Posted by Tom Foremski - October 20, 2005
I've become quite impressed with former Oracle president Ray Lane and his analysis of the enterprise software industry. From his perch as a VC with Kleiner Perkins, he has developed interesting insights into the sector.
A few weeks ago I managed to chat with Mr Lane at a dinner for Virsa, possibly the fastest growing private software company today (it provides SOX compliance).
Before the dinner, Mr Lane made it plain he did not want to hear about how the enterprise software industry was now dead because of Oracle's acquisition of both PeopleSoft and Siebel. "Nothing has changed that wasn't the case before the acquisitions," Mr Lane said.
Which is true; but the acquisitions just reinforced and underlined the fact that two companies control all innovation and buyouts.
Here are some of the highlights from the dinner:
Lots of M&A activity ahead
Mr Lane foresees a lot of M&A as thousands of smaller software companies try to acquire, or be acquired, as a survival strategy. Also, there are still thousands too many software startups that "won't ever produce significant revenues and should be closed down."
IBM should buy SAP
Mr Lane is convinced that IBM should acquire SAP. "Earlier this year I told Sam [Palmisano] that IBM should acquire SAP," Mr Lane said. But the IBM chief rejected that advice.
I pointed out that IBM makes more money out of SAP than SAP, because about one in ten dollars is spent on license fees, the rest is for implementation--the IT services that forms about one-half of IBM.
But Mr Lane believes that IBM needs applications on top of its middleware stack. I pointed out that IBM was terrible at enterprise applications and abandoned the market in 1999. "Well, Oracle was terrible at apps too," he said.
I covered IBM for a long time when I was at the Financial Times. Steve Mills, IBM's software chief, has been executing a strategy that has worked well and makes good sense. IBM found growth in providing middleware components to apps vendors, and not competing with them directly.
Mr Lane believes that if IBM had apps, it would be in a better position to sell more of its middleware components, which is probably true.
I would argue that IBM doesn't need to be in enterpise apps because it can let the developers create apps on its middleware platform and then use its massive IT services group to set it all up for its enterprise customers--that's where 90 per cent of the IT spend goes in such things.
A New Rules Car Corp.
I discussed with Mr Lane my description of what the new type of very successful dotcom organization would be, what I call a new rules enterprise.
These are small, highly agile, first mover companies, whose first rule is that they are new--no cultural battles to fight, and no legacy thinking and infrastructure to carry, etc.
Mr Lane agreed, "I think there is a lot to be said for a new rules enterprise. For example, if you were to build another General Motors today, it wouldn't look like GM. In fact, I think it is a great time to start a car company.
You can read more about the rules of new rules enterprises here:
These are the new dotcoms of the new rules economy...]
Mr Lane said he was a big fan of JotSpot and other types of software that allowed people/small groups to easily create personalized applications. He also said that Kleiner wanted to invest in Joe Kraus's JotSpot when it had an opportunity, but an administrative snafu lost the deal.
Why should startups take VC funding?
That's a question I like asking, because in my view, VCs were needed when startups needed significant infrastucture, such as data centers. Nowadays that infrastructure is already in place, on demand over the web, at low cost. Today it's all about knowledge capital. You just need to have a small team willing to throw their credit cards into a bowl and work for six to 12 months.
Mr Lane says there is still a role for VCs, and that the VCs provide valuable advice. Well, I can see that having Ray Lane on the board of my software company would probably be worth the 50 pounds of flesh; but otherwise, it's an expensive way to get expert advice.
And I come across an astounding level of animosity towards VCs. Too many entrepeneurs have experienced the shenanigans that go on in the VC sector; and they won't seek funding until they've built up their valuations as far as possible through other means.
I think that it's just a few bad apples in the VC community--but then again, I don't know.
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