What VCs Are Investing In

Virtualization and data-management companies still show potential.

Financial conditions for technology startups have been cool, to say the least, since the economic crisis began. But now, buoyed by two recent public offerings, venture capitalists are showing a renewed interest in fledgling technology firms.

Credit: Technology Review

The fourth quarter of 2007 saw 17 venture-backed technology companies go public, one of the biggest spikes in stock offerings in a single quarter since the height of the dot-com boom in mid-2000. In contrast, the last quarter of 2008 and the first of 2009 saw no venture-backed public offerings in any industry, according to the National Venture Capital Association. Mergers and acquisitions have also slowed, and the number of venture funds raising money at the beginning of the year was smaller than at any time since 2003.

Two recent public stock offerings have, however, lifted the industry's spirits. SolarWinds, a network-management software company based in Austin, TX, went public Wednesday of last week. Online restaurant reservation company OpenTable, based in San Francisco, went public the following day.

Venture capitalists attending Venture Summit East last week in Boston saw these developments as a positive sign for the industry as a whole, and they were optimistic about the potential for other startups.

"SolarWinds is evidence that software-as-a-service works," says Sunil Dhaliwal, a general partner at Battery Ventures. Instead of selling physical software, the company's products are distributed and maintained via the Internet. Some observers have questioned whether this approach to selling software is economically viable, especially when faced with competition from more established companies. The answer, Dhaliwal says, is "yes across the board."

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Enthusiasm for Web startups has, however, clearly changed since the height of the Web 2.0 boom. This is due partly to tighter economic constraints, but also to plummeting costs of starting Web businesses as cloud-computing infrastructure has spread. Since less capital is required to start a company, there is less need to turn to outside investors.

"I think most [Web] startup companies should not take venture-capital money," said Jeff Fagnan, a partner at Atlas Venture, during a panel discussion. He cited, in particular, companies building lightweight Web applications or software for portable devices like the iPhone. In some cases, Fagnan said, venture capital may damage a startup by creating conditions that push the company to aim too high from the outset.