2013 - The Year of Enterprise Software Startups?

Startups that are fortunate enough to be at the right place to take advantage of the hype cycle end up getting lots of attention from everyone. Investors rush in to invest in these startups, media showers coverage and awards on them and pundits dissect all possible angles trying to convince everyone why these startups will work.

But at the end of the day, the realities of the startup ecosystem overpower the hype cycle, culling out the weak startups and investors alike, leaving behind only the successful ones to prosper. This hype-reality-hype cycle is my favorite thing about the startup ecosystem because it works! Progress is made by creative destruction, and over time, adds incredible value to everyone!

If nothing else, it is very entertaining and makes for a great spectator sport.

Anyway, getting back to the hype cycle - What segment of the startup eco system do you think will be at the top of the hype cycle in 2013? My money is on startups in the Enterprise software market.

I've always had a soft corner for enterprise software, partly because it is more resistant to hype than your average startup. You can easily tell how well an enterprise software startup is doing - You just ask about their paying customers. Their customers are "real" in the sense that they have names and addresses and most importantly, they pay money.

Enterprise customers are very demanding and they are very direct with feedback. If they don't like the software, they don't buy it. The customer adoption and sales pipeline is easily understood and tracked. First you generate leads, then you have your leads evaluate and try out the software, and if the software solves a real problem, they pay for the software. And you take the money and ask what else you can sell to them!

I think they hype cycle for enterprise software is already underway. Startups like Dropbox and Atlassian have now grown into sizable software companies with valuations backed by real revenue that justifies the valuation. There are some emerging stars as well - Git Hub, the online Git repository targeted towards developers is growing fast, both in terms of revenue and customers. Closer home, startups like Druva and Fusion Charts have worked really hard over the last several years to build up a solid revenue and customer base.

According to Gartner, in 2011, the worldwide enterprise application software market generated $115.1B in revenue, and is projected to grow to $157.6B by 2016, attaining a 6.5% CAGR. And that's just enterprise application software. IDG is projecting that enterprise cloud application revenues will reach $67.3B by 2016, up from reached $22.9B in 2011. Then there's the SaaS market, Cloud Service and a whole host of other categories that enterprise startups can cater to.

All these startups, from Dropbox to Druva, are inspiring a new generation of startups that are focused on making money from paying customers - An important factor that seems to have fallen out of fashion recently. My prediction is that Investor focus will also slightly shift. From getting traction in terms of user adoption to getting traction in terms of revenue potential. Startups will be valued in terms of how much money they can generate from tangible market segments, rather then valued based on number of users with an undefined or unproven monetization strategy. Back to Basics, that should be the mantra for 2013!

At least this is what I'm hoping will happen. The Indian startup ecosystem needs a generation of startups that are good at generating revenue and real value. And they can hopefully grow up to become strong companies, or get acquired by larger companies that recognize and value the revenue potential.

That, I hope, will make the startup ecosystem stronger.