Mock the Magic Quadrant at Your Peril

by Micah Rosenbloom, Partner

Every year IT consulting firm Gartner releases a series of “Magic Quadrant” reports which offer a detailed analysis of dozens of obscure product categories, from Single-Instance ERPs to Integrated Workplace Management Systems.

A “Magic Quadrant” classifies vendors as Leaders, Challengers, Visionaries, or Niche suppliers and plots them according to the robustness of their offering and the company’s ability to execute. Dumbledore is unimpressed.

These reports are “make or break” for many in the B2B community, yet the hackneyed name of the chart and the self-seriousness with which startups treat it has made it fashionable to mock the Magic Quadrant.

Two startups worth a combined $35B, that’s who. Source.

Do so at your peril.

For many B2B companies, earning a spot in the upper right quadrant is the equivalent of winning a Heisman, an Oscar, and discovering the Holy Grail. Journalists like to make jokes about it, but Palo Alto Networks and ServiceNow, two of the most lucrative IPOs from 2011–2015 which are worth a combined $35B, both feature their position on the famous 2x2 plot as their primary selling point. Perhaps they know something the quadrant’s critics do not.

Not only are they proud of being in the quadrant, they’re six-time champs!

ServiceNow, a company with an $18.6B market cap, rests their entire “above the fold” sales pitch on their placement on the Magic Quadrant.

Even Aaron Levie, the enfant terrible enterprise founder, famous for dispensing business advice via Twitter bon mots, pays fealty to the Magic Quadrant during analyst calls.

Dare to Be Boring

Despite the fantastical name, the “Magic Quadrant” is surprisingly quotidian. You know the line about no one getting fired for buying IBM? The Magic Quadrant offers the same “CYA” protection to IT buyers throughout the Fortune 500.

IT leaders are beset by requests from all corners of their organization; Fixes to legacy EDI systems, their marketers have questions about data warehousing integration requirements, and mission critical security defenses to cope with an evolving landscape of threats. With the rate of change in software, it’s hard to expect anyone to stay current with the evolving software landscape. So, when deciding who to partner with for a long-term technology provider, they often turn to these reports and they help justify purchases to the CEO and CFO.

There is something to be learned here. Startup founders love chasing hot trends, e.g. the recent mania for ICOs, the brief chatbot moment, and sprinkling “AI” on top of everything. Too many founders miss, or ignore, the uninspiring but wildly profitable opportunities that come from tedious product development, foot-slogging sales work, and old school marketing. Paul Graham calls this “Schlep Blindness” and it’s an impairment that costs entrepreneurs billions.

Some critics say the Magic Quadrant reports are “pay to play,” but in the end, companies are rewarded for developing robust feature sets and building organizations capable of servicing their customers. No sorcery is required, companies just need to ship product.

Making Sense of a Post-Product Hunt World

Every generation of B2B software begets a new class of enterprise tools that replaces the last generation. Take CRM. In my first company, we used Goldmine. Now we use Salesforce. Oracle beget Workday. As more and more employees want to work on their own devices, we’ve seen an explosion of startups like Slack, Trello, and Dropbox to fill those needs. And the pace of change is increasing rapidly.

Corporate IT leads have to decide which of these products is worth the effort required for change management, the increase in security risks, and so on. The real value proposition of many of these new services is unclear until they reach escape velocity. For instance, as a VC, I imagine if I heard the pitch for Dropbox in the early days, I (very foolishly) would not have been compelled by their simple storage solution. I’m sure the initial response from IT managers was the same and millions of workers were worse for it. It helps to have a trusted 3rd party with an editorial bent sifting providing an objective perspective.

Search out Your “Magic Quadrant”

There’s a debate in the B2B world about whether it makes more sense to focus on competing within an existing market or trying to create one de novo. Should you fight to improve your placement on the Magic Quadrant, or build something so different that Gartner has to create a new one? Kara Nortman (from Upfront Ventures) tweeted this spot-on advice:

It’s fine to tell a transformative story to VCs, the press and employees to build enthusiasm, but at the end of the day, your job is to deploy software. Even if you’re mercifully free of the Magic Quadrant’s judgment, there’s a good chance there is some basic and potentially boring feature that can be built that will be surprisingly profitable. In B2B, blessed are the “boring.”

These B2B founders don’t get as much press as cool consumer founders. You won’t hear ads for “Insurance Claims Management Software” on podcasts. (if you do, skip them!) But in many ways this is the closest thing the venture / start-up world has to an immutable law. With each change in technology stack and worker habits, many large new (seemingly boring) enterprise companies will be built and firmly planted in the magic quadrant. Those are ventures worth building and worth joining.

The Magic Quadrant helped turn Gartner into a $11B company. It turns out that not only are the picks and axes valuable en route to the gold rush, but so are the market researchers!