The Power of the Incubator

Posted: October 13, 2006 in CRM

I keep thinking about the idea of this incubator that Salesforce.com is launching.  As you know I am a student of inflection points and I think the incubator potentially represents a very big one.

There is a popular trend in economics to look at economic systems on the same plane as living ecosystems and there is a lot of merit in that line of thinking.  When I think about inflection points I associate them with something called punctuated equilibrium, or PE for our purposes, an idea brought forward from biology into economics.  The basic idea of PE is that in a complex adaptive system like an ecosystem or an economy, things stay the same for long periods of time.  When change happens it tends to be quick.  The change resets the equilibrium at a different level and we go on.

The definition of quick is all over the map.  Living systems inhabit geological time—millions or billions of years—and change seems slow.  In comparison, economies live and breathe more on a human scale.

Punctuation in this case can be rather dramatic.  The flowering and decline of the Internet was extraordinarily quick in my book and that’s the nature of PE.  On one side of the equilibrium there was no e-commerce, no search engines, no basic Web based information, then there was and no one can imagine going back to the way things were. 

I think the introduction of an incubator for on-demand applications could foster the same kind of dramatic change.  I can’t imagine there will be only one incubator; there is simply too much money to be made and VC’s will be all over the idea. 

Innovative ideas may be in short supply but the success of an incubator might not rest solely on new product innovation.  Think about it, if the business world decides to make a headlong rush for on-demand computing, savvy developers won’t have to invent the next new thing, there will be plenty of opportunity for entrepreneurs to reinvent the infrastructure that is out there right now.

Although Salesforce.com has, at every opportunity, shied away from saying they would build the next ERP systems that only means the field is open to some other innovators.  NetSuite is one example, but they aren’t within the Salesforce orbit and the market can stand to have some competition.  It’s not unlike the re-invention of computing after mainframes gave way to client-server.  Suddenly, new companies were re-inventing things like networking and accounting systems that had been doing just fine before on larger computers.

What all this potentially means for the competition is significant and a little scary.  After years of pooh-poohing the idea of on-demand, many of the biggest names in software need to put their on-demand programs into high gear and that will be very hard to do.  As I have mentioned before, change for the big guys will require change not just at the technology level but at the business model level.  For public companies that is a hard but not impossible trick to pull off though few succeed.  (Separate idea, might the next move in finance be something to support companies in the position of making a business model transition?)

The existence of incubators, though, adds even more urgency to the task for conventional software companies.  In a punctuated equilibrium environment incubators are like steroids for the change process.  Keep in mind that the incubator idea put forth at Dreamforce was not simply to accelerate application development but leverage every aspect of company development.  The incubator will provide access to capital and some smart people to help with strategy and marketing.

The key ingredient, if used appropriately, which other incubators historically did not have, is the idea of a pervasive, multi-purpose platform that not only enables application development, but which is also an architecture that enforces standards to the point that unrelated developers can build systems that work together without much integration effort.  The practical effect is that these entrepreneurs will be building modules that have integration in their respective DNA’s.

For large traditional software suppliers, incubators hold out the possibility of death by a thousand paper cuts.  In a nutshell, that’s punctuated equilibrium in the making.  For the conventional companies whose drive has been to build everything in-house and to avoid integration where possible, this is a serious threat. Amalgamations of smaller companies with compatible products (read modules) can band together to deliver complex and customized solutions that are less expensive than conventional monolithic products.  If you have any doubt, just ask any seven year-old with a box of Legos.

So, what did you think?

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