An Enterprise Shift
Analyzing the Enterprise past, the now, & the future.
Over the past decade, enterprise companies have assumed the mantle of the up-and-comers from their consumer-facing brethren. The term “enterprise” covers a wide variety of sectors from cloud and infrastructure products to SAAS (Software-as-a-service) and PAAS (Platform-as-a-service). Companies now need customer relationship management, data science and business intelligence, cloud storage and security options to keep their businesses running.
The thrill of the investment hype machine has meant billions of dollars spent on this particular industry vertical, with the hopes of massive profits and returns and investors hoping to find the next Salesforce, Workday or Adeppar.
It’s time to take a look at how investors’ money has been spent. Given the decade between the launch of the latest round of enterprise startups, it’s about time we analyze how well they’re actually doing.
Using data from CB’s monthly exports from the enterprise-specific category, here’s a rough sketch of what’s happened to those business-facing software companies that have drawn so much attention and so many dollars.
From looking at this chart alone through the years, we can finally see some real consolidation in valuable returns from taking risks in enterprise investments early on. Investors who gambled on this market sphere like NEA’s modest backing on Tableau Software, which clasped the strongest Tech IPO offering in Q2’13, are finally able to see some major payoffs.
This chart also proves Aileen Lee’s note mentioned on her TC Unicorn Club post regarding years on avg. required per company before a liquidity round:
“It has taken seven-plus years on average before a “liquidity event” for companies… It’s a long journey beyond vesting periods.”
In 2008 and 2013, that’s when we see some major peaks in exits. Those companies, unsurprisingly, were also invested / founded on avg. 6+ years ago.
Looking at the graph, there’s a trend of steady increase of exits every other year since 2008. Again we ask: will this trend of exits continue on post this year? It’s important to note that, like Figure #2 on Total Enterprise Investments, they won’t last forever especially since exits are subject to the time a company was founded (also when they received funding). Since we see it takes on avg. 7+ years to liquidity, we’ll therefore probably see exits level off 7+ years post when enterprise investments leveled off too. So then going off of this theory and my previous standpoint (regarding comparing with the consumers / social media market), I believe the rise of exits will continue throughout the next few years until post 2015/16 + 7 years.
On another note, it’s difficult to state the existence of any correlation or trends for the avg. value of exit prices. We do not know whether future years will hold lower or higher avg. exit values, but it’s still interesting to visualize the history of these avgs. for the past decade.
The analysis of exits can be continued by looking at the IPO and acquired enterprises. For some more interesting insight: of the enterprise-only software companies (all time) on CB, 248 have been acquired, 22 have gone to the public markets, and 1509 are still under operation, 93 of which were said to have closed as of April 27. Of those that went to the public markets, it took them on avg. ~3 funding rounds (totaling ~$58.04MM on avg. total funding), whereas for those that were acquired, it took ~2 funding rounds (totaling ~$16.32MM on avg. total funding).
To put it into perspective and better understand how to optimize on investments, here’s a scatterplot I made of only some of the enterprise companies with their respective exit price & total funding. Note: they fundraised on avg. ~$16.32MM (noted previously) with an exit value of on avg. ~$242.86MM (keep in mind this is an estimate, not a precise correlation). It’s also very important to highlight that this very low positive slope distribution follows by Aileen Lee’s other conjecture on her post:
“… enterprise-oriented unicorns have become worth more on average, and raised much less private capital, delivering a higher return on private investment.”
How do all enterprise companies compare throughout varying liquidity stages? It’s interesting to note the above chart, showing a glimpse of the relatively low amounts of funding needed to get a typical enterprise company off the ground. Although it seems like the private capital avg. for a company to go public is scarily higher (roughly by an order of magnitude of 4x) compared to the capital needed to get acquired / continue operations, it is still not nearly as high of a capital burden compared to other industries (based on CBInsight’s 2014 Tech IPO Pipeline Report, the avg. dollars raised for a successful company stands at ~$101MM, with a median of $73MM).
A while back I also wrote a comparative analysis I called “The Rising Unicorns”, which analyzes other rising and already billion dollar companies that haven’t been noted on Aileen’s list. Of the enterprise category of 92 companies analyzed on my post, the avg. raised for enterprise is ~$96.10MM, deriving at a similar low private capital conclusion (note that my Rising Unicorns article specifically analyzed up-and-coming billion dollar companies, which accounts for the much higher avg. of private capital required to scale and grow). We get that enterprise companies have provided on avg. much more return value, and the risks investors take on enterprise entrepreneurs are likely to be offset by their lucrative potentials.
I could go on with datasets and points about the enterprise sphere and its successes, but we get that it’s doing very well. Of all spaces, enterprise is considered one of the fastest, most profitable growing markets after consumer business models. Big Data enterprise titans like Palantir, Addepar, & Tableau Software, CRM platforms like RelateIQ & Salesforce, Business Intelligence (BI) platforms like Birst, Looker, App Annie, and other analytic tracking tools, and others like Hearsay Social & Workday are prime examples of successful enterprises. Tons of private capital are pouring into enterprise software, and is already becoming crowded with overly anticipated and hyped capital returns — take a look at Sequoia Goetz’s old piece on “Building more for the Enterprise”.
Above all, the point of this piece is to give an overall birds-eye view of (a) the enterprise of the past decade, and (b) its undeniable success. It helps investors realize the vast opportunities for markets that could likewise push a similar remunerative potential. The super-Unicorn (a term representing a young company who’s valuation is somewhat north of ~>$100B) of the pre-50's was: HP, and birth of electronic tools. The 60's: Intel, famed for the invention of the semiconductor chip. The 70's: Oracle for enterprise, and Apple & Microsoft for building the first desktop computers. The 80's: Cisco & AOL, and the rise of the telecom space. The 90's: Google & Amazon, and the age of online information & eruption of an E-commerce industry. And finally, the 00's: Facebook, and the birth of social media. In the aftermath of the dot-com crash, a new age of technological disruption began to position itself — an inflection point that was so shifting it gave way for the notion of the “Web 2.0.” This begs the question: what’s going to be the super-Unicorn of this decade? Will it be in the enterprise?
- Note: All was done on personal / individual research.
- Crunchbase’s database may have been altered since I last extracted it (July & August, 2014), and not all of the companies listed had datapoints available on both CB.
- This post is long past due. This post was initiated in March ‘14, and may have information, opinions and perspectives of that particular time. It is, as a whole, also influenced from & similar in vein to my previous articles on “The Rising Unicrons” & “The Emerging Markets”.
- *CB refers to Crunchbase, not CB Insights.
- **Update: Alibaba may have been that Super-Unicorn we’ve been waiting for..
I’m currently a Stanford CS ‘15 student. Thank you to Alexia Tsotsis, Jon Shieber, Niv Dror & Onji Bae as well for your direction, inspiration, feedback & access to CB.
For questions, feedback or corrections, ping me at hi@danielcliem.com or visit me at www.danielcliem.com. Thanks for reading.
