When I invested in enterprise software in the late 1990’s, I saw a proliferation of “best of breed” solutions. These vertical solutions would focus on specific pain pain points in the enterprise, such as logistics or customer relationship management. Larger companies such as IBM and SAP that had enterprise-wide deployments would offer some solutions around these pain points, but entrepreneurs claimed that these were not sufficient, and that the emergence of the Web and server technology made some of the legacy software inefficient, inadequate and obsolete. The larger companies claimed that the cost of replacement and integration was not worth any savings that the enterprise could potentially realize, and that the risk of deploying with a startup was too high for mission critical functions. Some of these “best of breed” solutions went on to be acquired by these larger companies who realized it was more efficient to buy vs build in-house (but often after working together for awhile), a select few went on as highly successful standalone businesses (such as Salesforce), but most of them shuttered.
Fast forward to 2013. Client-server has moved to the cloud (dramatically decreasing the cost of software development and deployment), and mobile apps are everywhere. Best of breed solutions have exponentially multiplied, in both the enterprise and consumer sectors. Whereas I may have seen a dozen companies in 1999 with a point solution in a particular area, now I see multiples. The cost of starting a company is much lower, and entrepreneurs have more support than ever to get started. In my view this is why we are seeing so many “acqui-hires“. More people are starting businesses than would have in previous times, with many of these entrepreneurs creating what VCs often call “features” instead of standalone products. Lots of talented individuals are tackling the same problem by starting different companies, and many of them are getting seed funded. While there are some nuances in their solutions, these are not usually enough to validate so many startups in any given market, and larger companies are looking to snap up talent which is otherwise hard to recruit.
So how does an entrepreneur assess if s/he has a best of breed solution that can standalone?
— DO A COMPETITIVE LANDSCAPE. It still surprises me at how few entrepreneurs go through this exercise. A competitive landscape (particularly when laid out in a visual way) will identify gaps and opportunities in the market. Slice and dice this landscape according to different features/metrics that you think are important to your CUSTOMER. You will quickly see how crowded the space really is, how big a pain point you are solving and who potential partners are. The competitive landscape should be a very comprehensive overview of the market you are operating in – companies that are ancillary to your core business should be included. In addition to direct competitors, this landscape should include companies that could potentially enter the space that you are in, to expand their core business. Remember: they may also be acquirers of what you’ve built down the road.
— TIMING. Are you following, in sync, or ahead of the market? It’s best to be ahead of the market but can be challenging if you are too far ahead of the market as it may take time for partners and customers to see your product’s value.
— PEOPLE. Hire forward-thinking people who have worked with some of the larger companies you’ve identified as competitors and/or partners. Or at least get some of them on your advisory board. This will give you an inside view of the culture, vulnerabilities and ways to work with these companies if you decide to partner. Some incumbents move slower than others, some have internal initiatives you may not be aware of — and as a startup you need to have enough time to get to market and establish value (remember, there aren’t any overnight successes — at least ones that are sustainable). If you personally have this domain experience, even better – you’ll tell a more convincing story if you’ve been in the trenches and experienced the pain points you are now solving.
Remember, funding is just an enabler of success. The only way to build a successful best of breed solution is to create significant value for your customers by solving a big enough problem in a way the rest of the market can’t.
Posted: August 13th 2013