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.