When Rajiv Ayyangar and two other Yahoo alumni explored start-up ideas, they experimented with concepts directed at the public, like a personal finance app. But making money from consumers was too daunting, they concluded, partly because of the tight grip that digital giants like Google and Apple had over distribution.
So instead, their San Francisco start-up, Tandem, founded last year, made a product for the business market, a virtual office for remote teams.
“The bar is a lot higher in consumer, so we went to the enterprise side,” said Mr. Ayyangar, Tandem’s chief executive.
He has plenty of company these days. Entrepreneurs, engineers and venture investors are shying away from the consumer internet, and turning more to the seemingly ho-hum realm of supplying software to business, or so-called enterprise technology.
Venture funding for social media start-ups reached a peak of $3.9 billion in 2011. But by 2018 it had fallen to $400 million, according to Pitchbook, which tracks venture deals. Over the same years, venture backing for start-ups supplying software to businesses more than tripled, to $2.8 billion.
That overall trend — less a sudden surge than a steady migration — is a subject of scrutiny today as federal agencies, states and Congress investigate whether the country’s largest tech companies violate antitrust laws. With Facebook, some of the officials are looking into whether the company bought some emerging competitors to protect its dominant position in the market for social networks.
Is the movement of money and talent simply a natural shift from a mature market to one with greater opportunity? Or is the consumer internet dominated by a few behemoths whose size and aggressive tactics have created “kill zones” around them, deterring start-ups and investors, stifling competition?
Facebook and Google do loom large in the consumer market, discouraging entrepreneurs from trying ventures in the giants’ ever-expanding corporate paths.
Yet evolving technology — cloud computing and machine-learning software — has also opened a lucrative market in business.
“Public policy should pay attention to this,” said Fiona Scott Morton, an economist at the Yale University School of Management and a former senior official in the Justice Department’s antitrust division. “It’s important to see which way the money and people are moving, and why.”
A decade ago, about half the start-ups that went to Accel, a venture capital firm in Silicon Valley, pitched consumer ideas, said John Locke, an investor at the firm. Today, the consumer-focused pitches have dropped to about 30 percent.
At Amplify Partners, more than 40 percent of the 67 investments the firm has made in business-focused start-ups are companies whose founders have consumer internet backgrounds, said Sunil Dhaliwal, a general partner there.
David Ulevitch, a general partner at Andreessen Horowitz, a large venture firm, said it was increasingly looking to enterprise start-ups, and had invested in several. “The consumer landscape is incredibly difficult, so the consumer world is shifting to the enterprise,” he said.
Start-ups are increasingly writing software that allows mainstream companies to do things that the consumer internet giants pioneered, like constant online monitoring of how people use products, regular updates and personalization. In addition, as banks, manufacturers, hospitals and others struggle to make sense of their digital data from the web, online forms and sensors, they need the help of tech companies.
“The problems we were facing everyone else is facing now,” said Kolton Andrus, chief executive of Gremlin, which offers programming tools to make internet-style cloud applications more reliable. Mr. Andrus helped found the company in 2016, after seven years as a senior engineer at Netflix and Amazon.
Some start-ups are breathing new life into old categories of business software. Superhuman, an email service founded in 2014, is growing rapidly, offering fast, engaging and personalized service.
The start-up migrants from the consumer internet are often engineers. Their stories vary, and their motivations are nuanced. But they are all entrepreneurs fully engaged in pursuing opportunity, which they see in the enterprise marketplace, a door far more open than on the consumer side, for whatever reasons.
Isaac Oates was an engineer at Amazon and Yahoo, before his ad tech start-up was acquired by Etsy, an e-commerce seller, where he worked for three years. In 2012, he co-founded Justworks, a supplier of cloud-based payroll and human resources software for small businesses, having experienced that need firsthand in his earlier start-up and heard the same from other entrepreneurs.
“We have a team that came from the consumer internet, and we apply what we learned there to what we do now,” said Mr. Oates, the chief executive.
Justworks, based in New York, now has 80,000 people using its service, mostly at small businesses (15 people is the average) paying monthly subscriptions. The company employs 600 people and has raised $93 million.
In 2013, Facebook acquired a maker of software tools for mobile apps where Charity Majors was a senior engineer. She worked at Facebook for about three years, before departing to become a co-founder of Honeycomb, a San Francisco start-up, in 2016.
For years, Ms. Majors said, she had adopted the engineer’s neutral mind-set — she wrote code, and others decided how it was used. But especially at Facebook, with its model of harvesting personal data for ads, she increasingly had second thoughts.
“My career has been an escalating real-world lesson that I did care about what the technology was used for,” Ms. Majors said.
Honeycomb, she said, is trying to democratize and simplify modern programming with “consumer-quality” software monitoring and debugging tools.
The business market still lacks the curb appeal of the consumer internet. “There is so much opportunity, but to most people this stuff is boring, and that hasn’t changed,” said Jonathan Lehr, co-founder and general partner at Work-Bench, a venture capital firm that focuses on enterprise start-ups.
Yet the change-the-world idealism, once a hallmark of the internet giants, is alive and well. At Tandem, Mr. Ayyangar views his young company’s software as potentially being a force for good.
“People spend years working, eight to 10 hours a day,” he said. “If we can improve their work lives, that’s huge.”
Slack, the popular workplace-messaging service, is seen as a trailblazing success of the consumer-to-enterprise trend. It was founded in 2009 as a multiplayer game company, but pivoted in 2014 to become a messaging and collaboration service for office workers and software developers. Today, Slack says it has more than 12 million active daily users, and it went public in June.
But Slack’s stock price has declined about 40 percent since its first day of trading. A major reason is that Microsoft is gaining ground with Teams, a Slack competitor, that the software giant bundles into its Office 365 cloud-based suite of productivity programs.
The skeptics, according to Stewart Butterfield, co-founder and chief executive of Slack, are taking “a naïve view that just because a company is bigger it will win.”
History, Mr. Butterfield said, suggests that smaller companies with a head start and an intense focus on one product often prevail, just as Microsoft did against IBM in personal computer software in the early 1990s.
The consumerization of business software, with individual users sampling products and later subscribing, should keep the enterprise market competitive, Mr. Butterfield noted.
“We win when people have a choice,” he said, “and people in business increasingly have a choice.”
Those entrepreneurs still brave enough to start consumer internet companies tend to seek niche markets, and must navigate carefully in the shadow of the giants.
A few years ago, when Tina Fitch knocked on investors’ doors to raise money for her event-planning start-up, the first question she received was how her company could compete against Facebook, which already had an event-planning feature.
Ms. Fitch eventually raised $3 million for Hobnob. But the potential threat from Facebook, she said, was “a way of suffocating funding interest.”
Hobnob has a very different business model from Facebook. It does not serve ads or share its users’ data. It charges fees. Ms. Fitch rarely speaks publicly about Facebook, having avoided “poking the sleeping giant” as a survival tactic.
Better to stay off Facebook’s radar, she figures, out of the way. Ms. Fitch started Hobnob from a pig farm in Hawaii.
2019-11-22 05:00:00Z
https://www.nytimes.com/2019/11/22/business/startups-enterprise-big-tech.amp.html
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