Traditionally, consumer companies have had viral growth and network effects, while enterprise companies have been built brick by brick and sale by sale. But a new wave of B2B companies—Dropbox, Twilio, Atlassian, SurveyMonkey, GitHub—shows that enterprise businesses have started to look a lot more like their consumer counterparts. Software buyers are more accessible, and enterprise companies are making inroads by starting with simple products and using the product to drive growth, virality, and network effects, before bringing in a traditional sales team to sell it.
In this keynote talk from 4YFN 2019 in Barcelona, a16z General Partner Martin Casado explains the new enterprise go-to-market combination of bottom-up growth (also known as product-led growth, or PLG) and traditional sales, as well as how this new go-to-market is changing B2B startups and the technology they sell.
The biggest trend in B2B isn’t technological (0:16)
The old world of Consumer and Enterprise startups (3:10)
How VCs evaluate enterprise and consumer startups differently (4:45)
The new enterprise GTM (8:04)
SurveyMonkey & Dropbox: Bottom up growth alone isn’t enough (9:24)
The failure modes (11:05)
TABLE OF CONTENTS
The biggest trend in B2B isn’t technological
TABLE OF CONTENTS
As someone with a technical background who started a company, a very common question I get asked is, “What are the new trends?” What people expect to hear from someone like me is, “It’s IoT, it’s AI, it’s blockchain.” Those are all really interesting technologies, but honestly, I think there’s a trend that’s much more significant and much more disruptive. It’s a meta trend or a macro trend, and I’ve been obsessing about it for the last couple of years. I think it’s going to shape the entire B2B landscape for the next 10 years.
What do these companies have in common? It’s not blockchain, AI, or IoT. It turns out the thing that they have in common is that they’ve decided to go to market in a way that’s very different from traditional B2B. They decided to first do what we call growth, which is a very consumer bottom up motion, and then overlay sales after that. We call this B2B growth sales.
The implication is, today, you can build a company using two motions. This is fully advantageous to startups and it’s very difficult for incumbents to defend against. Number one, they tend to require a lot less money to start. They’re much less focused on typical execution. To be a founder of a B2B growth startup, or B2B growth sales, it’s more about being very, very good at product and less about understanding channels and understanding sales. Right now, the incumbents really don’t have any defense strategy against this. It’s very hard for a Cisco, IBM, HP, or an SAP to defend against this sort of a motion.
Not only that, because the growth motion is really a marketing-led motion, B2B startups can now really come from anywhere. That’s just not been the case in the past. There have been very, very few centers for really strong B2B companies, and now we’re seeing them everywhere. Berlin, France, UK, certainly New York, as well as Silicon Valley.
Now, growth and some of these motions have been around for a very long time, especially in vertical SaaS. Salesforce has been doing freemium for a very long time. The reason I’m giving this talk now is because the trend is so massive it cuts across basically every vertical, whether that’s security, open source, developer tooling, bottom-up SaaS, infrastructure, or cloud services. Chances are, any successful modern company is using this strategy today. If companies are not using this strategy, they’re actually at a disadvantage.
The old world of consumer and enterprise startups
I want to back up and split the world into how the world traditionally views consumer companies and enterprise companies. Consumer companies are typically marketing-led and that drives everything else about the company. Why is it marketing-led? If your customer is a consumer, there’s no way you’re going to pay a salesforce to go talk to every one of them. The way you get out to consumers is you do marketing campaigns, and that drives the company.
Enterprise, on the other hand, has been sales-led. If you’re going to build a product for the enterprise, the expectation is that somebody’s going to sell it. More importantly, if you’re building a product that a consumer has to adopt organically through marketing, it has to be very simple to use and understand. If you have a salesperson selling something, you actually benefit by more knobs because it will demonstrate more value.
Often I heard people ask, “Why does IBM or SAP make such complicated products? Don’t they know how to build products?” That’s actually missing the point. The point is I want something as complicated as possible that shows as much value as possible so I can extract as many dollars as possible. That’s why enterprise products have been gross for a very long time. In the consumer world, you really care about brand, like Coca Cola or Apple. In the enterprise, it’s much more about logical business sales. The economics, and the way we value them, are very different.
