Cashing in on software

After years of playing second fiddle to dot-com and telecom investments, enterprise software is taking centre stage among venture capitalists. The change is good news for network executives, who could see many new and innovative applications and infrastructure capabilities hit the market in 18 to 24 months as the latest investments start to mature.

A recent survey details the venture community’s renewed interest in software start-ups. In the fourth quarter of 2001, venture capitalists invested US$1.6 billion in 211 software companies, according to the MoneyTree Venture Capital Survey compiled by PricewaterhouseCoopers, the National Venture Capital Association and Venture Economics. That’s up 60 per cent from the US$1 billion invested in 149 software companies in the previous quarter.

Overall, venture capital investments in network start-ups remained flat at around US$4 billion in the third and fourth quarters of 2001. But software is garnering a larger share of the pie, accounting for 40 per cent of the total investment in the fourth quarter, up from 25 per cent in the third quarter.

The types of software start-ups getting funding include storage, security, collaboration, customer relationship management and supply-chain management – all designed to take advantage of the Internet infrastructure.

“We’re seeing a return to enterprise software development,” says Tracy Lefteroff, global managing partner for the venture capital practice at PricewaterhouseCoopers. “Clearly, this was an area that was underinvested during the Internet build-up.”

Software joined biotech as the area of investment that grew the most in the fourth quarter of last year, while sharp declines were seen in electronic retailing and distribution.

“We’ve seen a change in the IT sector moving away from Internet content and retailing, but telecom and software are about the same as where they were before the bubble,” says Jesse Reyes, vice-president at Venture Economics. “We’re moving back to networking, peripherals and the software tools that were used to create the Internet.”

“We still see companies that are focused on network applications and software….We’re putting a lot of money to work in those areas,” agrees Jeffrey Harris, managing director at Warburg Pincus.

Among the 10 largest deals of the quarter, four were for software companies: