Twitter, Yelp Board Member Peter Fenton On How Enterprise Is Learning From The Consumer Web

Peter Fenton joined Benchmark Capital in 2006, after spending seven years as a partner at Accel. Not yet 40, Fenton already sits on the board of directors at companies like New Relic, Polyvore, Twitter, Yelp, and Zendesk. Starting at Accel in his late twenties, the young investor focused his attention on the enterprise — on backing smart software and infrastructure companies. In 2009, for example, the young VC helped lead SpringSource’s $400 million+ sale to VMWare.

Yet, Fenton saw promise in startups like Twitter, investing in the microblogging service back when it employed just 25 people — and got in early on Yelp, too. Becoming actively involved in consumer web companies, Fenton came to recognize a marked difference between how these startups approached their users (and their market) and how enterprise players were doing business. Today, he tells us, a sea change has come to enterprise, which is being driven not only by a fundamental transformation of company culture but by new generation of users — namely those pesky, plucky Millennials.

Fenton believes that today we sit at a significant inflection point for enterprise software companies. Marc Andreessen and Ben Horowitz have made it clear that software has begun to eat the world, a belief that is reflected in their own investment thesis, which focuses almost exclusively on promising software startups.

But it’s not the old software model that is consuming the planet. When we talk about this not-to-be-underestimated change in software companies, we’re talking about the consumerization of enterprise. And we’re talking about the changing role of CIOs (and the distribution of their responsibilities), the rise of the BYOD (Bring Your Own Device) mentality, like the increasing adoption of tablets among IT decision makers, the integration of social tools, and even the introduction of gamification into enterprise.

While that last point may seem surprising, Gartner Research estimates that more than 70 percent of “Global 2000″ organizations will have a gamified app by 2015. On the whole, social initiatives are becoming integral to product strategies at the enterprise level, with more and more money being allocated internally to ensure that companies catch up to their consumer-facing brethren. And gamification is now a part of that shift in spending.

That’s why Fenton says that, boiled down, the consumerization of enterprise is about software companies re-focusing on ease of use and a top-down ability to be flexible and to quickly adopt those always-there consumer tools and technologies. Por que? Because younger generations have grown up using Facebook, social games, tweeting, “liking,” connecting on Myspace, texting, instant messaging, etc. These are fundamentally new (and different) user experiences, and more importantly they’re engaging. Even for something as boring (and yet essential) as BI.

Given the choice of viewing your core operations/business metrics in Excel or in a social, tablet optimized, interactive and rich multimedia app, no one opts for the former.

The companies that have seen success in recent memory have soaked up these experiences and are now intrinsically focused on creating fantastic (and addictive) user experiences. Instagram is just one of many that pop to mind. And it’s no mistake that the creators of these new, successful software companies are young. But they don’t have to be — at least not in the way you might think.

We often hear pundits, the media (and everyone else) drone on about how the entrepreneurs that are most successful are young. They just dropped out of Stanford, or better yet, they’re just learning to drive. The logic goes that they’ll be more successful because they’re less risk averse (cough, dumber) or that they have the energy to work those long startup hours, code all night, they don’t have kids to feed and will thus be less likely to ball up under their desk and weep because of what they stand to lose. That’s all true, more or less, but it’s really because they’ve been weaned on Facebook. (And they have no idea what a feature phone is.)

These entrepreneurs are creating new products to delight themselves and their friends — the core users of the Myspaces and Facebooks of the world. Not only that, but while they may find success based on a core team of badass engineers (and their cultures do reflect this), yes, really it’s the consumer that has become the rockstar developer. And companies that recognize this are much more likely to succeed, the Benchmark partner says.

So that’s what he sees as one of the biggest drivers of the tectonic shift at the enterprise level, and it’s creating a new, exciting generation of dynamic companies. (And, let’s be honest, “dynamic” is not typically a synonym for “software company.” Just ask Aaron Levie; he knows.) The truth is that we’re seeing a fundamental shift from sales-driven companies to product-driven companies. The companies that are leading the way there (Fenton cites Dropbox and, of course, portfolio companies Zendesk and New Relic) let this consumer and product focus permeate (read: define) the culture of their companies.

“It’s a fundamentally different value system,” he says. “These companies don’t try to sell to non-users.”

