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A Deadly Silicon Valley Habit: Chasing the Latest Fad

At considerable cost, Silicon Valley disdains direct sales

Photograph by Ian Philip Miller

At considerable cost, Silicon Valley disdains direct sales

(Corrects spelling of Aneel Bhusri.)

At a networking meeting I attended of influential Silicon Valley people not long ago, the consensus was clear: Direct enterprise sales is an old, out-of-fashion, even dead business model. In its place stands the modern, hip, ideas of social networking, “freemium,” and designing apps that virally attract users. The same sentiment was evident at a meeting of the advisory board of a human capital start-up—selling directly to human resources departments is so yesterday. As that start-up made the VC rounds, it got the same message from potential backers: Having a direct sales force is too costly and takes too long to scale; better to move to a bottom-up model in which other companies’ employees see the software and use it (for free, of course), which then may pave the way for enterprise adoption.

The direct sales force has become the Rodney Dangerfield of business models in Silicon Valley, drawing little to no respect. Selling is less glamorous than marketing or strategy or designing some cool new thing. Not many of today’s chief executive officers have sales backgrounds. They are more likely to come from finance or—in the Valley—from engineering.

Ah, but competitive advantage comes from doing something that is difficult but important. No sales, no revenues. Selling through direct sales to corporate customers, while out of fashion, is a process that is predictable and replicable, with prospect pipelines that can be measured and a methodology that can be taught and learned.

For every Yammer, a social networking company that attracted corporate users initially by giving the product away (bought by Microsoft (MSFT) for $1.2 billion in 2012), there are hundreds of companies that fail by having a business model predicated on capturing potential users—people who are overwhelmed by the number of business apps seeking their attention.

Then there is Workday (WDAY). Founded by Dave Duffield and Aneel Bhusri in 2005, the company set out with a very mundane strategy: Take the human capital applications sold by SAP (SAP) and Oracle (ORCL), move them to a software-as-a-service model, and then sell through a direct sales force to the companies that are, for the most part, unhappy with the level of service and support they are getting and are bothered by the difficulty and expense of upgrading to new software. (In a hostile takeover, Oracle bought PeopleSoft, a company founded by Duffield, at which Bhusri was vice chairman.)

Workday’s model is the old strategy of taking care of customers and offering them an easier path to technology they need to manage aspects of their business, albeit one that works. When Workday went public last October, its shares soared to a company valuation of over $9 billion. HR technology columnist Bill Kutik told me that at the time of the initial public offering, one Workday employee commented: “Maybe now the Valley will take enterprise applications (and sales) seriously again.”

I doubt it. The Valley is mostly about huge gambles for potentially enormous rewards, not building predictable, understandable businesses. So while Workday has a value greater than all of the companies at that Silicon Valley entrepreneurial networking meeting combined, it is not “buzz-worthy.” Too often, VCs and entrepreneurs blindly chase the latest fads, rather than ask, “How do I build something a paying customer will buy?”

As for that human-capital software company, it did follow the VCs’ advice and pivot away from selling directly to companies. It laid off its sales people while it chased “freemium,” “viral,” and all the other buzz words flying around the Valley. The company encountered a predictable result. With no sales people, there was no sales growth, which left the VC’s unimpressed. At the end of 2012, the company shut down for lack of money.

Pfeffer is the Thomas D. Dee II Professor of Organizational Behavior at Stanford University's Graduate School of Business, where he has taught since 1979. He is the author or co-author of 13 books, including Power: Why Some People Have It—and Others Don't. His latest book, Leadership B.S: Fixing Workplaces and Careers One Truth at a Time will be published in September, 2015 by HarperCollins.

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