Software VC Outlook for 2008
It's not a particular business model or technology that'll get your company funded in 2008. The key is to solve a valuable business problem.
By Bryan Stolle, Mohr Davidow Ventures
Mar. 17, 2008
Over the last few years, no entrepreneur pitching a VC for funding would use the words "enterprise software" in their company description. Last year, no entrepreneur refrained from using the word "SaaS" to describe their business model.
Investment trends come and go but software has been the leading category of venture funding for many years. Nearly $5.3 billion was invested in 905 companies during 2007.
Right now, software VC activity is hot again. But what's different these days is how VC firms are thinking about "software" investments and what entrepreneurs should focus on during their fundraising.
What's Hot? Solving Business Problems
The way that VC firms think about delivering value to business problems in a company has fundamentally changed. What was traditionally categorized as a software company isn't necessarily how we think about it anymore.
The most important factor in determining whether we will back a company is whether it solves a critical business problem. The problem must be serious, urgent and there must be significant value to the customers in solving it. The solution must be affordable, rational, and really solve the problem. Finally, solving that problem cost-effectively must allow the creation of a large market, or allow the company to take significant share in a large market.
To most VC firms today, there is no preference for how the problem is solved, as long as it makes sense for the market. It could be delivered as a software-as-a-service (SaaS) solution, an appliance, an open source download with premium add-on services, an ad-supported application ("freemium") or as an outsourced business process. There is software-enablement somewhere in the process but it doesn't matter whether the customer is exposed to it or not.
During the last several years, startups regularly pitched their companies saying, "It's going to work because it is based on the SaaS model." Thankfully, we've moved past that in the last year or so as the success of other models has becomes apparent, and entrepreneurs realize it takes more than the latest fad in business models to build a great company.
The majority of entrepreneurs seeking funding today are very conscious about their business model, and why it makes sense for their target market. They are very knowledgeable about their space and their customers, and have been thoughtful about what will work best - whether it's most important to reduce friction in the sales process, accelerate adoption, facilitate growth and expansion ("land and expand," as we say,) or some other benefit.
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Investment trends come and go but software has been the leading category of venture funding for many years. Nearly $5.3 billion was invested in 905 companies during 2007.
Right now, software VC activity is hot again. But what's different these days is how VC firms are thinking about "software" investments and what entrepreneurs should focus on during their fundraising.
What's Hot? Solving Business Problems
The way that VC firms think about delivering value to business problems in a company has fundamentally changed. What was traditionally categorized as a software company isn't necessarily how we think about it anymore.
The most important factor in determining whether we will back a company is whether it solves a critical business problem. The problem must be serious, urgent and there must be significant value to the customers in solving it. The solution must be affordable, rational, and really solve the problem. Finally, solving that problem cost-effectively must allow the creation of a large market, or allow the company to take significant share in a large market.
To most VC firms today, there is no preference for how the problem is solved, as long as it makes sense for the market. It could be delivered as a software-as-a-service (SaaS) solution, an appliance, an open source download with premium add-on services, an ad-supported application ("freemium") or as an outsourced business process. There is software-enablement somewhere in the process but it doesn't matter whether the customer is exposed to it or not.
During the last several years, startups regularly pitched their companies saying, "It's going to work because it is based on the SaaS model." Thankfully, we've moved past that in the last year or so as the success of other models has becomes apparent, and entrepreneurs realize it takes more than the latest fad in business models to build a great company.
The majority of entrepreneurs seeking funding today are very conscious about their business model, and why it makes sense for their target market. They are very knowledgeable about their space and their customers, and have been thoughtful about what will work best - whether it's most important to reduce friction in the sales process, accelerate adoption, facilitate growth and expansion ("land and expand," as we say,) or some other benefit.
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