After years of backing headline-grabbing consumer internet deals, it seems that venture capitalists are paying more attention (and more money) to the seemingly staid and stodgy enterprise technology companies (the businesses that sell technology to make businesses work better).
Their mission: to explore new ways of organizing data, to seek out new models for efficiency and security for business customers of all shapes and sizes, and to develop new technologies for marketing and selling on devices that no one has done before.
Investments into enterprise software companies of all stripes are soaring. The amount of capital invested in these startups has already surged to over $5.4 billion in the first half of 2014. That’s roughly the same amount that enterprise-facing companies raised in the entire year for 2013, according to data from CrunchBase.
Much of that capital was invested in the monster financing for new database technology, Cloudera, but it points to a belief among investors that there’s a huge change coming in the way that technology effects business. And these venture capitalists are hoping to cash in.
The surge in investment dollars is actually accompanied by a slowdown in commitments to new technology companies, indicating that investors’ confidence in the sector’s strength is matched by a belief that this current crop of business technology companies is maturing. In the second quarter of 2013, investors backed 328 startups in the enterprise software category, by the second quarter of 2014 that number had declined to 205.
While the numbers indicate a slowdown in the commitments going to business-focused technologies, some investors insist this is only the beginning. The idea of selling software as a hosted online service has been around for nearly a decade, beginning with the Salesforce.com customer relationship management revolution, but the technologies that are moving to the cloud were never part of core business operations, they argue. Now, these hosted software businesses are everywhere, and taking over core functions that used to be the purview of internal information technology departments.
Data storage is now a service, and even enterprise resource planning software can be bought as a service (and if there’s anything more important to a business than where it keeps its information and how it manages and organizes the use of its resources I’m not sure what it would be). Furthermore, new companies are taking advantage of the extremely powerful new infrastructure technologies that are available to rethink how customer service and other business processes can be automated to a degree that wasn’t possible before.
That’s why Salesforce.com is snapping up young cloud computing companies as if it were Oracle a decade ago, Microsoft has its head in the cloud, and why IBM and Apple have partnered to deliver software to mobile business users.
One need only look at the fact that Salesforce and Red Hat now trade above Oracle to see how momentum has shifted away from the traditional software vendors (although at 179.67 billion Oracle’s market capitalization is still over five times that of Salesforce.com’s $33.7 billion market cap). Not to mention the big bets that venture capitalists, corporate investors, and hedge funds and money managers are placing on technology like Hadoop and NoSQL.
“This is that next future data platform that in 30 years from now the vast majority that structured and semi-structured data would be stored in,” said Joseph Ansanelli, a partner at Cloudera backer Greylock Partners, in an April interview. “Oracle? Their core database is basically under attack from Hadoop.”
If Hadoop and NoSQL are eating at the core of the infrastructure businesses use to operate, then a slew of software as a service offerings, and technology solutions are attacking big enterprise companies on their periphery with services that better apply the new architecture of hardware, software, and cloud-sourced services with open interfaces for application integration.
“One of the themes we’ve invested heavily behind is this intersection between big data and traditional enterprise application software,” says Ajay Agarwal of Bain Capital Ventures. Indeed, Bain’s newest partner, Enrique Salem, the former chief executive of Symantec, sees business technologies on the cusp of a still-greater transformation.
“Historically some of these cycles have been a five-to-ten year change, but we are just at the beginning of this transformation,” says Salem. “Historically, $120 billion was spent on hardware implemented inside data centers. Now consumers will start running and picking their own applications and that $120 billion spend that was inside the four walls of the data center? A majority of the spend will not be in the data center, but in companies that are delivering services.”
Photo via Flickr user Scott Maxwell