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| Home - Industry Article - Mar 04 Issue |
IT is Dead? Long Live IT!
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New Investment Themes
Given our view that IT is not dying, but rather morphing into a mature function, we see several fertile themes for investment in this picture. Here are a few ideas to consider:
Products that Transform IT Into a Business
There are some fast-growing software segments that are taking advantage of these trends in a very focused fashion. For instance, the IT Management and Governance (ITMG) market includes a wide range of products that allow companies to set up management processes to select, manage and evaluate IT projects in the same way an investor looks at a portfolio. We invested in this segment when we saw some of the largest companies in the world embrace a process and product to lock down the IT investment, delivery and charge-back functions. These products enable them to track every dollar invested in every project (people, hardware, software, outsourcers, consultants) and thus calculate true cost of ownership for the first time.
As new projects are proposed, the system is used to select them based on fit to objectives as well as resource availability and risk factors. Most global companies have dozens or hundreds of ongoing IT projects. A system like this gives real-time status and forecasting across the entire portfolio. After implementation, the same system is used to score results and charge back business units based on real usage and costs. This space has been dominated by smaller vendors and still has opportunities for startups before large players jump in. Other segments that help IT transform into a business are portfolio analytics, CIO dashboards and project portfolio management.
Timely ASPs or Outsourcers
Many of you will remember the early rush of hype around the first generation of ASPs such as US Internetworking, Corio, et al. Many suggested a quick rush to host everything from accounting to supply chain. Then reality set in and it became clear that some applications fit the model well and others did not. Where there is a high level of security or need for real-time integration to the data center, hosting has failed at large companies. Where the function is separable from the data center an there is not a need for extensive customization by customer, the model works. It seems to now be accepted that a subscription revenue stream is better for vendors than the traditional license model for software. The revenue flow is more predictable and the costs of software development are lower without porting and installing on 20 configurations. Many VC’s are looking today for the recurring subscription revenue that comes from a hosted model.
The trick for an investor is to find a space that is ripe to move to a hosted pricing model and find a company with deep skills and no baggage from a license model. Being too early to a space can be a disaster here. A challenge with hosted models is that you usually have to build the software, assemble a scaleable and redundant system, and rent the hosted data center and then hope the demand will come through and not churn out. We have seen too many “build it and they will come” ASPs that still have $2 million data centers full of machines running at 10% capacity. With this model, the revenues ramp slowly due to the ratable revenue recognition of subscriptions.
We look for problems that can be solved the same way for thousands of companies and technology footprints that can be run loosely coupled with the corporate data center. Two examples we feel are just becoming viable are software distribution and lead management. When Microsoft delivers its next security patch, every company in the US will decide whether to apply it or not. Why do each of them today run their own software distribution servers and train their help desks to push out the same patch to 100,000 machines? Why would they not subscribe to a service that asked them to decide whether to distribute each patch, and then have it pushed out and self-installed on every internet-connected machine with full reporting on success or failure? Good question. We just invested in a company called CABC in Dallas, Texas that is doing this for some of the largest professional services firms in the world. How long will it be until this is the typical model for software distribution?
Lead management is also a very nice horizontal application that makes sense as a hosted service, especially with a distributed sales force and resellers. Sure, you can do some of this with Siebel or an SFA system, but then you get every partner coming though your firewall, needing a password and taking up your bandwidth. You could simply extract new leads from your SFA system (or maybe that is already hosted too?) and push them into a distribution system in the internet cloud. Then every partner or salesperson could work with them without your IT department managing usernames for 10,000 partners or salespeople. Changes, of course, get batched back up to the SFA system hourly or nightly. I have seen several large companies recently shell out $300,000 per year in a multi-year contract for exactly this system. It might be just the beginning. If you are interested in this vision, check out Blue Roads in Foster City, California.
Big Changes Yields Big Returns
We hope that this article gave you some new ideas about how IT will evolve in the next few years. There seems to be no argument that IT is undergoing a huge transformation, and we believe that most transformations yield investment opportunities. Unless technology ceases to be the largest investment area, IT will continue to spend money to manage itself as well as its assets. You can claim they are dead or weak, but I dare you to try selling a large deal without getting their blessing. Better yet, try to walk in their shoes and try to see what you would spend money on. This group may be less powerful than they once were, but they will not be ignored.
Matt Miller comes to WaldenVC from Moai Technologies, a WaldenVC I portfolio company. As CEO of Moai, Matt repositioned the company to focus on corporate customers instead of exchanges and marketplaces. In his two years there, he grew revenues from $1.3 million to over $14 million. In addition, he guided Moai through its recent merger with Medebiz, a Pittsburgh-based developer of contract management software for the health care industry. Matt can be reached for article feedback at: matt@waldenvc.com
Steve Eskenazi has been responsible for building WaldenVC's media technology practice. He joined WaldenVC from Alex. Brown, where he worked for seven years as a Managing Director and founder of Alex. Brown's New Media Group. At Alex. Brown, he was directly involved in financing and sponsoring a wide range of media technology companies. In addition to leading America Online's IPO, Alex. Brown handled the public offerings and private placements of BBN, Broderbund Software, CBT Systems, Creative Technology, Electronic Arts, GartnerGroup, Gemstar International, InfoSeek, Lycos, Macromedia, and Sylvan Learning Systems, among others. Steve can be reached for article feedback at: steve@waldenvc.com
 
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