Fred Wilson Calls Out Enterprise Tech Incumbents, Sees Room for NY Startups
When Fred Wilson, managing partner with Union Square Ventures, prefaces a statement as potentially controversial, most people in the room tend to lean forward for a listen. Last night’s New York Enterprise Technology Meetup was no exception.
Wilson, an early backer of Twitter and current investor in Return Path and MongoDB’s developer 10gen, spoke to the group about the types of companies he tends to invest in and why he wants to see enterprise technology grow among New York startups. After talking about what piques his interest, Wilson took questions from the audience, leading to a comment that sent a ripple through the room.
While discussing big vendors in enterprise software, Wilson talked up the need for new ideas from startups. But disruption in the space is not without challenges, he added.
“If I could short the entire big, fat, old, cynical, rip-off artist enterprise software business, I would,” he said. “They’re not innovating. There’s nothing that those big companies do that’s really any good. The caveat is it takes forever to rip out those systems.” The half-life of enterprise software, he said, is often longer than desired, making it difficult for new, replacement technology to gain a foothold.
Wilson said he came to the event to encourage the growth of the enterprise software community in New York. He told the entrepreneurs packed into the offices of Cooley they were welcome to pitch Union Square Ventures—with a few stipulations. For instance, companies establishing data networks need to do more than manipulate easily accessed information. “If your software is just pulling data from your internal systems or publicly available data sets, that’s not a data network,” he said.
His speech came at the tail end of a night that featured demos from companies native to New York as well as out-of-towners. The New York Enterprise Technology Meetup, founded in November 2011 by Jonathan Lehr, is one of several local groups that highlight the growing enterprise technology community in the city.
Last night, Atlanta-based JouleX showed its platform for managing energy consumption for enterprises, such as soft drink companies monitoring wirelessly connected vending machines across country. Tracx, the sole New York-based company, demoed its social media management dashboard that crunches data drawn from consumer intent into real-time insights for enterprises. SoMoLend, a Cincinnati-based company, presented its debt-based crowdfunding platform that will take advantage of the JOBS Act.
Candace Klein, founder and CEO of SoMoLend, said her company uses crowdfunding to fill a gap in small-business lending. About $25 million worth of capital has been requested through SoMoLend’s platform and about $5 million has been lent since its founding last year. Offers for loans can be made by institutions as well as qualified individuals. Klein said she helped author a small portion—38 words—of the JOBS Act and heads a taskforce that meets with the Securities and Exchange Commission and the Financial Industry Regulatory Authority to create a regulatory framework for this market.
SoMoLend includes what Klein called a “suitability analysis” of investments, particularly for individuals, before loan offers can be made. “There’s a five-minute survey that every investor must complete with us,” Klein said. Furthermore, potential lenders must take a quiz with random questions about the specific companies they want to offer loans to. “We require that [they] read the business plan,” Klein said.
That screening process drew praise from Wilson, who believes such a gut check could be applied elsewhere. “If every person who bought stock in an IPO had to take a test to prove they’ve read the prospectus, we’d be in a better place,” he said.
Of course, everyone wanted to hear more about the kinds of companies that draw Wilson’s attention. “One of the great things about the venture capital business is every day, without fail, I see an incredibly good idea,” he said.
Union Square Ventures, he said, looks for companies that could be worth hundreds of millions if not billions of dollars. “In return for going after those kinds of opportunities, we’re willing to take on a lot of risk,” he said. About one-third of the ideas Union Square Ventures backs fail completely, one-third are successful to some degree, either through a sale or becoming profitable, and one-third achieve the high worth Wilson hopes for.
Entrepreneurs developing enterprise software will have to work hard to impress him. He spoke about the prevalence of “ankle-biters” who often undercut innovators that establish new markets. Furthermore, other software developers might create open-source versions of the technology to distribute for free. “That’s been going on in the software business for over a decade,” he said. “It is a reality for everybody that there is very little value in software, per se, because it’s commoditized.”
Wilson said what gets his attention are network effects when there is something other than the software that the enterprise is buying. The network effect means each new user of a system increases the value of the overall system. “The more customers you get using your software, the more these network effects grow,” he said, making it difficult for the “ankle-biters” to compete with companies that already have the major players in the market.
Though New York has a vibrant community of enterprise-focused technology companies that serve the financial industry, Wilson also sees potential for more startups to emerge here pursuing horizontal markets, much like Oracle, SAP, and Salesforce.com.
“Silicon Valley has been the place where many of those companies have been built,” he said. “We have to have some of those successes in New York so people can say they can build one of those companies too.”