including gaps in the offerings of these giant technology companies. If you follow these companies closely, you will see they are actively acquiring smaller companies to build out their product stacks, and are specifically focusing on tomorrow’s models – social media, mobility, analytics-driven business. You might get some ideas for starting a business if you follow their money.
Closer home in Chicago, there’s a great example of a less sexy business that’s very profitable and highly sought after – Braintree. The company has built an electronic payment gateway that’s decidedly unsexy – it’s back-end plumbing software that enables electronic commerce. Not exactly a household name like Facebook, but probably quite sustainable and profitable in the long-term.
So if you’re a young entrepreneur, I urge you not to get caught up in the “sexiness” of an idea. I might even argue that sexy businesses are probably best avoided, because sexiness indicates a level of infatuation with an idea that’s probably losing its charm because of heightened competition. Look in the opposite direction. There may be golden nuggets on the other side of the coin that no one wants to focus on, and that may just be the opportunity that has a better chance of success. Follow the basic rules of business, and success is yours.
Make your business as unsexy as it needs to be. Your business doesn’t have to be exactly like you.
|About the author||Paddy Padmanabhan||@Technori|
|Paddy is a keen observer of technology-led business model innovation. During the week, he runs a healthcare analytics business. During the weekends, he plays guitar and sings in a classic rock and blues band. You can find him on www.linkedin.com/in/paddypadmanabhan99/, or follow him @paddypadmanabha.|
Join the Starter Movement!
Find out for yourself why starters love our newsletter so much. Only the articles and news you want and need, delivered weekly.