Software Pulse

Software VC Outlook: A Flight to Quality

March 13, 2006

Matt Miller

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.


Just Three Weeks Until Software 2006:
Get Your Personal Video Briefing!

Visit to play a video invitation by Sand Hill Group's M.R. Rangaswami which presents the highlights of the conference. Be a part of it! More than 2,500 senior software executives and professionals will be there on April 4 and 5 in Santa Clara. Calif. to discuss the key issues which will shape the next era of software business. In addition to insightful keynotes, Software 2006 will host dozens of tactical breakout sessions on critical issues such as open source and software-as-a-service. Click here to see the full list of breakout sessions and click here to register for this one-of-a-kind event!

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 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 Blog, Abinanti extols the virtues of repetition and shares ideas for maximizing your positioning message.

The Blog is ready for your perspectives. We publish insightful strategy and opinion pieces by a variety of software executives, analysts and professionals. If you would like to contribute a post, email

Join Our Offshoring Webinar and Get a Free Report

Software CEOs and VPs are invited to join the Sand Hill Group and Persistent Systems for a webinar on offshoring best practices on Wed., March 22 at 11 a.m. Pacific. Participants will receive a free copy of the new study, "Software's Offshoring Leaders." Sand Hill Group's M.R. Rangaswami will discuss highlights from the new study on software vendor offshoring trends, and will be joined by product development experts to discuss the latest strategies, challenges and best practices. Click here to register now.

Donít Miss This Interview with P&Gís CEO

Transforming a large organization is a delicate task. Alan G. Lafley discusses how to stretch a company's aspirations without overpromising in this interview with The McKinsey Quarterly on change management best practices.

Poll: Outsourcing on the Rise?

A new study finds 89 percent of firms intend to increase their outsourcing activity in the coming year What are your companyís outsourcing plans?
Take our Pulse Poll >>

Last week, readers gave their opinions as to when the U.S. IPO market would come back ñ if ever.
Give us your opinion and see the results >>

More at

IBM eyes 50,000-plus Indian employees.
Read the most important enterprise software industry news of the week >>

Coremetrics lands $31 million.
Monitor the latest software venture capital deals >>

Microsoft buys Apptimum.
Size up last week's software M&A deals >>

Art Matin named CEO of Softricity.
See who's made it to the top in our list of recent software executive appointments >>

Send us your feedback on this newsletter and the site.

Parting Thought

"Not in his goals but in his transitions is man great."
-- Ralph Waldo Emerson

Courtesy of Malcolm Kusher, The Kushner Group