Turning Customers Into Suppliers

The enterprise software business has been built on a simple business model – build a new software product and sell it to companies that will pay you for the increased efficiency that the software creates for them.

But its harder and harder to get companies to pay for software today. They’ve got a lot it in place already and they are paying more and more every year to maintain it. Plus they’ve been burned by relying on small companies to deliver for them.

I don’t believe that we have come anywhere close to addressing every problem that software and information technology can solve for businesses. But I am beginning to feel that we may be reaching a saturation point in terms of what enterprises can pay for software and information technology.

So what should we do about this? I think we should turn our customers into suppliers.

I’ll give you an example. Ten years ago, I invested a million dollars in a company called Multex Systems.
Multex was created by a brilliant guy named Isaak Karaev and his initial idea was to build a software system that would facilitate the electronic distribution of investment research within large brokerage firms. It was a big problem. Printing and mailing investment research cost the brokerage industry tens of millions of dollars a year and by the time the printed research got to the brokers and their customers, it was old news. Isaak and his team built the system and started selling it to the large brokerage firms. But as everyone who has built enterprise software finds out, its hard to crack into tight budgets and the sales process was long.

But Multex was scrappy. They turned their customers into suppliers. They realized that the research reports that they were distributing around these brokerage firms were also valuable to the firm’s clients. So they developed another product which was a service to the buy side (the people who buy the stocks the brokerage firms sell) that allowed the buy side to subscribe to an aggregated set of real time investment research. Multex’ original customers – the brokerage firms – became the suppliers. Sometimes they were paid for the research and other times they were not. The buy side became the customer. And the rest is history. Multex went public five years ago and last year was sold to Reuters for over a quarter billion dollars.

I’ve seen this scenario played out more and more frequently. A technology that solves a fundamental business problem can be monetized in more ways than you might imagine at first blush. And the most obvious business model is often not the best one.

So when you are writing your next business plan, think long and hard who your best customer is and who your best supplier is. It might not be the ones you first think of.

#VC & Technology