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The Enterprise Returns

December 21st, 2012

With the publicity that Facebook, Groupon and Zynga’s weak IPOs garnered, a clear shift has become evident in the investment trends of institutional funds.  Venture Capital firms have clearly begun moving their investments away from consumer applications and back into enterprise software, an industry that is currently valued at approximately $3.6 trillion.

For the past 5 years, technology headlines have been dominated by the rise of various consumer applications.  While companies such as Twitter and Facebook garnered much of the national attention, thousands of startups leased office space in Silicon Valley and raised seed funding from various angel investors and funds.

However, the amount invested in consumer applications was down 42% through Q3 of 2012.  Less than half of the 165 consumer applications companies that raised Seed rounds in 2010 have raised subsequent rounds, and overall, only 20% of companies that have gotten Seed funding will successfully raise Series A funding.

In sharp contrast to this downward trend is the amount of money flowing into enterprise startups.  Investment Banker Sanu Desai, known for taking Amazon public in 1997, recently predicted a “trillion dollar transfer of wealth” in the enterprise space from the established players (Oracle, SAP, Microsoft, Cisco) to fast-growing startups such as Box, Actifio and Zendesk.

A number of factors have prompted this shift of capital in the enterprise space.  As mobile becomes the dominant trend in IT and low-cost cloud hosting becomes more accepted, enterprise SaaS solutions have been increasingly adopted in corporations both large and small.  These cloud platforms cost thousands of dollars less than traditional, physical enterprise products and thus are more appealing to small cap companies, while the nimble nature of a startup’s structure allows these companies to respond quickly with novel solutions to their large corporate clients.

Additionally, the very public decline in the stock prices of major consumer application companies has driven investors to the enterprise, as the consumer base of enterprise products is much more stable than that of consumer apps.  Whereas individual consumers start or stop using Zynga’s product daily, businesses generally choose an enterprise product and stick with it for a much longer period of time, generating large quantities of recurring revenues for the SaaS providers.  Thus, investors recognize the stability that even enterprise startups provide as opposed to the fickle nature of the consumer app industry, resulting in VC firms such as Andreessen Horowitz, known for investing in companies such as Twitter, Facebook, and Instagram, leading a $100 million round for GitHub.  As we enter 2013, the consumer app bubble will grow closer to bursting while the enterprise industry will continue to strengthen. 

Posted in Current Events, Talener Blog

Technology IPOs

August 30th, 2012

Following the negative reaction to the IPOs of numerous technology companies, most notably Facebook, Zynga and Groupon, the general public’s attitude towards technology companies has noticeably cooled.  This is most evident in the decisions by CEOs such as Kayak’s Steve Hafner to delay the IPOs of their companies, as few companies wanted to test investor confidence in the tech sector.  However, while the price of Facebook remains down almost 50% from its IPO price of $38, numerous technology companies in the Boston market are positioning themselves for IPOs in the next 12-18 months.

Boston companies such as Cyber-Ark Software and Bit9 are two examples of technology makers that are successfully raising the capital necessary before an IPO.  Cyber-Ark, which provides IT security from internal threats, raised $40 million in a round of financing led by Goldman Sachs in December 2011.  Similarly, Bit9, a maker of security software for large enterprises, raised #34.5 million in a July venture capital round.  According to Bit9 CEO Patrick Morley, “When you raise a round this big, it suggest that you’re going to build something that has enough size and mass to go public.”

The most significant difference between these two companies and those such as Facebook, Zynga and Groupon is the target market for their products.  While the companies struggling to remain profitable post-IPO create consumer-facing products, Cyber-Ark and Bit9 focus on B2B clients.  In fact, the Boston technology market is known for its strong B2B and biotech companies, as opposed to the market in Silicon Valley or Palo Alto, providing a strong explanation for the confidence that investors are showing in Boston’s technology companies.

Similar Boston companies to watch in months ahead include Basho, which produces database technology, Rapid7, creators of software for vulnerability management, and Aveska, which manages user access to internal company information.  All of these companies have either raised significant rounds of funding or have publicly stated their intention of approaching an IPO in the future.  And, keeping with the theme, each of these companies focuses on creating software for businesses, not individual consumers.

Posted in Current Events

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