The venture market in the United States has seen a significant number of enterprise software startups go through a successful IPO. Veeva, Tableau, Splunk, Fireeye, Marketo, and Box.com are just a few examples of the past years. Many more privately held enterprise software startups are generating revenues that approach or even exceed $100 million annually and are enjoying $1 billion+ valuations. Clearly, investing in enterprise software can be as lucrative as investing in consumer apps and according to CB Insights, the capital efficiency in enterprise software has even been higher than in consumer tech companies..
When surveying recent exits and private unicorns in Europe, there is a plethora of consumer and e-commerce focused activity. In the enterprise software space, however: Next to nothing. Nada. Nichts. Rien. Nula. Niente.
As an active angel investor in enterprise software with a significant background in working for European high tech companies, this prompted me to dig deeper into this issue: Is my perception right? Are there really no big enterprise related software startups in Europe (and by that, I mean any software that is sold to an enterprise, whether is is to the CIO, other lines of business, or individual employees) ? And if so, what are the reasons: Is it a lack of seed money? Is there a lack of growth capital for enterprise software in particular? Is it that there are no entrepreneurs entering the space? Could it be that entrepreneurs are scared away by the omnipresence of large incumbent providers such as SAP and Sage?
I set out to find the answers to these questions and visited the hotbed European startup activity, Berlin. Here I talked to multiple CEOs of enterprise software startups and several prominent seed stage venture capitalists. What I learned was eye opening.
There is very little transparency about startups in the enterprise software sector: Compared to consumer and e-commerce startups, the trade press does not like to write about B2B. Entrepreneurs in this space have historically been focused on running a cash flow positive business without taking in venture capital at the early stages, and hence they ‘fly under the radar’. And while there are many startups in the sector, there is no natural center for them to cluster around and hence no critical mass in one place.
Large company CIOs in Europe appear to have comparatively little risk appetite to work with startups. European venture capitalists also don’t seem have a network of companies who are ready to serve as one the first ten early adopters for a new product. In fact, some people claimed that many venture capitalists of the current generation don’t understand enterprise sales to a CIO, and hence don’t invest in it. On a positive note, investing into software for the lines of business outside of the CIO’s decision power works as well here as it does in the U.S.. More importantly, small and medium enterprises are often the better early adopters of new technology compared to large incumbents. And as one venture capitalist pointed out, startups can be particularly successful selling to other rocket ship startups, for instance in the ecommerce space.
European based series A/B investors are expecting just as aggressive revenue growth rates as their U.S. counterparts: A startup in any European country immediately needs to look beyond the initial borders to tackle a big enough target market. In other words, purely French, Italian, German (name your country here) startups are not viable. The good news is that places like Berlin and London offer a workforce that can cover all of Europe from one location. One venture capitalist was also adamant that Europe alone is not big enough, and that startups therefore cannot ignore doing business in the U.S. And since any capital city in Europe can be reached within an hour or two via a budget airline, there is no longer such thing as UK venture capital or German venture capital or French venture capital. The larger venture firms such as Index or Mosaic invest their money across Europe. The dispersion of startups across many localities today makes it difficult for angel investors to add value and gain insight in a scalable way.
The bottom line:
Enterprise related software startups in Europe are plentiful and they are investable, but the founders and investors need to be aware of the boundary conditions and challenges imposed by their environment.
If you are an enterprise related software startup and are based in Germany or France in particular, send me an email. If you an investor with a different perspective, I would love to hear from you.
Picture credits here and here.