Where Are The Unicorns In Enterprise Software In Europe ?

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.

The Business Model Canvas Is A Swiss Army Knife For Innovation - You Need To Know When To Use Which Tool

Christian Dahlen & Oana Olteanu

Every product owner wants her new product to be successful. Every company prides itself for being innovative. Changes in software development tools and methodologies have made it much easier to build new products. New products are announced and developed at a rapid clip.

But how do we define success? In the software business, license agreements are rapidly being replaced with subscription models which need to be periodically renewed. These contracts can be cancelled at a moment’s notice if the customer does not receive value. And yet, many new offerings never get to customer mass adoption.

Clayton Christensen and Geoffrey Moore have extensively researched the failure of large, incumbent companies to innovate, particularly in the tech sector. Perhaps counterintuitively, their findings identified the inability of those companies to identify new customer needs and segments, and to change their Go-To-Market (GTM) approaches accordingly, as the main reasons of failure to innovate. Hence, innovation requires a company to think about the GTM strategy already in the idea phase.

The Business Model Canvas (BMC) and variations such as the Lean Canvas is a framework that has proven extremely useful to instill this thinking for startups. The canvas provides a holistic view of the business, and makes it easy to iterate on the sheer endless number of innovative business ideas before significant resources are being committed. In particular, the canvas forces startups to pay significant attention to identifying customer segments, marketing and sales channels, and revenue streams.

Less has been said about how larger companies can use the canvas to help innovate.

We used the Lean Canvas version for more than 70 software products across the whole stack, for new and for existing market segments, and at all stages of the product  lifecycle.  For each of the nine canvas tiles, we developed a set of diagnostic questions.

• Idea stage - customer segments, problem statement, unique value proposition and unfair advantage
  
  We found the canvas to be particularly powerful when used as the first step in the Investment Readiness Level (IRL) assessment. The canvas is used to assess the potential of the idea before any time and effort are put into development. The problem/solution validation begins with focusing on one customer segment. The users of this customer segment are united by a shared paint point that they urgently need to solve, and they agree that the new solution will provide significantly improved value. Viability and desirability take a front seat and answer the salient question whether the idea is worth a product, and whether it is the right time to invest. The focus on the customer segment and the potential routes to market already highlights whether the innovation will be sustaining or disruptive.  

• New product development stage - solution, revenue streams, channels
  
  Once a good idea has been pre qualified with the canvas, the team needs to iterate and find the Minimum Viable Product (MVP) based on customer feedback. The canvas keeps the team focused on the entire business model and fosters discussions among all parties accountable for the whole product. Once the MVP has been built, the focus is on scaling the customer base and developing the corresponding GTM to get to product/market fit. At that point, the canvas has been used to test the whole value chain from customer to revenue to channels. In particular, the right hand side of the canvas is combined with the IRL and can be used to assess whether a product is ready for launch.
  
  
• Later versions and sunsetting stage - Customers, revenues, cost, and the whole canvas
  
  For mature products, a product owner needs to decide whether she wants to continue investing, maximize margin, or sunset a product. By evaluating the customer problem to be solved, revisiting users and buying centers, and testing the unique value proposition, we found the canvas to be a useful tool to help make these decisions. For example, in one case a product extension of an existing product to a new use case promised to generate new revenues, and justified significant new investment in development, while keeping the GTM the same.

The canvas is an incredibly rich and flexible tool set which, in large companies, becomes even more effective when combined with complementary frameworks such as the three horizons model, customer development and the investment readiness level scale. We found that the canvas is a must-have framework that helps diagnose and improve business model innovation by emphasizing that customer validation is essential for product adoption, thus for product success. Its usefulness is entirely driven by stressing the right topics at the right stage, and by asking the right questions for each of the canvas tiles.

Picture credits here and here.

Why Culture Needs to be the Fifth Element of any Company

Article reposted with permission from Oana Olteanu

Peter Thiel’s single most important piece of advice for Airbnb is ‘Don’t fuck up the culture’. Other executives and venture capitalists like Brian Chesky, Ben Horowitz, and Steve Jobs have expanded on why culture is important for a startup company, and Marc Andreessen's tweet ‘...Ruin Culture -> Destroy Company’ summarizes the point neatly. No doubt, culture is crucial for success.

The Fifth Element in the eponymous movie contains four stones with the classical elements. It combines them all into a divine light capable of defeating the evil . Company culture combines the power of other four elements: vision, mission, strategy and priorities.

Ten employees at a now large software company described the key values when they joined this company as a startup 30 years ago. These values were critical in turning the small startup into the highly successful market leader that it is today. They should be applicable to any budding startup team:

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