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Protocol | Enterprise

Why Oracle and SAP are fighting over startups

Did someone mention a chance to burnish reputations and juice balance sheets?

Why Oracle and SAP are fighting over startups
New cloud-based offerings and favorable contract terms are convincing startups to switch to software from Oracle and SAP earlier in their lives than your might expect.
Jane Seidel

In the hunt for their next big-ticket customers, SAP and Oracle are trying to cast off reputations as stodgy tech providers by making a huge push to provide their software to startups.

Both companies have found themselves in choppy waters recently as potential customers have turned to the cloud, shunning the on-premises solutions SAP and Oracle are known for. That's coupled with a global pandemic that dried up demand for the expensive enterprise-grade software that drives profits at the vendors.

Now, to help bolster the balance sheet, they're trying to find the next Starbucks, General Motors or Medtronic as early as possible.

"Oracle and SAP have recognized that they need to go downmarket," Valoir analyst Rebecca Wettemann told Protocol. "The reality is, there just aren't that many companies that have the appetite or the interest … in doing a big investment."

It may surprise some to see such a focus on smaller organizations, which are typically loath to invest in what is traditionally thought of as enterprise-grade technology, especially given the cost. But improvements in the products from both providers, their pivots to cloud-based offerings and favorable contract terms are convincing founders of the value of deploying software such as an enterprise resource planning, or ERP, system from a large vendor earlier in the life cycle. So much so that, at Oracle, the startup business is growing at a clip of as much as 400% year-over-year. At SAP, the company brought 773 new customers in the space last year.

"It's been a steady plod over the past few years just to let startups know Oracle is here," said Jason Williamson, the vice president of Oracle for Startups. "Now, we're in that phase of the flywheel to really deliver on the promise."

Take the Jennifer Lopez- and Alex Rodriguez-backed startup Super Coffee. In 2018, the bottled energy drink company was finding it difficult to share daily sales data with its national team. Ultimately, it meant that only the top brass of the organization had a 360-degree view of the business. That prevented employees from, among other things, pinpointing the most successful sales strategies to use in their own outreach. So it tapped Oracle's NetSuite for an ERP system, industry jargon to refer to software that effectively helps back the most foundational business segments at enterprises, like finance and supply chain operations

"We were running our business gradually as we went, using spreadsheets," co-founder and president Jordan DeCicco told Protocol. "When we introduced the ERP, we had everything that we needed in one place and we could easily access and share it with the entire company. [Salespeople] had the same knowledge as the leadership team when they are making decisions."

Getting in on the ground floor

Super Coffee is not alone. Other startups are using similar products to help prepare for looming growth, gain efficiency in their daily operations and broadcast the maturity of the firm to potential customers or investors, according to startup executives.

In the past, founders may have shunned the more expensive products from Oracle or SAP in favor of cheaper alternatives catered to small businesses, such as Acumatica, Intact or FinancialForce. But there's now acknowledgement that deploying the costlier solutions sooner could save on a more arduous implementation down the line. And because most of the software is now offered through the cloud, it can scale much more easily as the company grows, without the added burden of managing the tech in-house.

"We saw a lot of the companies who were the size that we wanted to be in a couple years using the tool," DeCicco said. "It was kind of a no-brainer for us."

For SAP and Oracle, the business is unlikely to ever serve as a suitable replacement for enterprise licenses, given the software is often provided at a discount and startup success is the exception, not the norm. Instead, the goal is to try to make a connection with companies before some of them hit it big. As operations expand and the workforce grows, often so do the number of software licenses; since it's costly to switch out ERP platforms, that could mean more revenue for SAP and Oracle over the long term, even if only a handful of clients see huge growth.

Electric car maker Rivian, for example, tapped SAP's S/4HANA in 2019. Since then, the startup has raised billions in funding and is reportedly close to hitting a $25 billion valuation, becoming one of the most prominent companies in the automotive industry despite having not yet shipped a finished vehicle. Rivian declined to comment for this article.

"These are companies that have high expectations for growth," SAP Senior Vice President Greg Petraetis said. "They want to move from being ramp-ups to category leaders to global leaders in what it is that they do. They want to invest in a technology stack that they will never outgrow."

Growing the pipeline is so critical that Oracle is even expanding its outreach to catch entrepreneurs early, particularly at the university level, before they even begin the work to launch a company. "You reap what you sow," Williamson said. "If we want to gain the next big startup unicorn, we have to be early."

For SAP and Oracle, the partnerships also help shed their reputations as stodgy tech providers of yesteryear. Internally, both have made strides to improve their technology to blunt this criticism, but it still takes work to persuade potential customers of the upgrades: a continual challenge, but one that likely gets easier as they win more startup business.

"We had to actually convince people in our company to give it a chance. It's not the same SAP," said Tim Flaherty, chief financial officer at medical device startup Enable Injections, an S/4HANA customer. "Back 10 years, we probably wouldn't have gone this way."

And as both of those giants move toward small businesses, rivals that already catered to that market — such as FinancialForce, which offers a very similar product — are also making strides toward becoming a partner that can grow alongside the startup itself. Those competitors have the ability "to be a growth partner beyond the [small business] phase. There's nothing from a capability perspective that limits them … from supporting a large organization," said Wettemann.

The modern ERP

For startups, deploying big-ticket software signals to both investors and customers that the company is prepared to handle any major surge in business. While even just a decade ago, such a purchase would be almost unheard of for a smaller organization, the products are becoming more "out of the box" solutions, meaning that clients don't have to go through the often time-intensive and costly customization efforts.

"Would I have considered an ERP of 10 years ago in a startup? No way. Way too clunky, way too difficult to deal with," said Livekindly Chief Information and Digital Officer Rogan Moore. But, he added, legacy ERP systems and the modern digital offerings "are very different things." The vegan food collective is relying on SAP's S/4HANA to help it rapidly scale and compete against the globe's largest food producers for ingredients and partnerships.

SAP and Oracle are also giving the companies attractive contract terms, such as set costs for additional licenses or add-on applications. Oracle, for example, provides a 70% discount on additional cloud credits or licenses for startup customers for at least two years, according to Williamson.

"We bought what we needed at the time and we have a blend of things that we have pricing on that we think we will need in the future that we managed to lock in," Moore said.

There are also other non-operational benefits, like connecting startups to potential investors or customers. Enable Injections, for example, opted to go with SAP over other providers like Oracle due to its influence within the healthcare sector. As many as 80% of pharmaceutical companies use the company's software, per Flaherty.

Clearly, there are advantages on both sides of these relationships: startups get better tools and cred with investors; Oracle and SAP get to burnish their reputation and start on the ground floor with the corporations of the future. And while the startup business isn't the most lucrative for SAP or Oracle right now, the early battles being waged could help determine the fate of earnings reports in the years to come.

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