I encountered today an interesting post called Enterprise Software - 2006 by Daniel Cohen from Gemini Israel Funds, a prominent Israeli VC. Daniel presents the current lack of appetite VCs show for enterprise software investment opportunities vs. web 2.0 opportunities. I fully agree with the observations being made on the current mood but I am not agreeable with how they are rationalized and why they are rationalized.
Daniel says:
" 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)."
I'll address it in a bullet by bullet manner:
1) Exit strategy - Venture capitalists invest in the future and if we go two to four years back to 2000/1 then the same rationale for not investing could have been applied to new web 2.0 companies with no problem. Three years ago web 2.0 companies were just a strange internet (god forbid) startups trying to raise their heads among internet giants such as Amazon and Google (and they still do). The opportunity in the enterprise software market I think is only a matter of sightseeing and vision. A company that receives seed investment today in 2006 is expected to exit within three to five years the earliest, which means 2009-2012, which means no way to predict what "mood" will be.
2) Same response as in bullet number one though if we consider the nature of the innovative lifecycle in web 2.0 companies then we see that the innovation comes from the developers and not from the users. Maybe if we can apply a similar innovative cultures in enterprise software startups it will eventually lead to a new and unexpected productivity tools. Having said that I am fully aware that enterprise customers are tough and unforgiving and innovation in the enterprise software world does not depend only on the vendor wishes.
3) As I see it, open source is just at the beginning. Today open source is still accumulating good faith both from developers, consumers and enterprises. When and if todays' open source products/tools will reach critical market share point (in comparison to the market share of other competing giants such as Microsoft OS, IBM and others) a new massive wave of innovation will spree based on the newly accumulated market validation. Both investors and entrepreneurs will join the open source wagon as a viable opportunity. Most of the software we use today is still being paid for in full, a sign that also relates to the level of evolvement for open source. It can be the maturity of open source only in one case - open source is meant to be a small thing and not a big change (which I fully disagree on). Maturity of open source will be visible also in dramatic changes in the licensing concepts used today as well as in spending habits of CIOs.
I personally lead a web 2.0 innovation so I kind of need not worry about the moods described for enterprise software investments, or maybe even be happy:). Still I personally do not like the repetitive reflex VCs show again and again by following only what is very hot and creating rationales on why the investments in last week vogue is not reasonable anymore. Technology related industries are evolving always while always there is a portion that gets the focus and highlights. Still it is not a good reason as a long term investment strategy to track the lights always. Sometimes having a longtime specialty, deep domain expertise and longer term plans can be a bless and not a curse.
Dudu
P.S. I've encountered many similar state of minds from other VCs except for Daniel both in the US and in Israel.
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