Why There Aren’t More Enterprise Start-Ups: Because You Can’t Do Cr*p with a $750k Seed Round in SaaS

All of a sudden, SaaS and enterprise seem hot.  Billion dollar valuations and a billion dollar exit do seem to do that.

A new meme among VCs from Reid Hoffman to Sequoia on is that the enterprise is somehow overlooked, because it isn’t as ‘cool’ as consumer internet.

I’m not a VC but — but some of these very smart, very rich guys really don’t know what they are talking about.

Business and enterprise software is a big category, and has been for a very long time.  Yes, most kids just want to copy what they know, another photo or travel app.  But there are 1000s of great folks with domain expertise in business-y software who would love to do a start-up and disrupt their industry.

The problem?  Enterprise SaaS isn’t a great fit for current VC models.

Why?

  • Basically, if you have a proven track record, it’s very easy to get funded for enterprise/ SaaS, and always has been.  Marc Benioff at Salesforce, after success at Oracle.  The team at Workday after Peoplesoft.  Josh James, etc.  It’s perceived to be low risk.
  • It’s also very easy to get funded in SaaS once you hit about $5-$10m in ARR — and today, at a very high valuation.  The pieces come together.  The lead flow is predictable, the metrics make sense.  The revenue is truly recurring.  The capital is about scaling.  It’s perceived to be low risk.

But there a yawning investing gap otherwise:

  • Who really wants to fund another talent management SaaS company, for example, that is pre-revenue, but needs $10m to get off the ground?  Some, but very few.
  • The related corollary, is you can’t do cr*p in SaaS with a $750k seed round.  You need $2-$4m pre-revenue to get anywhere and $10m to really go big.
  • The related related issue, is that in enterprise/SaaS, traction = $$$.  In consumer internet, early traction = users.

The appeal of consumer internet for seed and Series A investors is exactly the fact you can get to some modest amount of traction on a trivial amount of money.  Y Combinator is the ultimate example.  At EchoSign, we were nowhere until we’d spent $1m and nowhere interesting until we’d spent $2m — and we were pretty scrappy.

Actually, what a lot of these VC guys really want is for folks to get traction in business-y, freemium-ish lightweight apps, get traction, and then invest.  Or somehow get to $2-$4m in ARR, and then invest.  Nothing wrong with that — worked for ZenDesk, worked for Box, etc.

But when VCs say enterprise is somehow overlooked, they’re wrong and not helping.  Because they don’t really mean funding too many pre-revenue enterprise, or true SaaS plays, me thinks not.

So VCs, I say, put your money where you mouth is.  Invest in more Series A SaaS companies.

There are 10 comments

  1. K. V.

    To be fair, the exits for enterprise startups take longer, and rarely hit the lofty heights that a YouTube, or an Instagram can reach – Yammer being the recent exception. The baseball analogy may be not quite perfect, as it does not take into account the costs, but enterprise startups are more likely to be get on base, and sometimes bat runs in, but take time. Consumer startups are more like hitting homeruns.

    Splunk is a great example of an enterprise startup, where the investors were rewarded handsomely, but it took quite a while. So VC’s being as good at pattern recognition as anyone else, will wait for someone else to pay for the initial expensive learnings, and then come in at the later stage.

    In a different era, where consumer startups were not so cheap to fund, you might have seen more funding for enterprise startups. But with facebook, google, and others paying handsomely for talent or technology, it only makes sense for VC’s to follow the easy money! Though of course, one could sympathize with the VC’s that they have to now compete with the Y-Combinators, and the zillion other angels/super angels. The flip side is that because they cannot compete here, they may realize that investing in enterprise is not so bad after all.

  2. Ho Nam (@honam)

    I don’t agree with your statement that “you can’t do cr*p in SaaS with a $750k seed round. You need $2-$4m pre-revenue to get anywhere and $10m to really go big.” You are spouting conventional wisdom. Exceptional companies defy conventional wisdom. Recent examples of companies targeting enterprises (or SMBs) that got started and reached profitability before raising VC money are 37 Signals, Atlassian, Github, Qualtrics and Survey Monkey. In the old days, companies like Oracle, Microsoft and SAS got to profitability without outside funding (SAS is still private but doing $2B in recurring revenue).

  3. jasonlkn

    For sure there are many exceptions. But many of them are really freemium plays (SurveyMonkey, Github), or started as freemium plays, or aren’t really enterprise/Saas (Microsoft). The real point is just is that a seed rounds don’t necessarily go as far in SaaS and enterprise as consumer.

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