Enterprise technology start-ups are predicted to go public in 2017, but only if current market conditions predominate. First, the stock market is doing well. Second, start-ups are gaining more time to incubate. In other words, they have more time to fine-tune their product. Finally, Wall Street is seeing the growth potential behind enterprise software’s monetization model and this is attracting serious investors.
A look further into the monetization model truly brings Wall Street’s interest in enterprise software technology into focus. When a company’s data lives in the cloud and when enterprise software links every aspect of an organization’s digital life with the cloud, then enterprises are committed to paying monthly subscription rates and are less likely to change vendors. Investors find the idea of buying into a company that generates constant revenue difficult to resist.
They did resist it at first because the monetization model seemed too risky. Since enterprise organizations can opt out at any time and since many start-ups didn’t have a track record, investors deemed enterprise technology start-ups risky investments. Far better, it seemed, to invest in the booming consumer-facing technology start-ups like Facebook or Twitter. However the problems with consumer-facing technologies include consumer unpredictability and the inconsistencies of trends and fads.
The shift from consumer IPOs to enterprise technology IPOs seems organic. In the early aughts, and even up until 2016, tech giants like Cisco, IBM and Salesforce bought out smaller entities for major sums of money. But given that smaller start-ups like MuleSoft, Alteryx, Yext and Okta can stand to achieve revenue gains far behind what private companies have to offer, it only makes sense for the founders to remain in control of their products and reap the rewards. Not only do their products generate monthly revenue but they are designed to serve large organizations who have money to spend.
What does this mean for players like Cisco, IBM and the rest? If start-ups have less incentive to sell to these established software companies, then Cisco, IBM and the others will have to invest in their own talent and support an in-house culture of innovation.