New Ideas from Software Investors
Experienced VCs and private equity partners share their perspective on what’s “hot†with everything from ASPs to SOAs.
By Maryann Jones Thompson, Sand Hill Group
Aug. 12, 2005
Given the dramatic changes going on in the software business today, it is no wonder that software investment is also rapidly evolving. Although venture capital investment is down from its peak, software continues to account for more funding than any other sector. At the same time, leverage buyouts, spinouts and strategic investments from corporate partners are on the rise.
At the Enterprise 2005 conference earlier this month, a panel of veteran investors discussed the very latest thinking on software funding trends.
* Aneel Bhusri, Greylock Partners, focused on traditional enterprise software VC
* David Golob, Francisco Partners, focused on buyouts
* David Helfrich, Garnett & Helfrich, focused on venture buyouts and spinouts
Panel moderator, Peter Sobiloff of Insight Venture Partners, raised all the right questions in areas of finance, technology and business models. As the discussion moved from one trend to the next, the panelists expressed a variety of viewpoints which underscored the complexity of today's software market.
Software as a Service: Company valuations are higher - why?
Golob: "The revenue multiples are higher for subscription companies because that metric typically rewards growth. Subscription companies are typically faster growing which has resulted in higher valuations."
Helfrich: "It seems to be less about the business model and more about wanting to solve the business problem. The fact is that the license model is seen in a negative light. We need to get it into balance."
Bhusri: "In the companies we've been investing in right now, it is more about on-demand vs. on-premise. The reality is that all vendors offer lease arrangements. There is simply an accounting arbitrage that will go away. The savvy analysts are focused on bookings right now - whatever kind of bookings they may be. What's dead? The "elephant hunting" enterprise license deals where you sell $30 million in software to a big company that you sell for $500,000 to a small company. Those days are gone. Those are the licenses that are dead."
Best-of-Breed ASPs: Can incumbents be deposed?
Helfrich: "At the high end, enterprises have so much invested that we see an aversion to change: The bigger and more complex the problem, the more the hassle of a changeout. It is likely that we'll see migration in the [best-of-breed ASP] direction but we don't see a 'gangswitch' taking place."
Bhusri: "At the core of all enterprises, there is ERP which has been around and is broken. But it is hard to take out piecemeal. You need to swing for the fences. Take SAP's Project Vienna - it's a big job for SAP and a big opportunity for others."
Golob: "We think that this might happen but it must happen in areas of very high value. The product must have tangible, rapid payback."
Helfrich: "One important thing to remember is that you can't assume that incumbents will remain in place and not change. They also have an aversion to change but their revenue and earnings are being impacted."
At the Enterprise 2005 conference earlier this month, a panel of veteran investors discussed the very latest thinking on software funding trends.
* Aneel Bhusri, Greylock Partners, focused on traditional enterprise software VC
* David Golob, Francisco Partners, focused on buyouts
* David Helfrich, Garnett & Helfrich, focused on venture buyouts and spinouts
Panel moderator, Peter Sobiloff of Insight Venture Partners, raised all the right questions in areas of finance, technology and business models. As the discussion moved from one trend to the next, the panelists expressed a variety of viewpoints which underscored the complexity of today's software market.
Software as a Service: Company valuations are higher - why?
Golob: "The revenue multiples are higher for subscription companies because that metric typically rewards growth. Subscription companies are typically faster growing which has resulted in higher valuations."
Helfrich: "It seems to be less about the business model and more about wanting to solve the business problem. The fact is that the license model is seen in a negative light. We need to get it into balance."
Bhusri: "In the companies we've been investing in right now, it is more about on-demand vs. on-premise. The reality is that all vendors offer lease arrangements. There is simply an accounting arbitrage that will go away. The savvy analysts are focused on bookings right now - whatever kind of bookings they may be. What's dead? The "elephant hunting" enterprise license deals where you sell $30 million in software to a big company that you sell for $500,000 to a small company. Those days are gone. Those are the licenses that are dead."
Best-of-Breed ASPs: Can incumbents be deposed?
Helfrich: "At the high end, enterprises have so much invested that we see an aversion to change: The bigger and more complex the problem, the more the hassle of a changeout. It is likely that we'll see migration in the [best-of-breed ASP] direction but we don't see a 'gangswitch' taking place."
Bhusri: "At the core of all enterprises, there is ERP which has been around and is broken. But it is hard to take out piecemeal. You need to swing for the fences. Take SAP's Project Vienna - it's a big job for SAP and a big opportunity for others."
Golob: "We think that this might happen but it must happen in areas of very high value. The product must have tangible, rapid payback."
Helfrich: "One important thing to remember is that you can't assume that incumbents will remain in place and not change. They also have an aversion to change but their revenue and earnings are being impacted."
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