Capital IdeasBy Larry Barrett | Posted 2004-01-16 Print
Venture capitalists are back and eyeing companies that can analyze data across your enterprise.After three years of reluctance to invest in new technology companies, venture capitalists have begun to emerge from their Sand Hill Road bunkers—and enterprise software is what they've set their sights on.
Companies offering customer-management software, systems-integration services or consulting are raking in one of every four dollars of new venture capital, according to Growthink Research Inc., a Venice, Calif.-based venture-capital consulting and market-research firm.
In 2003, startup software companies garnered close to $6 billion, or about 25% of all venture-capital dollars, and will likely meet or beat that dollar figure in 2004. Venture-capital firms invested about $24 billion last year overall with an increase between 3% and 5% in 2004. Still, that pales in comparison to 2000, when total venture-capital investments surged to a record high of more than $100 billion, more than four times what was invested this past year.
After a seven-year run as the top investment-capital segment, software relinquished that position last year to biotechnology investments which checked in with $6.3 billion in funding. Among the other favored types of software: Applications that provide security to corporate networks or help manage technology operations.
"We're always looking for something completely new," says Mark Sherman, general partner at Battery Ventures in San Mateo, Calif. "When we talk to CIOs, they almost universally say that security is at the top of their radar. But data analytics is another area we're seeing a lot of interest."
Firms that develop that kind of software, such as Addamark Technologies of San Francisco, promise to log and analyze several trillion bytes of data in seconds or efficiently sort through and index all the data in a company's customer-relationship-management system.
Addamark has developed a new data-management and -analysis platform specifically for managing large volumes of electronic event-log data. It received $9 million in funding in 2003, up from $7 million in 2002, from Battery Ventures, Sierra Ventures and Canaan Partners.
Addamark's software stores log data from a Web server, router or a firewall in compressed format that can easily be queried on clusters of desktop computers. The software gives systems managers the ability to find out inexpensively who has been accessing their databases and how they've done it.
Battery Ventures also has made multimillion-dollar investments in Bedford, Mass.-based BladeLogic Inc., a developer of data-center-automation software, and in San Mateo, Calif.-based DecisionPoint Applications, a maker of financial-performance-management software. DecisionPoint's analytical metrics and utilities extract data from customers' data warehouses.
"The economic climate is improving and we plan to make about the same amount of investments in software this year as we did last year," Sherman says. "We're looking at tens of millions of dollars for this year."
But Battery Ventures' approach to investment—along with that of the entire venture industry—has changed over the last several years. Venture capitalists say the double whammy of the dot-com implosion and the terrorist attacks of 9/11 necessitated a complete overhaul in how they evaluate prospective companies for investment. The days of throwing millions at unproven wunderkinds with an interesting idea but no concept of how to create a viable business plan appear to be over.
"We tend to focus on backing entrepreneurs with vision, passion, and, almost as important, a proven track record," says Ravi Mhatre, general partner at Lightspeed Venture Partners in Menlo Park, Calif. "The entire VC community got away from those principles in 1999 and 2000."
For software companies desperate for financing, it was a dark period. The good news? There's pent-up demand for new software and services because technology budgets have been cut dramatically during the past three years.
"The world will not ever return to late 1999 or 2000," says Ian Macleod, general partner at ABS Capital Partners in San Francisco. "But it might return to where it was in 1996 or 1997, when investments were prioritized against a reasonable budget and constrained by a realistic view of the potential return on investment."
The latest batch of enterprise-software startups are targeting as potential customers the large companies that are desperate to squeeze more mileage out of existing systems. For example, many companies have implemented multiple network-security-software systems throughout their organization but now need software that can provide a comprehensive view of their entire security infrastructure.
"People don't always think about it, but the shelf life for most technology is usually only four to five years," Mhatre says. "Because companies have halted their spending on new technology, most of their infrastructure is either obsolete or soon will be. They need to think about the next generation of technology to get more productivity out of the systems they've already invested in."
Skybox Security of Menlo Park, Calif., received $11 million from venture-capital firms over the past two years. Its software analyzes the entire security topology of an organization to locate vulnerabilities—in the firewall, perhaps, or a server used by employees working remotely—and determine which are insignificant and which require immediate attention. The application then simulates attacks, confirms the vulnerability and suggests the appropriate remedies needed to secure the network.
Security-software firms received only 1.8% of the $6 billion of venture-capital investment in technology in 2002 but shot up to 4.3% of the $928 million invested in software companies in the third quarter of 2003.
While security software has become one of the investment community's hottest sectors, applications that help organizations manage their technology systems or consolidate call-center functions are just as popular.
Nuasis Inc. raked in $17 million in funding in the third quarter of 2003, making it the quarter's sixth-largest recipient of venture money among software companies. The San Jose, Calif.-based company developed Internet-Protocol-based software that consolidates the routing of customer calls and Internet queries to one central location, reducing the number of employees needed to handle the calls and eliminating the overhead of multiple call centers.
Venture capitalists bestowed $16 million upon CoVi Technologies of Austin, Texas, in the third quarter. CoVi develops high-definition television surveillance software that improves the quality and accessibility of video data for a variety of industries. After flat growth in venture capital spending from 2002 to 2003, backers expect the number of investments to increase in 2004.
"Barring a major terrorist act on U.S. soil, funding for venture-backed companies should increase," says Corey Lavinsky, of Growthink Research. "The economy has shown significant improvement and we are optimistic that venture capitalists will be more active than they've been over the past two years."
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