With the global liquidity picture improving, more early stage companies are being funded by VCs and Angel Investors. There’ve been more IPOs and some big corporate acquisitions, which provide the needed “exit” for those investors. Some big M&A deals included: McAfee (Intel), Sybase (SAP) and 3PAR (HP). There were more IPOs this year too. IPO’s like MakeMyTrip and Qlik Technologies were succesful. Finally, there were a raft of new startup acquisitions and several large VC financing rounds for still private companies.
Another dynamic at work clearly favors start up companies. It’s that the largest companies are doing very little R & D For example, look at how much HP has cut back on the percentage of revenues devoted to R & D. And the disappearance of Bell Labs and other notable research institutions. This trend has accelerated recently, as the bad economy has led to further cuts in large company (and U.S. government) R & D spending. But start ups are all about doing new things in new ways. They are all about R & D in very selected areas. Hence, they become more attractive acquisition targets when larger companies are not innovating. In effect, innovation is being “outsourced” by large companies to start ups, which are often acquired (i.e. Cisco is famous for succeeding with this corporate strategy). More nimble, less bureacratic companies are seen as being more innovative and quicker to get their ideas to market then medium or large size companies.
On November 30th, TiE Silicon Valley (SV) Software Special Interest Group (SIG) convened a distinguished set of panelists to address growing software markets, technologies, applications, and investment outlook for start up companies in this space. The panel was to adress hot software segments and issues like:
- What areas of software are ripe for investing in 2011?
- Is the recession really over for software companies?
- Which parts of IT budgets will grow? Which are likely to get cut?
- What does it take to get funded now?
- Will exit windows stay open in 2011?
- How should startups navigate the current climate?
- Technology investments in the US vs. China and India (local control vs better value for investment capital, respectively)
The TiE-SV panel session participants were as follows:
Vispi Daver, Partner, Sierra Ventures
- Byron Deeter, Partner, BVP
- Mark Jacobsen, Managing Director, O’Reilly AlphaTech Ventures
- Mitchell Kertzman, Managing Director, Hummer Winblad Venture Partners
- Ping Li, Accel Partners
The hot software market segments identified were the following:
- Business Intelligence- especially real time analytics which help companies make real time business decisions
- Big Data- large scale data storage management. At a time when it’s possible to store more data then ever before- what should be retained and where?
- Cloud Computing- especially Software as a Service (AKA Application as a Service)
- Mobile HTML5 (the next revision of HTML- the standard for structuring and presenting content on the Web) and its effect on how mobile apps will be written in the future
As this global ComSoc Community web site focuses on communications technologies, we will restrict our coverage to the latter two software segments- Cloud Computing and Mobile HTML5.
The panelists saw huge opportunities in this space. One stated that even Cloud Computing niches could be big markets as all heavy duty computing moves from mainframes and servers in data centers to distributed computing in the cloud (i.e. the Internet). Here are some selected comments from the panelists:
- Application as a Service will be a massive enabler of new services. It’s more attractive for start ups than Infrastructure as a Service or Platform as a Service (the other two layers of the Cloud Computing architecture).
- The middle layer of management and services is intriquing.
- Large companies are going through a consolidation phase as they plan to use cloud services.
- “Pure play “cloud service providers and software companies can take cloud leadership from larger companies that have more diverse agendas and strategies.
- Cloud computing redefines software layers, with virtualization and security of utmost importance.
- Amazon is a role model as a Cloud service provider [Amazon’s Elastic Compute Cloud (EC2) is a web service that provides resizable compute capacity in the cloud. It is designed to make web-scale computing easier for developers.]
- “Virtualized desktop” could be another Cloud Computing service (no details provided).
- How to contol and maintain mobility of IT resources will be a challenge.
- Both mobile and fixed line access to the cloud will be provided, offering different capabilities and apps.
Background: The HTML5 specification was adopted as the starting point of the work of the new HTML working group of the World Wide Web Consortium (W3C) in 2007. This working group published the First Public Working Draft of the specification on January 22, 2008. The specification is an ongoing work, and is expected to remain so for many years, although parts of HTML5 are going to be finished and implemented in browsers before the whole specification reaches final Recommendation status late in 2010 or early 2011.
This new standard incorporates features like video playback and drag-and-drop that have been previously dependent on third-party browser plug-ins such as Adobe Flash and Microsoft Silverlight.
Mitchell Kertzman stated that HTML5 might be a replacement for both Adobe’s Flash and Oracle’s Java. “HTML5 has the potential to deliver a much richer user experience. More engaging HTML5 based apps will be offered to mobile users.” Continuing, Mr. Kertzman said, “Programmers and (mobile app) developers will take advantage of bandwidth and generate apps that enable you to do more than you can do today.”
While the consumer software space was described as a “wild west,” it seems that HTML5 (along with the Android platform) might concentrate efforts and initiatives such that software produced will run on more devices and hence have wider applicability.
We knew that VCs make initial investments of $500K – to $10M per start up company selected after passing their due diligence screens. What we were surprised to hear is that two of the VC panelists stated their company only made about four to six new investments per year. That’s after receiving over 1,000 business plans from start ups during the same period of time.
So very few new start ups are evidently being funded by VCs these days. That’s why the Angel Investor financing model is getting a lot of traction. Please refer to: Highlights of Nov 15th TiE Angels meeting http://viodi.com/2010/11/23/tie-2/
Prashant Shah, organizer of this panel session, believes the small number of start-ups funded may not be due to the sluggish economy, as many believe. Mr. Shah made the following comment clarifying the funding environment for start-ups:
“One thought that jumps out is on your statement of how few startups are getting funded. True that it’s tough to get funding nowadays, but in reality, it has never actually been easy (with the possible exception of the dot com days). It’s always been a challenge. So the 4 to 6 fundings a year would not necessarily be a significantly larger number if the economy was better. In fact, I would argue that in a better economy the percentage of fundings would be about the same because the number of business plans would go up as well. (There is a question of how fast venture firms could scale up in better times, but that’s a discussion for another day)
My point is that sometime entrepreneurs forget when they seek VC money, they are competing for funding dollars against other startups who may be in a completely different market but represent better investment opportunities. That’s they key to getting VC money – regardless of whether they are funding 4 deals a year or 40, entrepreneurs have to demonstrate their business will generate higher ROI than anything else in the deal pipeline.”
TiECon 2010 and 2009 Conference Summary Reports:
a href=”http://viodi.com/2009/06/14/tiecon2009/” rel=”nofollow”>http://viodi.com/2009/06/14/tiecon2009/