Launching a startup that cleverly targets the enterprise software market requires a courageous and perhaps foolish founder, not least because corporate buyers are away from the perceived risk of dealing with young and relatively unnecessary suppliers and established solutions are in favor of vendors. The added cost and energy of putting sales teams on the road to meet buyers face to face has been added.
But then again, as Itxaso Del Palacio, a partner in the European VC fund, Notion Capital noted that the enterprise market is not the only game in the city when it comes to business-to-business sales. “The B2B market has shifted from enterprise focused to SMB focused,” he says. This is because SMBs and mid-sized companies are now using tools that were previously associated with the enterprise. This is a great time to invest in B2B software. “
And as Dale Pallasio sees, there are huge opportunities for business-to-business software startups in Europe – especially if they adopt product-led growth strategies that have proven so successful for companies such as Dropbox, Calendarley and Slack.
But what does this mean in practice? When I contacted Dale Palatio late last month, I was curious to know why he believes so much in the idea of product-led growth.
Founded 13 years ago, Nation Capital focuses primarily on Series A investments in software-in-service, cloud and business-to-business solutions. With £ 700 million in assets under management, the fund has so far invested in about 80 businesses, including recently sold Messagelab and Star to Symantec and Claranet, respectively. Other investments include Go Cardless, Currency Cloud and Tradeshift.
In terms of investment philosophy, Del Palacio says its starting point is always the product. “I’m a very product-led investor,” he says. “I’m looking for companies that are willing to make great products.”
But the phrase product-led growth has acquired a much more specific meaning and one that is nicely connected to the era of software-in-service. Simply put, since so much software functionality is provided from the cloud, it was not easy for innovative vendors to invite potential customers to try a product. Often there is a free trial period or a tiered payment system whose basic level is free, with a charge for additional features.
By getting the product into the hands of users – and usually, an on-site visit by sales or technical teams is not required – sellers have the opportunity to become essential. Users move from free to paid plans and more importantly, they inform others in their organization. In this way, the product itself – or look at it in another way, enhances the user experience.
Del Palacio said the model made it possible for companies to aspire to become major software providers in a relatively short period of time in the Series A investment phase. “There’s very little time for price,” he says.
That’s the theory, but is it really that simple? After all, as Del Palacio admits, “only good products will win.”
Try before you buy
And here’s the potential problem. Try it before you buy into the software universe, end users are more likely to shop for new solutions without feeling any obligation. Take an example. You can try a new kind of cloud-delivery presentation software today and another tomorrow. There is no risk in doing this. And potentially, there is very little loyalty.
So the challenge is easy. How do you avoid being replaced by the next seller to come along?
Del Palacio said it was partly about quality. “People will want to use the product if they have a great user experience.” For example, it is important to “stick” the product in question.
This is probably a challenge for investors like Concept Capital. For example, how does the concept evaluate which of its potential investments provides the user experience needed for a product-led growth approach?
Del Palacio says the legitimacy generated by engagement metrics and good net promoter scores is crucial to investment decisions.
Eyes on the prize
The reward is the ability of a company to sell anywhere in the world without hiring a large sales team or leaving people on the ground. Del Palacio says it is a special boon for European companies planning to sell in North America. “Anyone from anywhere – Estonia, Germany, Denmark – can sell to the United States without having to go there,” he says. “Half of Europe’s software companies have some elements of product-led growth.”
So is it a secret sauce that isn’t really that secret? Of course, Del Palacio believes that product-led growth strategies have been accelerated by the epidemic – which has stalled face-to-face sales – but he says this is early days, especially in Europe. “It simply came to our notice then. We are still looking for ways to implement it. There is no playbook, ”he says.
So perhaps the secret idea is not itself, but the death penalty. Companies like Zoom and Slack have become synonymous with video conferencing and commos. Enthusiasts need to think about how their own product will rise above the crowd and the factors that will turn curiosity into a long-term user – or can. This may not be an easy formula to get right, but Del Palacio is confident that a greater focus on product-led growth will take many European companies to the world stage.