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Five decades ago, Jack Dangermond and his wife Laura started a boutique consultancy with a rather grandiose name: Environmental Systems Research Institute. Over time, “E-S-R-I” has simplified to just “Esri.” I’ve always thought it was a beautiful sounding name, like a forgotten Egyptian god or the name you might get stuck with if you were born on a hippy commune.
Speaking of names — “Jack Dangermond” sounds like an assumed alias. It’s just a little too perfect. While researching this piece, I was surprised to learn that he came by it honestly. His parents Alice and Peter Dangermond immigrated to the United States from the Netherlands and settled in Redlands, California where they started a tree nursery in 1945 (the same year Jack was born).
Esri is a “lifestyle business” founded by a husband-and-wife team, headquartered in the same sleepy town where Jack grew up, and run profitably without the aid of venture capital or debt financing. Today, Esri is what happens when a lifestyle business averages 30% annual growth for 50 years in a row. One thing leads to another and — whoops — you are now a billionaire. Not a bad… lifestyle.
What is Esri?
Esri is a software company that helps governments, companies, research institutions, and non-profits make maps.
In fact, Esri is one of the largest privately held software companies in the world. It sells a vast array of software for handling geospatial data collectively referred to as a “Geographic Information System” (GIS). In recent years, they’ve taken to describing themselves as working on “location intelligence” and “spatial analytics,” but I suspect that’s an attempt to muddy the water for new challengers like Tableau and CARTO more than a sincere effort to describe what they do. They didn’t invent the term “GIS,” but they are nearly synonymous with it today.
Esri’s history officially begins in 1969, but the current software-focused incarnation of the firm began taking shape in the mid-1970’s when they first took on digitally-focused projects. Their transition from a consulting firm to a software firm wasn’t formally cemented until 1981, the year they released ARC/INFO.
The first version of ARC/INFO was written in FORTRAN and was only accessible from the command line. Esri targeted government and academic institutions as early adopters of the software, and by 1983 had managed to win contracts with the University of Maryland and the Illinois Department of Natural Resources among a dozen or so other clients.
Arc/Info (as it was later styled) crossed 100 “seats” in 1986. By 1997, that number had skyrocketed to over 100,000.¹
The firm is probably most famous for its ArcGIS franchise, the generational successor to Arc/Info. Since then, the core desktop licensing business has remained largely undisturbed except for the introduction of ArcGIS Online in 2012, Esri’s first “cloud” offering. Today, they offer so many different products, it’s hard to keep track of all them.
Esri is a formidable business. Their official stats page lists some eye-popping numbers including: ²
- 51 years in business
- 350,000+ customers
- 4,000 employees
- 49 offices worldwide
No debt. No private equity. No strings attached.
In a financial climate where technology companies are routinely raising hundreds of millions of dollars, sometimes before even launching their first product, Esri stands entirely apart.
Below, I’ll get into some of the interesting strategic choices Jack and Laura have made while building the business, but I think the most important thing to understand about Esri is its capital structure. The Dangermonds retain unfettered control of the business and have surrounded themselves with a leadership organization of die-hard lifers. They’ve chosen to reinvest 30% of annual revenue (not profit, revenue) into R&D year, over year, over year. That’s a stupefyingly large bet on themselves that probably wouldn’t be possible if they were focused on returning cash to investors or catering to the quarterly attention span of the public markets.
Entrepreneurs of my generation are inundated with examples of technology companies that took a different path. The narrative that venture capital is necessary to build a business of meaningful scale is disturbingly dominant among my peers who have started a business or are considering it.
“Consulting” has become a dirty word among ambitious young people I know, and “services businesses” are routinely scoffed at for not being “scalable.” Never mind that tens of trillions of dollars of American wealth is tied up in such businesses run by retirement-age executives desperately grasping at a succession plan.
I’ve even heard people describe themselves as having “bootstrapped” their business because they only raised a few hundred thousand dollars from “friends and family.”³ That’s part of my motivation for writing about Esri — I want people to know that they’ve been presented with a false choice between building a big business that has real impact in the world and a self-financed one they can retain complete control over.
I’m not saying Esri-like outcomes are even remotely likely for self-financed companies. I’m simply pointing out that they’re possible, which I think a lot of people just starting out in business genuinely don’t realize.
How The Beast was Built
The Dangermonds made several strategic choices while building Esri that I feel are instructive.⁴ Think of these as a Cliff Notes™ version of their story — most of the truly fascinating stuff is in the details, but unfortunately, I don’t know the details.
Below are some of the priorities Jack and Laura set forth for the business that helped it quietly become a multi-billion dollar behemoth:
Become a Category King
I mentioned earlier that Esri is nearly synonymous with their software “category,” GIS. The term “category king” comes from one of the only marketing books I’ve ever purchased, Play Bigger. The basic thesis is: enduring companies market the value of their category, not themselves, and in doing so become synonymous with it.
In Esri’s case, they promote the value and utility of GIS as a concept, to great effect. In fact, if you Google, “history of GIS,” the top hit is a page on Esri’s very own landing page. It’s not every day a company website outranks Wikipedia.
Focus on Overlooked Markets
Esri is now famous for what I’m gonna start calling pedagogical capture. I noted earlier that universities were a large portion of their initial client base with ARC/INFO, and they still are.
Now “GIS” is its own field of study. You can get an undergraduate or even a Master’s degree in GIS. Esri is the overwhelmingly dominant software of choice for professors in the field. And for a surprising proportion of recent graduates of GIS programs, the only way they know how to express the analytical techniques imparted upon them in school is by working with Esri tools. Like I said, pedagogical capture.
