Venture Outlook Bullish on Cloud, Enterprise Startups

Posted: November 22, 2011 in CRM, Economics
Tags: , , ,

I was hoping to save this idea for either a year-end story or something focusing on the new year but events seem to have a mind of their own.  The story, whenever it would be issued, would go something like this: Enterprises are picking up more cloud computing solutions and as they do there is a willing audience of customers happy to jettison the legacy systems that have increasingly hamstrung them.

In the last few weeks we’ve seen an increasing number of articles and reports, and I have written about them, that indicate building or built up frustration with enterprise software, especially the legacy on-premise variety.  We all know the drill, legacy software is expensive to buy and costly to maintain.  It cramps your style and it requires legions of people to manage.  And try as we might to remember that business today leverages information to make a buck, information management is for most companies an external thing.  It’s not core to doing the business of making widgets.

But all those observations by pundits don’t add up to much.  What we need is proof before decision-makers plunk down scarce cash.  We got a bit of that this morning in an article in the Wall Street Journal about venture capital investments.

According to the piece by Ben Worthen, VC’s are investing heavily in the enterprise cloud application sector and it cites recent investment news from companies like Workday, Zuora and Marketo.  The latest investments in Workday give that company a $2 billion market capitalization according to the article.  Perhaps it’s time to think of an IPO?

But Workday is far from alone.  Zuora just raised $36 million in its series D round placing its valuation at $300 million up 100% from a year ago.  Marketo recently raised $50 million but I don’t know what that does to the company’s valuation though I could guess.

Want more proof?  The article goes on to say “In the third quarter, venture capitalists put a total of about $1.2 billion into start-ups that sell business software online, sometimes known as ‘cloud’ companies, nearly double the $758 million they invested in the year-earlier period and 50% more than in any other recent quarter, according to VentureSource.”

While all this capital is certainly nice for the startups mentioned it also bolsters the trend I alluded to above.  These enterprise cloud companies are the tip of a spear aimed at the heart of legacy enterprise software.  These guys are lean and focused and they have solutions that are better fits and have greater relevancy to today’s world than some of the legacy products that may have been designed during the Reagan administration.

I think that’s the story.  The preponderance of evidence strongly suggests that after many years of dissatisfaction about the state of legacy software, many companies are about to discover, if they have not already, that they have a new array of options.

Interestingly, this sea change in the making is not happening in CRM to the same degree and that’s all thanks to cloud computing.  The front office had its change over the last decade when it changed out legacy CRM for the cloud variety.  Given the flexibility of cloud computing and the more iterative way improvements and updates are distributed it will be interesting to see if the front office will ever have a similar change again.  The front office may be entering the same condition.  So let’s speculate in a later piece about what that might mean to the software industry, OK?

Finally, this kind of activity is a net good for the economy.  As companies reduce their overhead for IT and spend money on new systems they become more competitive and in many cases require less credit for purchases because cloud computing is a pay as you go affair.  Legacy software isn’t going away soon but its advance may have stopped especially if the VC’s intuition is right.

So, what did you think?

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