Consumer vs Enterprise Software Start-ups
High technology start-ups have been extremely important to our economy, starting in the late 1990′s. Although the dot com bubble came and went, there is still a vibrant place in our economy for technology start-ups.
There are businessmen and women who are still actively starting new technology companies. They are not only finding and engaging in their passion, they are also making boatloads of money.
If you have thought of starting a tech company yourself, one of the decisions you will need to make early on is what kind of start-up it will be. At a very high level, you will either be in a consumer or enterprise software start-up.
This is what most people think of when they think about software start-ups. These are companies like Facebook, Google and Priceline. They were all consumer start-ups.
That means they primarily build software for the consumer as the end user. They may make money from businesses via advertising in the case of Google and Facebook, or referral fees in the case of Priceline. But without the large consumer base they have, they would not get revenue. That means they compete on how good their consumer software is.
These tend to be the more popular start-ups because most of the use-cases are very intuitive. It requires less specialized knowledge because the founders merely need to understand demand from the perspective of the consumer. Everyone is a consumer so it’s fairly broad.
This also means they tend to be more risky. That is because there is more competition in this arena.
You also need a lot bigger budget. Marketing costs for consumer software can be very high. That is because the business model is on volume, on how many people you can get to use the software. This requires a large marketing budget.
If it’s a great idea and you don’t have a large budget for marketing, you can easily be beaten out by another company that decides to copy your idea, but has more money to spend on advertising. That is why many consumer start-ups require venture capital.
Enterprise software business require expertise that many people may not have. This type of software is geared toward big companies. These would be companies like IBM, SAS and EMC. These companies focus on serving other large businesses.
The big advantage to enterprise software is that there is less competition. There are less players in this space because of the domain expertise and technological innovation required to compete with companies like IBM and SAP.
Another big advantage is the margins. You may spend a lot of time and resources to develop your technology, but once you do, each customer will represent revenues of six figures or more.
When you’re talking consumer software, you’re looking at $10-100 per customer. When it comes to the enterprise, you are looking at $100,000-$1 Million+ per customer. That means your margin is a lot larger.
Lastly, I like enterprise software because of the low marketing costs. In the beginning, you don’t really need to invest a ton of money into marketing. You can actually start out with simply doing sales. If it’s innovative enough, you shouldn’t have a hard time getting appointments to demo your software.
Most enterprise software is really difficult to duplicate and copy. Most have strong patents associated with them. So even if a potential competitor sees what you’re doing, it may take them 1-2 years to actually come into the market. That is 1-2 years head start that you have.
It is pretty clear which type of business model I prefer when it comes to software start-ups. Both can be very good ventures, but they each have unique qualities that should be acknowledged.