It has never been easy for business software companies to break into the exclusive billion-dollar club—hitting $1 billion or more in annual revenues. Only 14 pure software companies (not including giants such as IBM that also sell hardware) have managed to reach the magic number. And it is getting tougher, not easier. Just two companies founded since 1990—Siebel Systems and VeriSign—have managed the feat.
"The opportunities to build a software company today are as good as ever," says Eric Schmidt, CEO of Google, "but it will be harder and harder to build companies of the scale of old." Schmidt should know. Before joining Google, he was the CEO of Novell, a member of the billion-dollar club, and he is now on the board of directors of Siebel Systems.
In short, the software industry is consolidating as it matures. Some have argued that such consolidation is a sign of trouble for customers and entrepreneurs alike because it will lead to less choice, less innovation and higher prices, and make it harder for smaller companies to compete. But there are good reasons to believe that is not the case, and that the software industry is as healthy as ever. Innovation, one of the key metrics for measuring the health of the software industry, has been strong throughout the past decade. The commercialization of the Internet led to a wave of new technologies that changed the way software was used. And as might be expected, many of the new ideas came from software company startups, among them the Web browser, application server, digital certificate, firewall, application service providers, procurement automation and the search engine, to name just a few.
Some of these products, like the Web browser and application server, were what used to be called "killer apps," or what business guru Clay Christensen today might call "disruptive technologies." A few of these products might have even launched the next billion-dollar software firm. A lot of investors certainly thought so—mistakenly as it turns out. Just look at the multibillion-dollar valuations that were assigned to Inktomi, BroadVision, Vignette, Ariba, Commerce One, E.piphany and Red Hat.
"It was absurd," says Raymond Lane, former president and COO of Oracle, another billion-dollar player, and now a partner at the venture capital firm Kleiner Perkins Caufield & Byers. "Investors wanted to get in on the gold rush." Most of those companies stood little chance of breaking the billion-dollar mark, and none of them will ever live up to those lofty valuations. Yet by and large, their failure to reach $1 billion was no fault of their own. Each had innovative products, experienced executive teams, plenty of money and willing customers.