'Enterprise Is Sexy': Why Alchemist Thinks It Can Be the Y Combinator for Boring Startups

Let’s say you wanted to make an app to order attractive and physically fit men to follow you around for a day. You’d need designers, business development people, marketing help and, of course, a supply of attractive and physically fit men.

Under the hood of your rent-a-hunk service, however, you might need cloud server space for computing power to process all of your app’s functions. You might need specialized software to help manage your customer feedback, or to help handle the paperwork for all the studs you’re hiring. Quality HR software is probably a good idea, too.

The companies that handle all this kind of work, and whose customers are primarily other companies, are what compose the knotty world of enterprise technology. And as cloud technology services have greatly increased the computing power that businesses can afford, data-crunching services and company-wide software providers have attracted more and more funding and grown dramatically in recent years.

Courtesy of Michael Krilivsky

Ravi Belani, a Stanford Business School professor and a former Draper Fisher Jurvetson investor, has built the startup incubator perhaps most suited to this changing reality. Belani is the managing director of the Alchemist Accelerator, a six-month-long San Francisco program that specializes in enterprise tech companies.

In more casual settings, Belani describes Alchemist (named after the bestselling New Age Brazilian novel) as the “Y Combinator of enterprise.” Alchemist companies don’t have the grandiose, world-upending premise of consumer-oriented YC startups like Airbnb. Instead, the startups Alchemist takes in focus on relatively unsexy areas, like data crunching for insurance providers (Amodo) or automation software for commercial property owners (Switch Automation).

Where Alchemist is a lot like Y Combinator, however, is in its reputation among investors as a place to source deals. Its backers include major enterprise players including Cisco, DFJ, Khosla Ventures, Salesforce, Siemens, Foundation Capital and others. Prominent early-stage investors like Andreessen Horowitz, Innovation Endeavors, Social Capital and Draper Associates funded startups in Alchemist’s last class.

InterWest Partners’s Doug Pepper, an early investor in enterprise successes like Optimizely and Marketo, said that Belani has “already carved out that reputation as the YC of enterprise startups.”

“The big difference is that he’s not trying to get by on hype. Enterprise startups can’t get by on hype. They have to deliver on metrics and on creating enterprise value,” Pepper said. “It might take a bit longer for people to recognize this as the best of enterprise, but everything takes longer with enterprise startups.”

Enterprise startups can’t get by on hype. They have to deliver on metrics and on creating enterprise value.

August Capital’s Howard Hartenbaum largely agreed with Pepper’s assessment, adding that “companies coming out of a consumer accelerator are measured on very different things.

“At the point they’re coming out of the accelerator, consumer is more speculative than enterprise. Some of the YC companies are definitely solid companies, like Dropbox and Airbnb,” he said. “Ravi’s thing is much younger, and the companies out of there have customers and revenue and business metrics that investors can understand.”

Re/code was on hand for the incubator’s Demo Day last Thursday afternoon, where we got a firsthand look at what these startups and Alchemist were telling investors.

Held in a conference room at Citrix’s office complex in Santa Clara, Calif., the event was packed with a couple hundred attendees. The way a demo day works is pretty straightforward. A founder (usually) from each startup has a few minutes onstage to pitch their company to the room, a kind of nerd beauty pageant where the prize is a round of growth funding from an impressed investor. Alchemist’s demo day was no different.

Here’s a selection of the 14 startups that presented:

• A performance optimization service, Performance Sherpa, that was started by a former Yahoo data storage executive,
• merchandising service RageOn (Zazzle or Cafepress, but for celebs), whose presenter wore pizza- and cat-printed clothing that made it look like he was wearing a BuzzFeed listicle, and
• Amodo, an analytics service whose data could help insurance carriers craft highly-specific policies for customers.

Courtesy of Michael Krilivsky

Pepper, who was in the room at the event, told me he was particularly impressed by the RageOn CEO (“Tremendous passion.”) and Performance Sherpa (“The kind of caliber that’s going to make Alchemist successful.”).

Though what actually makes Alchemist successful might not be in Alchemist’s hands. The end of 2015 and the beginning of 2016 have not been kind to many tech companies, consumer or enterprise. Private equity investors have written down the value of enterprise darlings like Zenefits, and the stock price of cloud storage provider Box has dropped from over $23 a share to just under $10 since it went public a year ago.

Belani isn’t fazed by the instability. If anything, he says, the down market presents a welcome business opportunity for him and his program.

“There are a few reasons I’m not really worried about the market right now. First, the biggest companies get funded during down markets. The mercenaries leave, and the missionaries stay,” Belani said in an interview. “Look at 2008 or 2009, successful enterprise companies like Slack and New Relic were getting started then.”

Venture capitalist Jake Flomenberg backed Belani up in an email to Re/code. “In this period of greater financial conservatism, we’ll definitely see more focus on the bottom line (eg profit/unit economics) than just the top line. This bodes well for enterprise startups,” he wrote.

The numbers seem to back this up, too. Data from the research firm CB Insights indicate that among the 200 biggest tech company exits from 2009 to 2015, there was a roughly 70/30 split between enterprise and consumer firms. Pepper said that “a number of early-stage firms started out with a 70/30 consumer to enterprise split, and a number of them are going the other way.

“If there’s a pendulum in Silicon Valley backing user metrics and pure apps versus what the industry was founded on — backing fundamental tech innovation — it certainly seems it’s swinging from former to latter.”

This article originally appeared on Recode.net.

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