Janice Roberts: To buy or not to buy: The CIO’s dilemma

With IT budgets for 2003 expected to remain flat, and with traditional early technology adopters such as financial services companies short of resources to spend, the environment is harsh for start-up companies with new products to sell.

Most CIOs say they plan to avoid large, long-term projects, except deployments such as enterprise research planning and CRM already in the works. They will spend their scarce budget dollars on ways to get a very quick return on smaller technology investments. A few long-term infrastructure items, including security and storage technologies, also should find their way into IT budgets.

From a venture perspective, however, there are new and emerging companies that should do well even in these tough times. For the most part, the companies that will succeed will be those that demonstrate to network managers early ROI dollars.

Bandwidth cost always is increasing. Peribit Networks Inc., a Mayfield investment, makes technology that identifies and eliminates repetitive data that litters network traffic, resulting in WAN capacity gains. The technology, known as Molecular Sequence Reduction, lets companies increase available bandwidth and prioritize it without having to purchase new bandwidth – a major plus for companies rolling out large, bandwidth-intensive applications such as voice over IP (VoIP) and ERP.

VoIP systems also promise to reduce a company’s recurring telecommunications costs with a relatively low upfront investment. Sylantro Systems Corp., another Mayfield investment, provides a suite of hosted PBX and IP Centrex managed telephony services via the company’s applications switch platform for next-generation networks. Sylantro partners with service providers that use the company’s applications switch to offer VoIP and other telephony services.

Even with tight IT budgets, storage expenditures will increase. At the same time, the cost of managing data is far outstripping hardware storage cost. Mayfield has invested in 3PAR, whose utility storage systems reduce capital and operating expenses and let companies capitalize on enterprise-level storage investments. By simplifying the storage infrastructure, 3PAR reduces cost of ownership.

Finally, the demand for Internet security will accelerate over the next few years. Companies continue to move mission-critical applications to the Internet and open their networks to suppliers, customers and partners. In doing so, they expose themselves to security risks that were not present when traffic was largely internal. Security is a complex puzzle with missing pieces that start-ups could provide.

But both start-ups and established players need to remember that innovative technology alone will not entice IT buyers. Only products that provide a tangible ROI will see a share of those scarce budget dollars.

Roberts is a general partner with Mayfield, a venture capital firm in Menlo Park, Calif. She can be reached at jroberts@mayfield.com.