Picture an enterprise startup. What comes to mind?
Most people imagine an army of expensive salespeople wearing Rolex watches and flying around the country to sign seven-figure contracts with the Fortune 500. That's the Old Enterprise. The Old Enterprise is all about top-down sales: first you convince executives and other decision-makers to buy your product, then you negotiate a contract, then you install it, and only then can employees toward the bottom of the organization start using your software.
But there's a new model emblemized by startups like Twilio, Stripe, GitHub, Yammer, and 10gen (the makers of MongoDB). The New Enterprise is about grassroots, bottom-up adoption. Take Twilio, for example. If a developer at a company wants to start using Twilio, they just need to sign up and they can start integrating the API immediately. There’s no contract, no setup fee, no need to talk to a salesperson, and it takes minutes.
You can tell whether a startup is New Enterprise or Old Enterprise by just looking at their web site. Do you see a "Try it now" button? That’s the New Enterprise. Do you see a button to "Request a Demo"? Old Enterprise.
New Enterprise vs. Old Enterprise is like the tectonic plates of B2B startups. It affects who your customers are, how you sell to them, who your investors are, and what roles you hire for. Those who straddle the middle risk liquefaction.
Is New always better?
If you’re an engineer, designer, or product person, the New Enterprise holds an incredible allure. It means you can forget about 12-18 month sales cycles. Rather than sales, you can compete on product and design, a strength for many founders. And you can import compelling ideas like virality from the consumer world and use those to fuel your product’s growth.
But New isn’t always better. Even among a top VC with a relatively young portfolio like Andreessen-Horowitz, 16 of their 28 enterprise investments fall into the traditional Old Enterprise model.
What gives?
The trend is obvious if you break out investments by category:
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For startups creating developer APIs (e.g., PagerDuty, Meteor) or collaboration software (e.g., Asana, Box), the New Enterprise predominates. For all other categories, well... Meet the New Enterprise Customer, he’s a lot like the Old Enterprise customer.
Strategy Starts with the Customer
To understand why things are so polarized, you have to think about how a typical company buys software.
Let's say your startup sells A/B testing software, and your product lets marketers try different text on the site and measure conversion rates. At a typical company, the users of the software are people in the marketing department (the "technical buyer"). But they can't buy your software alone -- the CMO or VP Marketing controls the budget (they’re the "economic buyer"). Not only that, a typical enterprise installation requires modifying code on the web site, which means you'll need to get approval from a bevy of engineers, engineering managers, or product managers. You may also have to handle objections from security, procurement (who negotiate contracts), legal (does your software comply with the company's privacy policy?), and possibly more "stakeholders." This is a complex, lengthy sales process, and to make it harder, often people inside of the company can't even describe how the full purchasing process works. Great enterprise sales representatives are masters at taming organizational complexity, ruthlessly mapping out the decision-making process and checking off boxes until the contract is signed and the software up and running.
It's tempting to want to bypass the complexity of top-down sales, and just build a product that "sells itself."
But if that's not the way your customer buys software, that's not the way you're going to sell it. You can change your design, you can change your feature set, and you can change your marketing. But you can't change your customer. Your customer's buying process is your selling process. Since the default customer buying process is complex and involves many people, the default B2B startup strategy is Old Enterprise.
When does the New Enterprise model work?
The "New Enterprise" model succeeds if, and only if, there's a "unitary customer" at a company who can decide to use your product unilaterally, with no approvals from anybody else. Then you can bypass the traditional top-down sales model. Most New Enterprise startups follow one of three basic strategies:
Open source, e.g. 10gen, Meteor, Cloudera. The core software is open source, and developers can download a version and immediately start using it without paying a cent. Once the customer relies on the software day-to-day in production, you can sell them a support contract or premium (closed-source) features. This is a variant of the freemium model.
Developer-oriented software as a service, e.g. Stripe, Twilio, Parse, Firebase. The software is a back-end API that developers integrate, and it’s either free or cheap enough to come out of a personal or team budget (e.g., generally < $1000), without requiring corporate approval. These companies sometimes have free plans, but you don’t have to do a freemium model to make this work.
Team collaboration, e.g., Yammer, Asana, Box. One person on the team can start using the software for free and invite others. These products are almost always freemium and viral. The idea is that the software will spread throughout the organization, and once a critical mass of employees are using it, then the sales process begins. Usually, the startup sells premium enterprise features—for example, controls on sharing, quotas, e-discovery support—in exchange for a large enterprise contract with the company's IT department.
Does it scale?
For early stage startups, New Enterprise vs. Old Enterprise is a strict dichotomy. But as companies grow, they naturally adopt a mix of sales strategies tuned to different segments of the market. For example, Twilio has started hiring enterprise sales reps, just as Yammer did several years ago. And traditional companies sometimes introduce a freemium product. That’s normal — all companies grow in layers. Particularly for companies that start off with the New Enterprise model, it’s almost always eventually necessary to add an enterprise sales force—with support roles like sales engineers, account managers, people to qualify leads, etc.—in order to build a truly meaningful business.