What's Still Holding Back a Small Business Software Revolution

By Sarah Lacy , written on August 13, 2012

From The News Desk

Imagine you were a squirrel. You could pick between making your home underneath a tree that dropped a small amount of massive acorns or a tree that dropped a near endless supply of small acorns. Add to the equation that other ambitious squirrels had already moved in around the first tree, while the second tree boasted practically virgin, small acorn Nirvana. Acorns as far as the squirrel eye can see.

The wise thing would be to go with the tree with fewer squirrels with a near endless supply of acorns, right? So you move in there. But a funny thing happens. Harvesting those acorns turns out to be a lot of work for little payoff. You have to make three trips just to get enough acorns for a meal, because you still have to run as far to get them and carry them back home. And by the time you open them, the paltry insides are barely enough to replace the depleted squirrel calories. You are starting to see why so many squirrels picked the other tree. You look over at those cocky, chubby squirrels. They have to lift more acorn at a time, but they dine on it for a week.

This (admittedly bizarre) analogy gets at a big reason why small businesses don't have better software. It's not for lack of companies going after the perennially juicy and untapped market, and not for a lack of VCs funding them. I must have seen thousands of pitches showing the exact same stats on how many small businesses there are in America and how comparatively few of them use things other than rudimentary tools like filing cabinets, pen and paper, and spreadsheets and emails to make their businesses run.

Those pitches continue to explain that the big software companies -- Oracle, SAP, IBM, and the like -- are simply not good at taking bloated software designed for large corporations and streamlining it for small ones, try as they might. Also true.

And yet, despite all these intentions there are still very few very large companies who almost exclusively make their money selling software to small businesses. Intuit has done it the longest, through painstaking visits to offices to watch how an average mom and pop uses products like QuickBooks and what they need, through a constant cycle of adding features customers request and taking them away in the name of simplicity. There are two problems with selling to small companies: They're inherently very different and need very different things. And finding them, marketing to them, pitching them, and closing the deal still requires operational cost and time, but for a relatively small payoff.

A step up the food chain -- the so-called small medium enterprises category -- is a bit more crowded. That's where the initial software as a service crowd found early success, particularly NetSuite, which has built a $4 billion company selling financial software to them. But NetSuite has struggled with profitability most of its life. While SMEs have more money to spend, closing a deal can take almost as much work as closing a larger deal. And the spoils are much smaller.

It's a brutal way to build a company -- NetSuite is a rare survivor, and it has been a hard slog. While the company is rare in its dogged commitment to the category, you can see even Netsuite is inching up the ladder in recent announcements about deals with high growth startups like Groupon, Square, Box, and Yammer -- in other words, companies that might be an SME now but are on a quick path to change that.

That's why Workday never set out to do anything other than enterprise, crowded as it may be. And why Salesforce ran as fast as it could from software as a service's SME roots towards booking big, honking enterprise deals. That's accelerating quarter-after-quarter.

According to Piper Jaffray's Mark Murphy today, Salesforce has booked possibly the biggest in its history, worth more than the one it closed earlier in the year with State Farm Insurance that was worth some $140 million. Salesforce is also a company that analysts whine isn't as profitable as it should be -- deals like these slowly change that. Not surprisingly no one is whining today. Shares are up nearly 5 percent as of the writing of this post.

All of this comes down to one reality that is still the case, no matter how much the current cloud mania would have you believe otherwise: Right now software is still largely sold and not bought. Yes, that's changing. We see modern, flexible, try-before-you-buy freemium software worming its ways into companies and later translating to purchases. But while software is sold differently than it was ten years ago, it's still sold.

Consider what we've seen from Salesforce: It never gave its software away or pretended it didn't need salespeople, but it has certainly inched its way into many companies through unauthorized skunkworks projects and steadily grown its foothold from there. But that strategy has taken more than a decade and huge investments in sales and marketing to pan out. And so far, Salesforce is the only company that's come close to building a $20 billion market cap company using that playbook. You can count the companies who have even gotten past a billion dollar market cap doing it, out of thousands who tried.

The truth is you still need a traditional salesperson to make most deals happen, and until that changes small businesses will remain an area that hopeful entrepreneurs rush towards and then run from. There are more new software products small businesses can try out than ever before. But that's not the same thing as a large company making billions of dollars tackling and dominating this fragmented category.

Sure, Atlassian has somehow found magic pixie dust that allows it to build a $100 million revenue-plus business with no traditional sales people. But as we discussed in this installment of CEO Supper Club, even other cloud vendors of the same generation don't have that luxury, and say companies who count on software only being bought will likely fail.

Until that dramatically changes, small businesses may never have as good of software across the board as large companies, because selling, configuring, training, and maintaining them is just too expensive to justify the prices paid and still build a company that can make Wall Street happy.

The optimistic case would be that we're getting there. But we're certainly not there yet.

[Disclosure: NetSuite's CEO Zach Nelson is an individual investor in PandoDaily.]

[Illustration by Hallie Bateman]