The pejorative industry term for recently graduated Esri-reliant GIS analysts is “button pushers.” They’re becoming rarer by the day, but there are still a few remaining pockets of the world where you can get a job working in Esri software all day long (without knowing how to code or even write basic SQL queries). They’re mostly concentrated in the public sector, the other strategic market Esri focused on early and consistently.
Speaking of the public sector, pour yourself a stiff drink and Google this exact phrase:
Esri Enterprise License Agreement filetype:pdf
While other people see city, county, and state governments as slow, fractured, services-intensive, unprofitable cottage industries where great software companies go to settle for mediocrity…Esri sees dollar signs.
Imagine this common scenario: an undergraduate with a GIS degree can’t find a job, so they join a Master’s program in GIS (decades later, they will find themselves prone to random bouts of crying). Soon thereafter, they pop out the other side with $100K in debt, and by the grace of God, they manage to land a job at a local county GIS office that pays $40K/year. A few years later, Esri’s license is due for renewal — a whopping 5-year commitment of $1.5M. Esri tosses in free tickets to their annual user conference for the entire office…and a deal gets done, no questions asked.
Which brings us to our next strategic priority.
Build a Community
Esri was one of the first software companies to perfect the“user conference.” Today, over 16,000 people attend their annual event. Lanyards abound.
But perhaps the most striking thing about “Esri UC” is the exhibition hall. Esri has built an enormous and thriving partner network. By focusing on growing the industry as much as growing the business, Esri has put themselves at the center of a miniature economy revolving entirely around their software.
Expand by Franchising
One of the most controversial decisions Esri ever made was to aggressively partner for distribution outside of the United States. Personally, I can empathize with the decision — the difficulty of selling overseas, especially to foreign governments, is almost universally underestimated by young companies. Having international distributors allows Esri to maintain its focus on product development and domestic sales (where they have the most competency) while growing and diversifying their revenue with minimal cash investment. I’m not sure if “franchising” is technically the right term, but it captures the spirit of the thing.
The reason the decision is controversial is because resellers of Esri software abroad have…strange incentive structures. They don’t have the overhead cost associated with developing the product, and they typically have exclusive rights to sell the software within their territory. Add those two things up, and you get a strong incentive to sell software for the highest amount possible per deal (because the logistics of servicing each deal are where most of your costs come from). The result is a distorted market, where Esri products routinely cost more in low-income countries than they do in America. That’s messed up.
None-the-less, the model seems to work for them. Esri distributors are as far-flung as Afghanistan, Argentina, Iceland, and New Zealand. On their “Quick facts” page, Esri claims, “most national governments” use their software — a feat that I doubt would be possible without the global footprint their distributors provide.
Embrace Professional Services
As someone who has competed, on occasion, with Esri sales reps, I know their playbook a little. To land new accounts, they prefer not to discount the software so much as throw in free licenses of complementary products, especially if it’s a large non-profit. Sometimes, if they’re really desperate, they’ll even throw in a basket of professional services time to help customize their tools to the customer’s liking or integrate them with internal tools.
A year or two later, once they’re settled in, the bill for an annual license for those freebies will arrive in the mail. I believe in the startup world they call this strategy “land and expand.”
These days, professional services is looked down upon as a low margin source of revenue that only scales linearly. But what Esri realized early on is that in “Enterprise” software, you almost can’t over-invest in landing the initial deal and ensuring it goes well. Professional services, for them, is getting paid to lock a customer in even more deeply. And that’s how you build a huge business — sure, you add new customers, but most of all, you retain your install base and grow revenue per customer over time.
There are Worse Tyrants
Esri often gets a bad rap in the GIS world because it has so few natural competitors. It looms large over a tiny backwater of an industry that it practically created from scratch.
And it deserves a lot of the criticism it gets — if you’ve ever gone head-to-head with Esri for a deal, you know how fiercely (and unfairly) they’re willing to fight. They also seem to have a habit of bad-mouthing open standards that compete with their own products (until they inevitably decide to support them and pretend they did all along) among other annoying traits.⁵
But I can’t think of a more benevolent pseudo-monopoly in software. Esri’s commitment to supporting environmentalism and civic health is genuine. If they yanked all of their desktop licenses overnight, the world would shut down. Literally. It’s not like their business model involves farming personal data for advertisers — they’re building mission-critical software for clients doing meaningful work.
Most importantly, they’re doing it all on their own terms. They aren’t at risk of a hostile takeover from an activist investor. They don’t have any loans to default on. Their client base is composed of the slowest moving and most loyal organizations in the world. When you add it all up, I think it’s safe to say: Esri can’t be stopped.
¹ Source: https://gisuser.com/2007/06/esri-arcinfo-arcgis-arcview-25-years-in-the-making-a-time-line/. As an aside, a good “dad joke” for all you software people out there: next time someone quotes you in terms of “seats,” ask them if you can get a discount because so many of your coworkers use standing desks. It won’t go over well, but it’ll be satisfying — I guarantee it.
³ That term — “friends and family” — has never sat right with me. You can’t control who your family is, and unless you grew up in an affluent area, there’s not much chance you have friends who are accredited investors…For all but the most fortunate people, raising a few hundred thousand dollars requires going far, far outside of their close (or even distant) circle of friends and family.
⁴ I refer to them as a team, because while Jack is undoubtedly the “face” of Esri, Laura has always been instrumental in running the business despite her low profile.
⁵ Cloud Optimized Geotiff vs. Meta Raster Format comes to mind as a recent example for the nerds out there.