Younger generations demand a radically different user interface, one that breathes ease of use and really pops. Scoble (and a few million others) have said that enterprise software isn’t sexy (or dynamic). Understandably so. It isn’t. After all, for decades, it’s just been hard to offer a lightweight, flexible consumer-facing interface that’s supported by the depth of functionality enterprise is/can be known for: Robust security, reliability, deep backend integration, and tools for use in the multitude of business processes (and use cases) inside huge, death star-sized organizations.

But IT and consumer tech have begun to mate, and while the resulting offspring may not yet be sexy, at least things aren’t looking so much like Frankenstein’s monster or Conan’s “If They Mated” sketches.

When Box’s Aaron Levie addressed some of the major myths behind enterprise software, really he was addressing issues that have at one time or another been true for the market, but have recently begun to change. They are becoming myths. Among them is that enterprise software companies don’t scale well.

As Levie points out, software companies were traditionally seen as entities which addressed niche markets, then tried to lumber their way across the divide into larger markets — all the while, burning through mountains of cash like addled junkies thanks to high (unsustainable) sales cycles. Historically, for these companies, the cost of acquiring new customers has been high. But, with the emergence of the cloud, things have changed.

The cloud has lowered the barriers to scale, making enterprise solutions instantly horizontal and global, providing an increasing number of access points to much larger markets. Fenton says that he’s been keen on finding smart, product-focused entrepreneurs and either turning them on to enterprise opportunities or backing those already beginning to focus there. There’s a much greater opportunity for those companies to reach scale than it is for their sales-driven counterparts.

He thinks New Relic is a great example of this. (Again, keep in mind that New Relic is a Benchmark portfolio company.) New Relic, which offers a cloud-based app performance management and monitoring solution, has been moving away from the traditional sales model, which often takes way too much time to onboard and train new customers.

Companies like New Relic, Box, and Dropbox are creating products that are robust yet don’t require new users to go through lengthy training or workshops to learn how to use the product, and they have enough sex (or visual) appeal to warrant giving them a try without dealing with a migraine.

As Patrick Moran of New Relic said in a recent post, the key to reaching scale for software startups has also been the freemium model — the old model of software licensing provides too much friction for new customers. There are too many options out there in the market, and the attention span of the average consumer is short.

Moran says:

SaaS and Subscription Models are the future of software. Period. And according to Ben Horrowitz of Andreeson Horowitz, software is eating the world. So technically, SaaS is the future of the world. TechCrunch readers may already be over this hump, but the titans of enterprise software (Oracle, Microsoft, CA, IBM) are still clinging on to the licensing models of yesteryear – but they’ll be disrupted soon enough. Meanwhile, the financial markets are just starting to understand how to value the new business models of the Subscription Economy.

With the freemium, subscription model, the fact that consumers can touch the product before they ever take out their wallets is extremely important, Fenton says. These companies have to resist temptations to grow revenue more quickly (he cited Github here), which is a lot easier to do when executives are focused on the product — when there’s little separation between the creator and the end user.

When users get to touch the product themselves, it creates an experiential value. “That’s how we live in the world,” Fenton says, “and that’s how our products should work.” There’s no longer a CIO sitting in his high chair in a grey suit barking orders, making the product decisions for big companies with even larger user bases. Employees and customers are now driving product decisions.

As a result, there’s been a rise in the number of SaaS companies going public, as these companies recognize their business customers moving away from in-house solutions to more flexible, cloud-based platforms that boost productivity and help shrink costs. These companies aren’t focused on media hype but by “the investor appetite for attractive recurring revenue business models offered by SaaS platforms,” and investors are no longer worried as much by sub-$100 million revenues or a lack in GAAP earnings, “because there is a comfort driven by the 90-95% customer retention rates and an understanding that investing capital back in the business makes sense during the early phase of adoption,” said Doug Pepper, a General Partner at InterWest Partners.

Fenton is seeing a new model of production and a changing culture in young software companies and is investing accordingly. The ways we work — and the ways we interact with software — are changing, and will only continue to change. And the cost for missing the boat is getting higher: Software companies have to get on board, or be left behind.

What do you think?

More on The Future of Enterprise from Uzi Shmilovici here, Doug Pepper here, and Patrick Moran here.