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Are enterprise tech startups a vanishing breed?

Are enterprise tech startups a vanishing breed?

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Where have all the enterprise software startups gone? Is it the economy, or something else holding back new business ideas?

Economic downturns are always a brutal period for startups, especially those in the tech sector. When venture capital gets fearful, everything dries up all at once.

Garage where David Packard and William Hewlett started HP in 1938. (Credit: Daniel Terdiman/CNET Networks)

A lousy economy may or may not have been tamping down startup activity in one area that use to be hot -- enterprise-class software. You know, the big iron-ish workhorse stuff, like enterprise resource planning and customer relationship management systems. And more lately, software that makes this software run better, such as service oriented architecture toolsets.

Is the economy, or something else?  Ron Schmelzer, a consultant with analyst firm ZapThink, just made a disturbing observation -- the pool of new vendors in the enterprise software space seems to be drying up altogether. Out that what was once a highly entrepreneurial, diverse market of enterprise IT-focused vendors has now boiled down to domination by five large vendors.

This is a shame, because the lack of competition has reduced innovation in this sector, he points out. And, to make matters worse, Ron says he has seen "a significant drop-off in new enterprise software venture creation," with no clear reason why this is happening.

Perhaps this dry spell is what spurred Intel Corporation to partner with 24 VC firms and commit more than $3 billion in funding for startups over the next three years.

But at the same time, many enterprise customers perceive a greater sense of security and less risk by going with big-name vendors.

Where there is new startup activity, it's happening in the cloud and Enterprise 2.0 arena. Ron asks: And if a startup's solution fills a need in your enterprise, is it feasible to go with the solution?  Is it worth the risk?

Startups provide some advantages the Big Five can no longer provide, he adds:

  • It’s easier to get your way with smaller companies hungry for your business
  • It’s easier to negotiate on price
  • It’s easier to get help with your specific implementation from startup companies

The ultimate objective of service oriented architecture, and cloud and Enterprise 2.0 for that matter, is flexibility and independence from vendor lock-in solutions. You should be able to readily swap a service, interface, component, application, or system out as your business needs change. Most enterprises don't have anywhere near this kind of agility yet. And there's still plenty of room for startups.

In Ron's words: Startups, do your part innovating in this space. Enterprises, do your part and implement startup companies’ offerings so that innovation does not come screeching to a halt."

My take:  Could it be that enterprise IT has become so complex and mandate-driven that it's too much for many startups to delve in?  Maybe in a world of social networking and mobile computing, enterprise apps just aren't that much fun? Note the huge surge in iPhone apps, for example -- a simpler and more fun business to get in to. But SOA and ERP are fun, aren't they?

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Joe McKendrick

Contributing Editor

Joe McKendrick is an independent analyst who tracks the impact of information technology on management and markets. He is a co-author of the SOA Manifesto and has written for Forbes, ZDNet and Database Trends & Applications. He holds a degree from Temple University. He is based in Pennsylvania. Follow him on Twitter. Disclosure