The Death of B2B Venture Capital?

At the October 21 Xconomy “Global Vision for Venture Capital …” forum, Terry McGuire remarked that Polaris has stopped taking risk on commercial/industrial technology start-ups, as the recent experience has not been good. That’s a consequential thing. “Commercial/industrial technology” encompasses enterprise software, most of telecom and datacom, and large parts of clean tech. Note that these are sectors where Boston has been strong in the past (and in Clean Tech we hope to be strong in the future). I’m not sure that Terry’s remark was intended to be so sweeping, but it prompted me to explore the hypothesis that investing in start-up businesses that sell to business (“B2B”) is very tough these days.

What says this is true? Here is a data-bite: the share value appreciation of Apple, the consummate B2C IT company, has beat IBM, the consummate B2B IT company, by a factor of 8x over the last ten years. (Share prices indexed to Oct 1, 1999 = 100.)

Relative stock price performance of Apple, Inc. and IBM.

Relative stock price performance of Apple, Inc. and IBM.

I showed this data to one of my partners, and he remarked, “That’s provocative but unfair. IBM is an old-line company and Apple is the leader of the new wave. You should compare Apple to” I took his “provocative but unfair” comment as evidence that I am learning to blog  ;-).  More on the comparison below.

So, I admit, this is two samples-of-one.  Each company has specific factors:  CEO, culture, starting position (although Apple’s starting position was not great).  The fact remains, however, that Apple found tremendous opportunity and turned it into shareholder value, and IBM did not.  I think the Apple/IBM comparison is on the right track: B2B is a much harder place to make money as an innovator today than is B2C. Fundamentally, the difference is that, compared to business customers, consumers are much quicker to adopt new technology, easier to engage, and more prepared to pay for innovation value.

An entrepreneur remarked in a pitch meeting recently that “CIOs love technology, but they need to keep their ‘houses’ clean, and that makes them change-averse.” Big businesses mostly do well by increasing efficiency (rationalizing, extending scale, outsourcing). Clay Christianson taught us that big companies are drawn to, and internally very good at, incremental innovation, and fundamentally resistant to “disruptive” innovation. The highly volatile economy of the last decade and the number of major industries (telecom, autos, airlines, banks, pharma) that are struggling and consolidating rapidly has reinforced this: smart managers are calling reliable running plays, not putting the ball in the air.

There was a period of time in the 90s when it was lucrative to sell technology to big companies. In hindsight this was a perfect storm of the good kind: big companies were truly scared of the web, there were live examples of successful business strategies based on IT innovation, and the Y2K scare caused a lot of legacy systems to be replaced. That triggered enthusiasm for new systems projects and enterprise software IPOs that seem fantastic from today’s perspective: do you remember Healtheon and Kana? There was a parallel bubble building both long-haul and local telecom networks. And Moore’s law was hitting its stride, which drove investment in the engineering infrastructure of information technology.

That’s all gone now, there’s little to replace it, and such times have been rare in the long run of IT industry history. What innovators selling to business face today is often very demanding requirements (= $10s of millions of engineering) and long, complex selling processes.

But B2B is huge field. And Buffett says, “when others get scared, I get greedy.” What makes for a good B2B innovation investment? I suggest the following:

  • A really powerful user benefit. Payback in less than a year via reduction of external spend or increased sales/margins is the best. Eliminating a lot of pain and frustration is very good, too, especially if the person who feels the pain has the budget and authority to make the purchase (versus the case of one man’s pain and another man’s budget).
  • Success can be demonstrated, and perceived risk can be defused, locally and quickly: the buyer can do a small implementation and show the benefits. This dramatically reduces perceived risk, so the innovation becomes the reliable running play, not the hail-Mary. SaaS enables this approach: someone can buy a small instance of the product (service) and try it at low first cost; then it can scale up very far with linear costs.
  • Once successful, the product can spread “virally” through the big company. Peer groups in big companies are typically closely connected and compared, which helps successful innovation spread fast.
  • The new product comes in “up the elevator”, not “over the loading dock”. This means that individual employees or group managers can buy it and try it on their own. Engineers can be good customers because they like to try new things and control big project budgets. This is how PCs, mobile phones, BlackBerrys, desktop publishing, Xerox machines, engineering workstations, minicomputers, and local area networks entered the enterprise. Someone with local authority bought a few to solve an immediate problem. Other people copied that success, widely. Then the corporation had to work out an “enterprise architecture” for the technology.

And, of course, to answer my colleague’s challenge, this is pretty much the story of the success of

I believe that there is opportunity in B2B investing, and it’s what I mostly do. But, I think it takes a very focused and careful strategy to be successful in what I see as a difficult innovation environment.


November 19 2009
by NewAtlanticVentures

From the NAV Blog: The Death of B2B Venture Capital?

November 19 2009
by Todd Hixon

RT @navfund: From the NAV Blog: The Death of B2B Venture Capital?

November 25 2009
by Douglas Graham

Very encouraging comments – I had been considering focusing on the ‘individual’ sector of our market but your comments encourage me to keep going with both. I am afraid your comments will also result in your getting sent yet another business plan!

November 29 2009
by Henry Elkington

I think you are right not to give up on B2B innovation.
One issue you don’t mention directly is the ability to scale (across industrial sectors.) is a great exemplar of a B2B innovation that has worked across industries. There will be many others (Amazon Web Services is one that I think it still gathering pace and the impact on corporates will be huge.)
However, in the B2B space many innovations will be industry specific.
Understanding whether an opportunity will scale or is bounded to one or two sectors is obviously a key investment insight.

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