Software VC Outlook: A Flight to Quality

An analysis of the latest statistics finds new economics, new technologies and newfound restraint will drive software venture investing in 2006.

By Matt Miller, Walden VC

Ask any venture capitalist to rank their favorite investment sectors and youíd be pressed to find any lists with ìenterprise softwareî at the top.

The mood among VCs remains hesitant about enterprise software startups. Competing against todayís megavendors is tough. The last investment ìbubbleî funded plenty of strong small and mid-sized vendors who are still waiting to be acquired with many stagnating. Perpetual license models are a slowly dying business model, but the much-hyped Software as a Service (SaaS) model is still more conjecture than reality in the core software sectors.

Yet software companies received $4.7 billion in venture capital investment during 2006. Thatís more than biotech, alternative energy, or any other sector.

Sure, you hear about some software VCs moving on to clean energy, digital media or consumer plays. But most remain committed to software. Why? Because even in todayís rapidly evolving industry, software startups offer backers high margins and high growth rates ñ a combination that few VCs can ignore.Ý Moreover, the sector has become more capital-efficient in the last 10 years.Ý (More on that to follow.)

Of course, certain software sectors are more promising than others. An in-depth look at the latest statistics on financing trends shows software venture capital is on solid ground with several ìhotî sectors, lots of interesting startups and a stable of active investors.

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What Are Your Customers Thinking?

How much do your customers like your product? Would they buy from you again? ÝMost software vendors are not conducting customer satisfaction research on a regular basis and may be making decisions on the wrong assumptions. Nilofer Merchant of Rubicon Consulting shares insight on how new technologies have revolutionized the market research process and what you can do to better track your customerís needs in this weekís post to the SandHill.com Blog on New Era, New Thinking.

Let Your Positioning Make Its Mark

How long should you maintain your positioning strategy? At least 18 months to make an inpact, according to Lawson Abinanti of Messages that Matter ñ but that doesnít mean you need to regurgitate the same messaging again and again. In this weekís post to the Sales & Marketing topic of the SandHill.com Blog, Abinanti extols the virtues of repetition and shares ideas for maximizing your positioning message.

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