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Small is Beautiful
Alok Mittal
Wednesday, September 30, 2009
For years, enterprise buyers have driven technology venture markets. The mantra for success was to create a product or service offering for the Fortune 500 customers – understandably so, since large customers are amenable to efficient sales processes, higher ticket size, and control most of the technology spending. Not anymore. Technology purchasing power is now shifting to smaller customers, and that represents the wave of innovation that we are likely to see over the next many years.

The notion of serving small customers is not new – Web hosting and pay roll outsourcing companies are examples of relatively standardized services that have been offered for some time now. However, the broader range of technology and service offerings has been out of reach for most of these customers. Very often, businesses providing such services are fragmented and locally driven, hence unable to create venture-style returns in most categories.

Small customers have their advantages – they offer significant diversification to revenue, and offer more pricing control than the larger ones. They have also been conventionally underserved. Furthermore, the globalization of buyer base has accentuated the need for such offerings. The key challenge has been lack of a relevant business model – how does one architect the offerings that can be customized for small businesses or even for individual consumers, and how does one take them to the market efficiently. Innovations in business models are enabling these markets across the spectrum, and Canaan is looking to participate in these opportunities.

On the core technology end of the spectrum, hosted software and cloud computing are areas that represent this trend. The computing infrastructure of the world is getting redesigned to provide more flexibility to customers. Small businesses can now get access to world-class infrastructure and software, and can dynamically scale their capacity, rather than having to incur huge capital investments. Provisioning of such infrastructure requires significant technology development; and some of the companies such as Success Factors, Soasta, and Virsto are helping create that future.

At the other extreme, services are also being reconfigured to suit the requirements of smaller businesses and individual consumers. Often delivered through a global workforce, these services are becoming more and more platform driven, and provide configurability not very dissimilar from that provided by hosted software. An example on the business side is our investment in UnitedLex, which is bringing the benefits of high end legal consulting and outsourcing to smaller clients. On the consumer front, iYogi aims to provide top end computer support to millions of consumers through a personalization platform.

Most of the businesses mentioned above are being enabled by advancement in technology to offer personalization and rapid customization, in business models through offshoring and enabling pay-as-you-go pricing, and in distribution through a mix of online, inside sales, and channel sales. The combination of these factors represents a compelling opportunity for entrepreneurs to create large businesses that were not possible till a few years back. Canaan is very excited to support and help build such businesses at a global scale.

Advice to Entrepreneurs

The migration of technology markets to smaller customers represents a disruption that does not naturally fit into the DNA of current market leaders. The business models related to this opportunity often threaten to cannibalize their existing business and thus are internally resisted. This opens up a compelling opportunity for innovators to create the next-generation leaders. Like any other business, what is required is an ability to think afresh from the customers’ viewpoint and a team that leverages ongoing advances on all the fronts required to execute on this opportunity.

The author is General Partner, Canaan Partners
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