Here's Why Enterprise Startups Have An Easier Time Raising Big Money

aaron levie 400 300Box CEO Aaron Levie’s company has a special place in VCs’ hearts.

Photo: Business Insider / Matthew Lynley

Raising money for your startup is a tough process. But you have to do it to get the capital that will let you grow your good idea.Some startups have it easier than others, though. In fact, there’s one class of startups that, when they can demonstrate success, can usually raise a big batch of cash—enterprise startups.

For example, data management provider Cloudera raised $40 million late last year. Box raised $125 million just last month. These are huge piles of cash.

Here’s how a partner at a venture-capital firm explained it to us: When a startup like Pinterest went out to raise money in its early days, there was literally no way that investors could have known it would have exploded the way it did. (It literally wasn’t Pinterest back then—it was a startup called Cold Brew Labs.)

Meanwhile, enterprise startups usually have much more predictable growth. They don’t jump from zero to 100 million users in a month, but it’s far easier to project their trajectory.

It’s also easier to understand precisely what enterprise customers like about a company. For example, when Accel got interested in Qualtrics, a software company that claimed to offer great customer support, Ryan Sweeney dragooned his partners into helping him call a long list of Qualtrics customers to evaluate it, he recently told Business Insider. Turns out customers really loved Qualtrics, and Accel invested alongside Sequoia Capital.

That was another big round—$70 million.

If you speak to any major investment firm in Silicon Valley, they’ll likely tell you the same thing: Investing in a consumer-focused startup is like trying to capture lightning in a bottle.

While investors weren’t looking, Pinterest quickly blew up and became one of the most popular Web services for women. Photo enthusiasts likewise discovered Instagram, even though there were plenty of similar competitors.

By the time investors jumped on those bandwagons, the companies’ valuations had gone sky-high, meaning that venture capitalists got a smaller chunk of the company than they might otherwise have. With enterprise companies, it’s easier to get confident about a business at an earlier stage, which means better returns for investors. 

If you look at some of the top-performing initial public offerings this year, many of them are enterprise services. Palo Alto Networks, which went public last month, is already up 25 per cent.

Some of the top exits are also enterprise companies. Nicira, a company that had just come out of stealth mode in February this year, sold for $1.26 billion to VMWare. Yammer sold to Microsoft for $1.2 billion.

Both Wall Street and venture capitalists tend to like these kinds of companies because the growth is more predictable than “capturing lightning in a bottle.”

So if you really want to raise a big batch of money, you might think twice before trying to build the next Pinterest.

Try building the next Box instead.

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