Venture capitalists track enterprise trends

If you want to find out what's hot for the enterprise, follow the money: the venture capital money, that is. Interest in old-school business models and applications has waned, but startups that offer enterprises innovative, secure solutions at low cost are attracting big money.

Venture capital investing this year could meet or surpass 2002's US$21.7 billion, which was the highest level for the past three years, according to PricewaterhouseCoopers' MoneyTree Survey, from PricewaterhouseCoopers, Thomson Venture Economics and the National Venture Capital Association.

In the third quarter this year, the software industry retained its position as the largest single industry category receiving venture capital money, with 185 companies capturing approximately US$1 billion. Though the life sciences sector received US$1.6 billion in the third quarter, that category is made up of several industries.

After a big drop in venture capital spending after the height of the dot-com boom in 2000, venture investments have stabilized over the past few years, at about US$20 billion per year.

"We've gone through the valley, and we're in a period of cautious optimism," said Mitchell Hollin, a partner with LLR Partners, a private equity firm. He flags business intelligence along with security and management of mobile applications as areas ripe for new, innovative applications.

Other industry insiders agree that not all startups are created equal. Though corporate spending on IT is up from the trough that occurred after the boom, business is still, on the whole, in a period of consolidation when it comes to technology. Corporations are looking for applications that will help them get the most out of what they already have, or technology that will let them try out new ways of conducting business -- without getting trapped into spending a lot of money right away.

"Dollars are definitely going back into the enterprise field -- not into companies with classic enterprise business models, but more into software as a service, managed services, and dynamic IT," said Pat Kenealy, who is stepping down this month as chief executive officer of International Data Group (the IDG News Service's parent company) to take the helm as general managing director of IDG Ventures.

Warren Weiss, a general partner at Foundation Capital, agreed with Kenealy's emphasis on software-as-a-service. "The on-demand computing model is real, and startups that offer software with friendly, consumer-like interfaces, but which scale up, are in a good position," he said.

With an interest in innovative pricing plans, Foundation invested in Itemfield, a maker of application-integration software based in San Mateo, California. Earlier this month, SAP announced that the NetWeaver middleware platform would integrate Itemfield software. "Users will pay for usage, based on the amount of data coming in and out of NetWeaver," Weiss said.

Foundation also has invested in San Mateo-based Rearden Commerce, which makes the Services On-Demand platform. Rearden's EBS (Employee Business Services) application provides a single Web interface for procuring employee services such as travel, package shipping, audio and Web conferencing, and dining.

Open-source software and services that can lower the cost of business intelligence are also sought after, according to Bernard Dall, a London-based general partner for Index Ventures. Index last week announced, in partnership with U.S.-based New Enterprise Associates(NEA), a US$5 million round of funding for Pentaho of Orlando, a provider of open-source business intelligence software. Users can get 80 percent of the Pentaho code for free. The remaining 20 percent is purchased under a license and provides the code needed for scalability.

"In this time of consolidation, when companies that are looking to contain costs, they have to look at the open-source distribution and development model," said Dalla. Index Ventures has invested in open-source companies including MySql, Sugar CRM, and Zend Technologies.

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