I mentioned that people who never worked in an enterprise shouldn’t try to develop for it, to which Michael Arrington replied that “perhaps people who’ve never worked in enterprise are the BEST people to build disruptive enterprise products.” The problem is, I think you need to at least understand a market before you try to disrupt it, and it’s clear to me that Yammer doesn’t understand some basic dynamics of the enterprise which is ultimately going to hold them back.

So, let me rephrase and restate my original point: you shouldn’t build for the enterprise if you don’t understand the dynamics of the enterprise. These are just a few of the points that come to mind specifically on how Yammer misses the mark on building a true “enterprise” product and why they will never disrupt that market.

How big is an “enterprise”?

To me, Yammer seems like it was built for smaller teams, not the enterprise. Notches has a team of 4 people, and we’ve found Yammer to be a great tool for status updates, whereabouts, and the like. We use tags extensively, but even with the four of us it can get a little noisy. The other important thing to note is that everything said is public – this isn’t an issue for us right now, but you can imagine how you might not want to broadcast all discussions/status messages to everyone with an e-mail at that domain.

Contrast this to my previous employer, Goldman Sachs. My old project team was around 15 people, my department (one of the smaller ones) was several hundred, and my division (one of many) was probably 10,000 globally. Obviously, the noise and public broadcast issues are much amplified at this level. Plus, as I will discuss later, there are sometimes compliance issues with broadcasting certain project/department specific details to the entire organization. (After I originally wrote this, news came out about a new “groups” feature that Yammer is launching, so we’ll see if this helps at all).

The simple fact is that Yammer is going to need to do much more to help team/project organization if they want to attract larger teams. In that sense, the only thing Yammer brings to the table for us is the ability to broadcast messages within a small group (our team). If Twitter had support for private groups, we would probably not be using Yammer at all.

As successful as Yammer has been early on, I think the numbers they have reflect this. They’ve signed up 10,000 companies with an average of 6 employees per company, and have only converted 2% of those into paying customers (200 companies with an average of 20 employees each). This is far from what I would define as the enterprise. Yammer is bringing in $4,000 per month right now - in order to get this number up, they either need to sign a lot of large enterprises (which I don’t think they can unless and until they address the compliance and other concerns) and/or convert a lot higher percentage of their users into paying customers.

What’s the story on compliance?

Public companies are subject to a number of compliance and regulatory requirements that do not affect private companies. By nature, investment banking is one of the more heavily regulated industries, but in general there are a lot of requirements that public companies have that you’ve never experienced if you’ve only worked in private startups. For example, Sarbanes-Oxley (SOX) 802 now requires proper retention of business documents and “material communications” – which e-mail and IM and things like Yammer would/could fall under.

I know this is boring stuff and most of us in startups don’t want to think about it… but it’s important when you’re building a communications tool you want to sell to public companies - and yet Yammer does not mention compliance or retention anywhere on their site. They offer no assurances that past communications can be archived or exported. If they want any chance of being adopted by the “enterprise”, they need to address this question.

Blackmail doesn’t work when you can be blocked

Perhaps most telling is their business model: the service is free to users but they are in effect attempting to blackmail businesses into paying for admin access. What this misses, of course, is that most enterprises are closed networks and Yammer can very easily be blocked on all corporate devices.

For the compliance and other reasons, many enterprises block web mail, forums, and IM entirely. While they maintain their own blacklists and whitelists as well, most use an outsourced filter like SmartFilter and block by category. In other words, Yammer is already blocked at GS because it’s classified as “forums” or “chat” – so users didn’t even have a chance to build critical mass.

This is the second in a series of posts inspired by Yammer and issues in the business that I think underscore broader problems in our approach to building startups. See part one about innovation.

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