On Riding a Trojan Horse
Big companies no longer pursue Research and Development the way they once did. There is no contemporary equivalent of Xerox Parc or AT&T’s Bell Labs. Not that long ago, innovation was the product of the laboratories that every major company owned. There has been no real move to replace the investments that those large companies used to make in R&D. The massive refinancing of the private sector made it impossible to afford the lack of predictability in innovation departments.
When companies were financed in a more straightforward way (and not saddled with debt), they could afford to be freer with their internal investments. With the right management, brilliance was a result. With bad management, operations like Parc delivered their innovation flow to guys like Steve Jobs
Much of what happens in the merger and acquisition marketplace is a reflection of this disconnect. Companies need innovation to grow. The management of innovation is to tricky and risky for a public company to handle. So, new functionality comes in the form of a purchased company.
A deal like last week’s purchase of Kenexa by IBM simply wouldn’t have happened. Neither the Oracle – Taleo nor the SAP – Success Factors arrangements would have made sense. The coming wave of consolidating purchases would have been unthinkable.
Today, big companies purchase innovation on the open market. Most contemporary software startups are built to sell, not built to grow.This phenomenon, which some people call the ‘appification’ of enterprise software, is a perfectly reasonable adjustment to the fundamental financial shift in the marketplace.
Innovation has to happen whether or not big companies can afford it. As a result, smaller and smaller increments of value are worth more and more. A good look at the startup battlefield will suffice to remind you that most of the offerings are not more than an item on a drop down menu. The shape of today’s innovation is a small company experimenting with a very narrow range of functionality. If there ever was a test of the market’s invisible hand, we’re witnessing it today.
In the old model, an innovation didn’t have to be much more than a good idea. The transistor (which is the foundation of the computer chip industry) was invented at Bell Labs. Many consider it to be one of the greatest inventions of the 20th century. It was never assessed for economic viability. Even though it now drives the computer industry, it was never imagined that it would serve the purpose it does.
Today’s innovations are infinitely less impressive than the transistor.
Today’s entrepreneurs, investor backed or otherwise, are faced with twin demons. They have to innovate and then sell the innovation while still innovating. It’s a challenging set of obstacles. Most of the members of the entrepreneurial class are better engineers than salespeople.
That explains the flood of companies whose sales plan is to “turn users into buyers”. It’s an oft-repeated refrain. A good number of the commentators on last week’s Kenexa purchase cited the idea that the user is now the customer.
That belief underlies the flood of tools trying to enter the enterprise in the pockets of its employees. The theory is that once an internal groundswell is reached, the person who signs the contract won’t have any choice. User-centric freemium tools that propose to generate meaningful new data extracted from their users are the current vogue.
This ‘Trojan Horse’ marketing scheme is what we’re hearing most often from small startups who might be better advised to actually build an enterprise sales force. From here, it looks like the entrepreneurs are betting on an early purchase of their company by a bigger player in search of additional increments of innovation. There are a ton of companies peddling freemium services to users in hopes of snagging corporate accounts.
Imagine, now, that you are the department head responsible for signing the check on these deals. Employees, who have a somewhat limited view of corporate needs and resources, now want to have meetings to tell you about the latest cool app on their cell phone. How many of those meetings will happen before the sifting process gets really extreme?