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October - 2002 - issue > Cover Feature
Monoliths Will Have To Break Up
Monday, November 3, 2008
The current state of the enterprise software industry

We feel that the value-creation from enterprise software has not yet peaked. From the very top level, we feel that this industry will continue to grow at a very good rate. For the next 15 to 20 years, we will see substantial cost savings from the automation of business processes and information exchange platforms that this industry will deliver. Buyers of enterprise applications are still figuring out ways to extract value out of the large investments they have made. They are finding methods of enterprise application integration that retain process values. In the current state, the enterprise industry is scrambling to deliver these values.

Investing strategy in this space

We divide this industry into three broad categories: infrastructural, horizontal and vertical. Infrastructural, which is foundational, an enabling software typically strong in intellectual properties, and which may not deliver direct value to the enterprise by delivering customers or cost savings. For example, one of our invested companies develops business process management software. Business process management software doesn’t create value by itself, but enables a business to automate its processes and build systems thereon. We look for strong intellectual properties in this sector.
To be defensible, you need to be technology-heavy. We typically invest in this sector at the early stage, where a company can have only potential clients, and we will still be interested. They need to have built a technology with a customer-focus.
Then, we look at another sector: the horizontal application pocket. Here, a company typically would have built a product that can be customized across industries. One of our portfolio companies is into supply chain management software, which helps companies in lean manufacturing, inventory management, and forecasting. This software is applicable across industries: aerospace, healthcare, consumer goods. The processes in each industry being different, the software must have the generic strength to be customized. The team should have deep technology and industry knowledge.
The vertical application demands tremendous domain knowledge. The product will be specific to some very specific parameters, fulfilling certain critical needs. Typically, these applications will find very few customers, but have very high ticket values. We look at domain knowledge here.

Where is enterprise software heading?

We think web services was the “next big thing” of last year. There’s still a lot of value in web services, where many parts have yet to be developed for industrial strength. What is becoming more apparent is the kind of applications web services enable. In the space of linking one system to another, seamless conversation is becoming critical. In this, products need to be flexible and forgiving, accommodating system and need demands.
We focus more on the business process management space. Once the hundreds and thousands of processes in a business space are mapped, what’s next? In the first place, there are so many processes that are not discovered in the business map itself. This needs to evolve. There needs to be a smoother transition from the process maps to writing codes. Right now, this is a nightmare, as the processes would have changed by the six-month period in which the product is written. We foresee large proprietary products breaking up to offer businesses polyps of products, so that the model elements are disparate, yet converge onto one map where the process and product match business needs. The need is to build applications as a business person and not as a coder. We should be able to take out a lot of the syntax and make it so that the business map turns into an application, much more easily.
Examples abound in how information flow creates value. We are looking at real-time applications coming under pressure to become more lucid and efficient. We are going to have lot more companies like Wal-Mart and Dell. They have spent an incredible amount of money to build their systems top down.
Their business advantage lies in the business process and the applications were built around these processes for real time use. They did not buy SAP and SIEBEL to build on. If they had done so, they would had to accommodate these monolith’s systems into their processes. Then where would have been the advantage? It would have leveled out the playing field. This is where we see real-time applications breaking monopolies, where the large companies will need to provide flexible polyps that will help a company build systems that complement its processes.

In the short term, is it the best time now to start a company?

Definitely. If you look at the pre-95 period, a company would have taken about 6-7 years to come to an IPO. In the boom, companies barely two years old went public. They were simply not ready. We feel expectations are now rolled back to normal levels.
You can start a company now, build your product to test your beta in two years, and you can speak with customers. People may not be buying, but they are willing to listen. It may not translate into an order, but you have the time to test and see if your idea is good or stupid. At least, you won’t be discovering this at a later date. Yes, it is difficult to source funding now. But the companies who manage to source funding now will be robust. They will have built patience into their business model, which makes a great deal of difference. The money that you want, the burn rate, the people who will buy at a later date all take on a new perspective.
If you have the persistance and the confidence, it is the right time now to start. Rents, labor, utilities are all at an all-time low and you could get some great deals tied up for the next 2-3 years. This is the best time to start a new company. Definitely.

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