What a scary market means for enterprise startups

As ominous economic signs loom, is a glorious run of exciting new tech cooked up by enterprise startups coming to an end?

What a scary market means for enterprise startups

I can’t even count the ways startups have moved enterprise tech forward in the past few years in an unprecedented burst of technology development. Many have built themselves on open source projects, including Mesosphere on Mesos, Elastic on the ELK stack, Databricks on Spark, Datastax on Cassandra, and Docker on, well, Docker. Other enterprise startups have set up shop in the cloud, with the likes of GitHub, Slack, Sumo Logic, and Birst delivering essential cloud services.

Today, we face a new round of macroeconomic peril along with a slowdown in venture funding over the past three quarters. Is the party over? Will we be at the mercy of the lumbering technology giants again? As Upfront Ventures’ Mark Suster said in his blog during last August’s stock market tumble: “In a period of ‘uncertainty’ about the future, venture capital rounds take longer -- particularly later-stage deals ... If the markets continue to go down expect less funding.”

Market turmoil loomed over a panel discussion I attended last week hosted by Peter Levine, general partner at Andreessen Horowitz. It featured the CEOs of five startups: Ash Ashutosh of Actifio, JR Rivers of Cumulus Networks, Tobias Knaup of Mesosphere, Suhail Doshi of Mixpanel, and Todd McKinnon of Okta. The discussion turned out to be substantive across a range of topics, including cloud adoption, machine learning, which big industry players will stay relevant, and so on. 

But in the end the financial journalists in the audience prevailed, pulling the conversation toward the market downturn, precipitous drops in the stock prices of young tech companies (Twitter, LinkedIn, Box, etc.), and the effects of all this on startups. A few important points emerged:

  • As Levine said, how a downturn affects startups depends on where they are in their lifecycle. Now, for example, might not be a great time to file an S1. But if you’re half of a two-person company developing your first product, it may not matter.
  • Box, which went public a little over year ago, has offered a cautionary tale for everyone. Its stock has lost over half its value in the past year and its burn rate has been exceedingly high.
  • Less available funding means startups can’t get too far ahead of their revenue in pursuit of growth, McKinnon said. Okta, a cloud identity management play that has already gotten considerable traction, decided it’s done raising for the foreseeable future.
  • For what it’s worth, none of the five CEOs admitted to seeing a decline in customer demand as a result of recent headwinds.
  • Quoting the entrepreneur David Cummings, Doshi noted that it’s always possible for a startup to go into “cockroach mode” and cut way back on expenses to survive a downturn.

As Ashutosh said, “the financial markets do what the financial markets do.” Many successful companies have started under terrible market conditions. It’s all about whether the product or service being offered fits the market.

I’d also add that while it's still tough for open source companies to make real money, a robust open source community can help sustain technology development, even when budgets must be cut. Often, the core technology already exists: Mesosphere, for example, was built on the Apache Mesos cluster manager created at UC Berkeley’s AMPLab. Also, as everyone knows by now, the ability of customers to download and deploy open source software may be the best free marketing there is. 

Companies like these five startups are delivering real value to the enterprise market, which is tiny compared to the consumer market. The financial press likes to lump tech into one bucket, and as Rivers observed, has been actively celebrating companies that are “overvalued and overextended.” Now, as the market slips, they’re trashing those high flyers -- and disparaging the entire tech sector in the bargain.

Uber and Snapchat and Pinterest occupy a different world than Actifio or Okta or Cumulus Networks. Each one stands on its own value to customers. Even if we’re headed for more than a correction and face an impending recession, enterprise startups delivering targeted solutions that improve productivity or reduce cost will prevail, even if they have to go into cockroach mode.