The Startup Conundrum: Scalable vs Services

VCs Seek Scalable Technologies
Lately, I’ve been spending time trading information with one of the most powerful groups in our industries: VCs. They spur innovation by injecting funding into startups, help fuel those that need an accelerated path, and work many deals in the background to connect their investments with the right folks.

[Although VCs seek investments that rapidly scale, startups must satisfy the needs of enterprise clients by offering a range of services]

Yet despite their power I’m often concerned about one of goals that VCs have of their investments is finding and investing in a company that will quickly scale an an exponential rate then exiting. Their vision is for technology to go from 1 person to 10 people to 100, 1000, 10k and so forth. Then the opportunities for monetization and exit strategies are more at hand.

Yet Enterprises Often Need Service Offerings
I understand why this model makes sense to VCs, but this is often the opposite model that enterprise class companies may need. Some analysts approach the same industry from a different perspective. I’m looking for companies that just won’t scale to reach millions of users, but companies that will help brands and users make a difference, yet often, this requires offering non-scalable offerings, like services.

The Conundrum of the Solution Startups
Take for example the community platform market, a space I’ve been covering for over a year and a half. These vendors sell to large enterprise companies, yet the business case is far different. To be successful in selling to the enterprise, vendors need to have a solution offering that includes services like: education, implementation, custom development, support, analytics services, and community management services. When you couple these services with a technology offering (called a ‘solution sell’), you’re now able to provide value to large brands.

What’s the challenge when vendors offer a solution to enterprises? Services don’t scale in terms of revenue, it’s only an incremental growth in the top line incomes (2-10X). As a result, some VCs may shy away from investments that are heavy services focus, and may instead encourage their portfolio companies to instead focus on scalable technologies.

[Often, social media implementation in the enterprise is 80% process and labor, and only 20% technology]

80/20 Rule of Services/Technology
In the end, you’re going to need both types of companies (scalable technology and solution partners) to help both businesses and users, in fact the most successful companies will often have both. I often encourage my clients (large brands) to look at vendors beyond technology, in fact, most enterprise deployments of social media are only 20% technology and 80% process and labor. So when you’re selecting a vendor, be sure to understand their roadmap, how their investors perceive the direction of the company, and take a long hard look at the services and support they can offer you.

Note: I’ve also heard that some VCs are scaling back their investments in startups, while you continue to hear of funding happening for vendors.

Speaking of community platform vendors, I’ve submitted the community platform wave report to editing, and am anticipating a publish date in early Jan.