If you are thinking of investing in a startup that addresses the needs of enterprises, you already have a large competitive advantage over other startup investors. Why? Business to business plays tend to be safer bet. While your investment money might still evaporate, the potential of actually making money is higher because the money in this space is more readily available and identifiable. Does this mean there is no money in consumer plays? Absolutely not. Just look at Google for proof. However, the appeal of servicing enterprises is that it allows you to take rifleshots and narrowly tailor solutions to a fixed problem set. This isn’t the case with many consumer plays because the field of problems is wider and there is less assurance that you will be compensated directly for solving those problems. If you ever need proof of this, just look at how many consumer plays are funded by advertising. If you have your eyes set on investing on enterprise technology startups, you are not out of the woods yet. You have to have a system for sizing up enterprise technology outfits or you might end up wasting your hard-earned money. Here are some basic tips that can steer you into the right direction.
Think in terms of fundamental elements
When you look at a technology, you are probably tempted to look only at the solution and the problem the startup addresses. This is myopic. You have to assess the company based on a larger framework of how its solution fits into the pattern set by other enterprise technology startups. In particular, look where it fits into the typical model for its niche. For example, for infrastructure plays, the framework involves, technology platform, hardware, and software. See if there is a direct correlation between the solution being proposed by the startup and an immediate problem in that space. Does the solution speed things up? Does the solution eliminate layers? Is the solution ready for integration or can it only get legs if the whole industry undergoes a sea change?
Disruption and revolution have costs
The big buzzword in venture capital and angel/seed investing nowadays is ‘disruptive technology.’ No doubt many enterprise tech startups out there do have technologies that turn things on their head. However, as awesome as this prospect may be, you have to be aware that disruption has costs. The higher the cost to the present system, the higher the pushback and resistance. Of course, this resistance can be overcome if the disruption brings enough cost savings, increased sales, or added value to make the change worth it. And we’re not justing talking about incremental benefits. The benefits have to be pronounced enough to give the technology a strong momentum. This is easier said than done. Talk about a tall order. And this is precisely what weeds out most garden variety ‘disruptive’ enterprise technology startups. Most just don’t pass muster when this filter is applied. Use this filter so you increase your chances of picking out solid winners.