How VCs evaluate enterprise and consumer startups differently
Let’s look at this from the VC perspective. How do VCs traditionally think about consumer companies and enterprise companies? We’re going to start with consumer. The reality is that nobody knows how to evaluate consumer companies before they go into the market. If you asked me the question, “What do 19-year-olds in Berlin like?” I haven’t a clue. In all the partner meetings at Andreessen Horowitz, I’ve probably seen nine dog walking companies in the last year. What differentiates these dog walking companies? It’s not technology. They all kind of say the same thing, yet eventually, one of them is going to win. This plays out in many consumer companies. It’s very rare that you have a crazy technical moat in a consumer company. Some are just good at making products that users like and they end up becoming winners. As a result, the investment community has come up with this ethos surrounding investing in consumer, which is basically the graph is smarter than whatever theory we have about the market.
If someone pitches me the next Snapchat, I’m a 40-year-old who grew up in the country. I have no idea if it’s good. But if I look at the numbers behind it, I do. And we, as an investment community, have created an entire calculus on understanding what’s a good consumer company and what’s not. If you ever hear things like MAUs and DAUs, engagement, and the smile curve, all of that came out of the last 10 years because investors were trying to understand how to evaluate consumer companies—and none of it is, “Oh, I looked at the app and it was cool.”
Enterprise companies are much different. You assume there’s a core technology being developed and that the buyer is rational. Consumer buyers are totally irrational. Why is something taking off? No idea. That’s weather prediction. In the enterprise, the buying motion is normally based on some business need. If I’m an investor in B2B, which I am, I just call the enterprise and say, “Do you need this—yes or no?” If the answer is yes, then it makes sense to make the investment even prior to having traction. There are fewer people to call and they’re a much more rational buyer.
In general, when you think about investing in these two areas, in consumer, you want very strong product founders and you can’t really invest until you see that it’s working. There’s no other way to really understand what’s going on. In the enterprise, there’s typically a strong technical problem being solved and it requires a lot of money to build the initial product, but you can kind of understand what’s going to happen in the enterprise, so you invest early. That’s been Silicon Valley for the last 20 years. But all of this is changing now. Think Dropbox, Twilio, Atlassian, SurveyMonkey, and GitHub. Most of the modern success stories in B2B have been this combination of bottom-up growth and then sales—and that really changes everything.
The new enterprise GTM
Let me very quickly talk about how these are constructed. Normally, the company starts with a very simple use case and very simple product. It could be open source, it could be freemium, it could be an app. Then they try to get users just like a consumer company would. They do all the bottom-up stuff, such as content marketing or SEO—whatever you can do to increase adoption. You iterate on that until it’s working and you grow that engine so you have a huge user base. Then you build a sales engine behind that to monetize that user base, and you have sales efficiencies that are far better than we’ve ever seen before in B2B. Once you have that hook, once you have that user base, you make the product much more complex so you can actually deliver enterprise value.
Why does this work now? It’s actually straightforward. We are the app store generation. Buying software is something everybody does. It’s a daily ritual for all of us. Before, you could really only sell enterprise software to core IT. Today, it’s HR, P&L holders, marketing, and anybody else, so it’s quite possible to get access to these buyers. Let me go through a few examples of this and why it’s so hard.
SurveyMonkey & Dropbox: bottom-up growth alone isn’t enough
One example is SurveyMonkey. Within 10 years, SurveyMonkey got to 60M registrations. Assuming you can monetize $20 a year or $3 a month, that’s a $1.2B business. It’s very rare that you have businesses this large in the enterprise. However, if you actually read the quote from the earnings call, you’ll see that growth alone isn’t sufficient. You can build these beautiful curves of users, but you still have to build sales on top of that.
