Innovation, startups hot again in the enterprise

The Month of Enterprise Startups looks at companies that could become the superstars and flame-outs of the next two years

Five years ago enterprise startups hit the skids, stung by a perfect storm of commoditization, vendor consolidation, and the IT spending downturn. In the intervening years, however, the skies have cleared and, to paraphrase Ronald Regan, "It's morning again for enterprise startups."  

InfoWorld has declared May the Month of Enterprise Startups. Each day this month, InfoWorld will profile a different startup company in the enterprise space. By the end of May, we hope to have catalogued some of the promising new technologies that will be working their way into your cube in the coming years.

The next two years will be critical for many of the early-stage enterprise companies, which have been out of favor with investors and customers for so long it's hard to remember their last heyday -- in the client/server-dominated 1990s. A mere handful of big winners emerged from that dark period: names like, VMWare, and Red Hat.  For many of their peers, which often lacked a complete solution or strong distribution capability, success meant getting acquired rather than thriving as a stand-alone company. Even as recently as this year, companies such as Webex and Tellme Networks have continued to capitulate to the lure of M&A.

The crop of enterprise startups that we'll profile this month could be different. For starters, venture capitalists have soured on enterprise deals in favor of consumer plays, so they aren’t funding as many look-alike companies for every enterprise idea, as they did in the late 1990s. (Remember the B2B craze?) That leaves more competitive breathing room for those that do get funded.

Second, the open source movement has provided a rich array of cheap tools and platforms that enterprise startups can innovate on top of, enabling them to deliver more value-add to customers with less capital invested in plumbing. Third, the worldwide IT market has grown, especially globally, over the past five years -- and that means more customers and budget dollars (or Euros, Yen, and Yuan) to go around.

But most important, enterprise customers are back in innovation and experimentation mode, and more are open to working with startups than they were in the brutal 2002-2005 era of "consolidation."

The companies on our list cover the waterfront of enterprise needs: security, open source tools, analytics, e-commerce, storage -- you name it. A few areas in particular are worth highlighting. First, software as a service now has proven traction and demonstrated disruptive potential in enterprise environments. Second, the SMB market (small and medium-size customers) is finally getting tech savvy and begging for new, innovative IT products. But large vendors, used to selling to the Fortune 500, don’t necessarily have the right products or perspective to meet SMB needs, despite their desire to do so.

Finally, Web 2.0 and global competition are creating top-down demand (from the boardroom and CEO on down) for IT innovation. Many of the enterprise Web 2.0 capabilities can be directly linked to profits, and therefore have measurable ROI -- better customer acquisition and retention, for example, or increased employee productivity through collaboration.

To be sure, today’s crop of enterprise companies faces some major challenges. Commoditization rages on -- a Web analytics package that might have sold for $250,000 three years ago, for example, now can be had for free courtesy of Google.  International competition from outsourcing services companies beginning to productize their solutions is another concern.

The big question is whether today's enterprise startups can string together enough pieces of differentiated functionality to be meaningful to enterprises -- and how many of them can develop into true, silo-spanning "platform companies." A recent Forrester study claimed that CIOs want to buy suites for Web 2.0 from large established vendors rather than small startups. The study cited the usual "integration" and "viability" concerns typically levied against early stage vendors, and advised Web 2.0 startups to "partner up" to successful penetrate enterprise accounts.

Perhaps that's right, but it may also be stale conventional wisdom, not what customers are actually saying or doing. Let's face it: Large incumbents almost never deliver the "next big thing" -- otherwise we'd still be running OS/2 and texting each other on our StarTACs.

Value creation isn't a smooth, polished process, either, but it's what enterprise customers need most these days. As a recent Gartner report pointed out, IT must think differently and focus on delivering new sources of value.

"The people who will make this happen are unlikely to be the staff you have already," the Gartner report said. "Your management team is likely a monoculture of middle-aged, middle managers from the aging baby boomer generation."

The same could be said of the incumbent, large vendor community. And that bodes well for the new crop of enterprises startups. So, for this month anyway, let's don our nose rings and let the disruptive innovation begin!