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VCs’ View of Software Development Today

Some notes from a great SDForum event this week with Valley VC’s.  Thanks to the panelists from Norwest Venture Partners, Altos Ventures, Hummer Winblad, PricewaterhouseCoopers, Granite Ventures, and Pillsbury Winthrop.

Venture Community investments snapshot Q3 2009:

Biotech                                 18.82%
Industrial/Energy                    17.97%
Software                              12.94%
Medical Devices                    12.80%
Media/Entertainment                9.28%

Q3 2009 had the lowest VC investment in software since 1996 (though 2007 saw software investment peaks).  VC’s think this is just a natural investment correction phase.  They already see the economy slowing turning around.

Trends and tips and hazards:

  • A revolutionary shift is underway where routers, data centers, and servers are invisible and developers can roll out of bed and create or upgrade their software!
  • We will see more pay-as-you-play; elasticity leading to scalability; infrastructure-as-a-service; platform-as-a-service.
  • Amazing analytics refinements will be made possible by cloud computing which can pre-compute undiscovered correlations for business focus now that a huge set of servers is temporarily available to spin up for the exhaustive data mining task.
  • Small companies are the innovators and should still “ride the wave” regardless of the economy.
  • The negative economic impact is on later stage businesses right now:  Exits are depressed as there is a growing consolidation of industries, fewer companies left to make acquisitions, and capital markets are down.  Your exit may take longer and hence be diluted.
  • Most revenue from enterprise software comes from maintenance contracts.  Make sure you are creating software and not “shelf-ware”!
  • Is your revenue model predictable?  (ex:  term licenses)
  • Today, software entrepreneurs should focus on solving cost-avoidance pain points with long-term solutions.
  • Make your product “sticky” to eliminate churn, and create on-demand features to increase revenue options.
  • Avoid making a presentation to a VC using the term “cloud”!!!  Emphasize the value proposition (reduction of cost of development, deployment, etc.), and the customer pain point being addressed.
  • The role of IT is changing from managing hardware to managing services.  Your in-house IT team will more frequently write code to customize desired services to the company’s environment.
  • On green software:  the opportunities (ex:  tracking carbon in/outputs) depends heavily on taxation and regulation.

Are you disruptive?  😉  Altos Ventures seeks out disruptive companies.  If your company is defining a new category of service, defines a new business model, and does not fit in the conventional ecosystem, the big companies may not know what to do with you, but Altos is interested!

-Valerie Fahs-Thatcher


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