Dropbox is an example where they invested mostly in bottom-up growth and less on sales. Again, you’ve got a great public company that looks like a consumer company. This is very rare traditionally in the enterprise. But on the earnings call, there’s an admission that the majority of the growth is from organic methods, so now we need to start thinking about sales.
It’s very easy for me to stand up here and say, “the new companies have growth and they have sales, and it’s great, and we all win.” The reality is, it’s way, way more difficult than that. I don’t think anybody right now actually understands how to build these and, as investors, we certainly don’t understand how to evaluate them. The reason is, if you’re a founder and you’re managing these two motions, growth and sales, the interaction between the two is incredibly complicated. It’s very complicated for us to evaluate. There are so many failure modes and there are so many ways to get this wrong that the majority end up failing.
The failure modes
I want to talk about this complexity because doing something that’s pure growth is pretty straightforward. It’s hard to execute, but it’s pretty easy to understand. Doing pure sales is pretty easy to understand, hard to execute. But when you’re doing both, the interplay between these two curves is incredibly complex. Let me give you an example. This is a straightforward case. If you just do bottom-up growth and no sales, your monetization can only grow as fast as growth. Growth tends to be slower for B2B users than it is for the consumer. Unless you have a network effect, like GitHub or LinkedIn and you’re really lucky, you often end up with slower-growing companies.
On the other hand, let’s say you do the traditional process of only sales and no bottom-up growth. Today, most successful startup companies in B2B have to do bottom-up growth because it’s the only way to actually get access to the buyer. If you don’t do this, you have no credibility and you don’t have a relationship. Core IT and core security buyers have too many people calling them and existing relationships, so this is becoming more and more difficult.
Now, let’s say that you’re going to build a new company and you’re going to do both motions. A very common problem when you build a bottom-up growth engine is that the users that adopt it may not end up being the users that will actually buy the product. Then you’ll end up with a growth engine that you really can’t monetize. If you send a salesperson in there, the person using the product has no idea who can actually pay for it. This is one of the biggest problems that we see people running into, especially in open source.
Another problem is when you build a beautiful growth engine during the first stage of the company. You want to do anything you can to make that look good because you want that nice curve to monetize later. The problem is, if you give too much away or you invest too much, you may have nothing to sell. It’s another classic problem in open source. It’s also a classic problem in vertical SaaS. Let’s look at many of these core infrastructure components: if you’re already giving it away, it’s very hard to have something to sell on the other end, but if you hold too far back, you may not have the independent growth engine.
There’s another problem that’s actually even worse. Sometimes you have okay growth so you release your open source project. People kind of like it, you don’t invest a lot in it, you build sales, and then your sales catch up to your growth. The problem in these situations is either you have two totally independent sales motions, one of them to your users and another one to those that don’t know you, which is very hard for early sales teams to do, or your sales are limited by your growth engine. I would say a good 70% of open source companies run into this problem. They figure out a little bit of the early growth side, they kind of get it working, and then they try to monetize that with the sales engine on the back end and quickly overcome their ability to do it.
I’m going to talk about one more. A lot of organic growth is popularity; it’s being cool, man. I’ve got this thing and it’s open, it’s branded, it’s interesting, and people like it. But what happens when all of a sudden now you have someone like me walking in trying to sell it? I’m not cool. As soon as you take this organic phenomenon and you put a sales engine behind it trying to monetize it, you make it more complex and you try to extract value—and all of a sudden, it’s no longer the cool thing and it erodes organic growth. This problem is very common in collaboration tools and vertical SaaS.
I just want to do a very quick product overview for you and then I’m going to wrap up. If you’re going to execute on this, you want to start with a very simple product. You generally want it to be horizontal in nature when you first create it. You want to use the product to drive growth, virality, and network effects, and then you want to be able to take that product and make it more complex and more vertical.
Right now, we are standing at a new wave of B2B companies. The recent large exits show it. I actually think many of the incumbents are going to be unseated by B2B companies and it’s going to happen faster and with more value than we’ve ever seen before. I think a core component is understanding how you can take advantage of what’s been learned in the consumer world and how you can apply it to sales as you build your company.
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