Venture Capital Watch

By Elizabeth Millard  |  Posted 2008-04-16

Every day brings news about another corner of the economy crumbling ever-so-slightly into disrepair, but even doomsayers might be heartened by the optimism of venture capitalists.

Charged with trying to predict the next big trends, VCs are a compelling group to watch, since they telegraph the future of an industry -- and many times, shape that future -- long before products and services come to market. So what are the areas likely to boom in development? Just follow the money:

Apple iPhone
Anyone who's not living in a mountain shack has some sense of how mobile technology is shaping the tech scene, and VCs are hoping that the line between enterprise and consumer will continue to blur. Case in point: the Kleiner Perkins Caufield & Byers (KPCB) iFund, which will give developers financing to create applications for the iPhone and iPod touch platform.

"We've been more and more enthusiastic and confident about mobile going forward, and we're going to be more aggressive about investment in that area," says Matt Murphy, KPCB partner and manager of the iFund. "Clearly, we're seeing the rabid demand for devices, and the fund provides a way to provide capital to companies we thing are important."

Certainly, there's no lack of demand. Before the iFund was announced, the firm had an internal bet going about how many proposals would come in within the first 30 days. "We beat our highest estimate within 48 hours," Murphy says. "The enthusiasm around this platform is impressive."

Internet-based enterprise infrastructure
One of the areas that has seen under-investment for the past six years is Internet-based enterprise infrastructure, believes Vag Goel, partner at Norwest Venture Partners: "In the past few years, the Internet has become more a part of business communications, and we're looking to invest in ideas that help enterprises take advantage of what the Internet has to offer while delivering rapid ROI."

Goel adds that a few recently-funded companies that illustrate the trend include: LifeSize Communications, which does high-definition video conferencing over the Internet; Unisfair, creator of virtual events for enterprises; and Qumranet, developer of a virtual desktop infrastructure platform that enables employees to work off any PC in the company while Windows software is hosted in the datacenter.

Green Technology
The definition of "green" is as difficult to pinpoint in the tech industry as it is in other realms like building materials or household cleaning products. The area is still thriving, but there could be shifts ahead, according to Bart Greenberg, partner at Manatt/Phelps/Philips' Venture Capital and Technology Division.

"Investments in 'green' technology continue to be a hot area, though the initial furor seems to have tempered and the focus is back on basics," he says. "VCs are still weighing their decisions more heavily on what the value proposition is, as they have always done."

Desktop Virtualization
According to Justin Perreault, general partner of Commonwealth Capital Ventures, the area of desktop virtualization is speeding ahead faster than some experts have predicted.

"I've been shocked by the level of interest we're seeing from very large corporations moving ahead with desktop virtualization stations that are, on one hand, pilots, but on the other hand are pretty aggressive in terms of the scope of the rollout," says Perreault. Because of this, the amount of development and number of startup firms could increase sharply in the year ahead, as VCs try to fuel more opportunity in the sector.

Application Security
Anything security related -- particularly technology that might stand out in a very crowded market -- is likely to be heard in more than an elevator pitch, and this year's darling is application security, notes Perreault. IT managers are urged to put a multi-layered defense strategy in place, which is driving development of different levels related to servers, desktops, and networks. And if you can secure all those, why not applications?

"Application and data security is seeing strong corporate emphasis and spending, and application security in particular is getting a lot more momentum," says Perreault. "It's been around for a while, but we're seeing more interest lately."

The convergence of technology and healthcare has been intriguing to many VCs, particularly as healthcare organizations demand cutting-edge gadgets, better data storage, and compliance-friendly online applications.

In the near future, look for even more expansion around diagnostics and alternative therapeutics, notes Christopher Greendale, general partner at Kodiak Venture Partners. Most notably, drug development is heavily accompanied by diagnostics, he says, and the advances in technologies servicing these sectors takes the guesswork out of prescriptions and how they work.

High-end E-Commerce
It's tough to build the next Amazon, but it's possible that shoppers aren't looking for another way to buy books, tools, and housewares all from one site -- they could be searching for diamonds and furs instead.

"We're seeing significant growth opportunities in these [sites]," says Greendale. Kodiak recently invested in an online luxury retail site called Ideeli, a members-only site offering premium products at a reduced rate. The company generates revenues through a business model that combines online sales with a premium subscription service, he adds.

Software as Service
The SaaS model has been around for years, but it could get kicked up in the near future, notes Don Caldwell, founder and CEO of Cross Atlantic Capital Partners.

"Enterprise-wide systems tend to be yesterday's news," he says. 'Companies don't' want to invest any more than absolutely necessary in plumbing. It is a necessary evil to be done as inexpensively as possible, hence SaaS: little upfront investment, ease of install, and variable expense."

So, the economy may be making the average Joe and Jane fret over home values and job security, but just like during the dot-com bust, investment in good ideas rolls on and on.