As technology markets reach the end of their adolescence and enter maturity, the dimensions of competition change. To continue growing, it is no longer enough to offer high end horizontal products. Companies need to simplify their products and lower their cost to make them more appealing to late adopters and they need to tailor their products to the specific needs of smaller and smaller customer segments to differentiate them from competitors' offerings.

Using this framework as a prism through which to view the market for business software, the current wave of SaaS, Open Source and vertical market investments can be seen as the tail end of the client-server/Internet automation boom that started in early 1990s.

The 1990s represented the adolescence of the client-server/Internet automation market. During that era, business software start ups were likely to offer horizontal products that relied on extensive professional services to build applications on top of them or customize them to the needs of a client or an industry. Siebel, PeopleSoft, Documentum and Business Objects are all good examples.

As the business software market reached maturity (by my reckoning, that occurred in 1999 with founding of Salesforce.com), start ups needed to adapt to the new dimensions of competition, simplification and specialization, in order to succeed. That perfectly describes the wave of investment in SaaS, Open Source, appliance, and niche market companies that is now starting its ninth year (1999-2007).

Categories do not remain hot investment areas forever and the simplification/specialization boom is getting long in the tooth. Since it isn't obvious that there will be a third act in the client-server/Internet automation boom (where is there to go after the mature phase - old age?), business software is in need of a technological shift of that magnitude to breathe new life into it (Don't ask me what that will be or when. If you have any ideas, I'd love to hear from you).

In the meantime, the business software space will continue to support new companies, albeit at lower levels, through:

1. A steady stream of important, but less wide reaching innovations such as IP video and mobile.
2. Emerging business problems such as regulatory changes that drive the need for new niche applications.

In our Q3 2006 Follow the Money report on IT venture investment trends, we identified that 41% of the business software companies receiving funding fell into the innovations category, while 59% fell into the simplification/specialization category. If you assume that the simplification/specialization category declines by half, that means that overall business software investments will decline by 30%. Despite that decline, don't worry about the health of the venture capital market, the rise in consumer investment (as shown by our Follow the Money reports) and Green Tech will make up the difference

For a full breakdown of business software investments, visit our blog.

Company Type	Number of Q3 Investments	% of Q3 Investments
New Technology Innovation	56	41%
Simplification/Specialization	81	59%
Total	137	100%

Jonathan Klein is founder and general partner of Topline Strategy Group , a strategic consultancy for emerging technology businesses.