I want to start this post with a quote I found from "the deal" posted in January 2004:
"Illustrating how hard fundraising has become for Internet companies...Startups in the Internet commerce sector fared even worse as only $188.2 million was raised through all of 2003, 51% below the $391.1 million the sector gathered in 2002. The number of deals was slashed to only 20, after the industry recorded 67 in 2002. The sole bright spot was the average deal size, which jumped to $9.41 million, after posting a paltry $5.82 million in 2002"
Only 2 years ago, the Internet industry was untouchable for most VCs. Now, it's the most booming industry, and the leading companies in the space are all companies that started in those sticky days of 2002-3.
Now back to 2006. In a preparation for a call with the Gemini CIO Advisory Board, I started to review the # of deals we saw in Enterprise Software, while comparing them to the # of deals in other areas, especially consumer (Internet & Electronics). The ratio is just amazing. Without getting into specific numbers I can say that most of the new deals that we see are consumer related.
So, the question is obvious. Is 2006 in Enterprise software the comparable of 2003 in Consumer Internet? Will the Enterprise bounce back and become an attractive sector for investment. There are 3 main reasons why that won't happen -
- The exit strategy for most enterprise software companies is through acquisition. The big players pay little money, so the overall potential is limited. (Check this interesting analysis on 2005 exits).
- I still can't see the underlying activity at the enterprise level that will drive startups and innovation. Most CIOs are still looking to buy most of their products from SAP, Microsoft, and IBM.
- Difficult to find what will be the next driver for big companies & big returns. Open source is already a big thing going through consolidation (Jboss as a recent example).
However, there are reasons to think otherwise. Recently, I started to hear more and more interest from CIOs in understanding Web 2.0 better. It's still not clear for most of them why they should be interested, but they are asking about this. I think this is an early indication, that Web 2.0 may drive some interesting changes & opportunities at the enterprise level. With this thought - I will be interested to see companies riding this trend.
In summary - Enterprise Software is quite out-of-favor these days. It may turn out that now is the best time to put venture capital $$$ in new enterprise software companies.
Comments