Year! After a longer than normal holiday break, I’m taking this
opportunity to reflect on 2012 and provide my early thoughts regarding investment
activities in 2013.
During 2012 50
companies went public, the most of any year since 2007, but only 8
venture-backed companies during 4Q12, the lowest number in any quarter since
2009. The $11.2B raised through these
IPOs was the most since 2000, though most of it came through Facebook’s IPO. M&A proved a little more disappointing
than in 2011 with 433
deals valued at $40.3B completed, compared to 548 deals valued at $49.8B that
were completed during 2011. Because of
the uncertainty surrounding the US economy, due to the “fiscal cliff” and the
associated tax issues, corporations appeared to be holding back on
acquisitions, especially during 2H12, despite their healthy balance sheets. I don’t see the liquidity environment
changing materially during 2013.
Late last year I wrote
about the overall VC
investments during 2012, and the financing terms (including valuations)
that private companies with certain characteristics were able to negotiate
putting entrepreneurs and management teams in the driver’s seat. However, by the end of the year it also
started becoming apparent
that during 2013 seed-stage startups will face a financing crisis and most
won’t be able to raise new capital. Over
the past 3-4 years angel investors (casual and experienced) funded too many
companies that have weak teams, undifferentiated
IP and debatable business models.
Therefore, in my opinion, the expected “pruning” of early stage startups
will be welcome.
Many venture and
private equity firms will attempt to raise new funds during 2013. The LPs
remain skeptical of the ability of venture and private equity to provide
them with yield. Because many investment firms will be in fundraising and even
more firms have reached the end
of their funds with no hope of raising new pools of capital, I expect that
during 2013 we will see an investment slowdown with fewer new financings
overall compared to what we saw in 2012.
Investors will focus their investments on existing portfolio companies.
portfolio consists of enterprise applications, including social and mobile
enterprise applications, and adtech platforms.
In most of these solutions big data management and analytics play a
central role. During 2012 we saw the
emergence of a few important trends, which I expect will continue in 2013.
Accelerating adoption of cloud in
general and SaaS applications in particular by the global enterprise. The SaaS market is projected
to grow by 25 percent in 2013 to $59B and could
reach $75B in 2014.
Strong adoption by brands and their
advertising agencies of cloud-based adtech platforms and of programmatic
buying for online advertising. Of
particular interest has been the exploding
usage of online video whose monetization is now primarily coming through
Enterprise mobility initiatives started
moving from experimentation to production.
The incorporation of tablets in many business processes, e.g., sales,
quality control, collaboration, the BYOD
policy that many corporations have already adopted, the broader adoption of
smartphones and tablets by consumers who want to use these devices to interact
with enterprise applications, e.g., banking transactions, purchase
transactions, are the reasons for this move.
Big data initiatives are slowly moving
from experimentation to deployment but remain driven mostly by
rather than innovation goals. I still believe that the adoption of big
data management and analysis technologies can be transformational in the
enterprise and may even become a bigger opportunity than SaaS and cloud
have proven to be. But for the time being most enterprises don't
exploit the opportunities they have for data collection, e.g., few
collect data that is generated from machine to machine interactions, or
various forms of unstructured and semistructured data, e.g., social
graph data, and more importantly for data analysis, insight creation and
action. Of course, a major reason for the the slow creation and
adoption of big data
analytic solutions, particularly of solutions that utilize predictive
prescriptive analytics rather than just descriptive analytics, is due to
the shortage of
big data analysis talent (from data scientists to business analysts with
good understanding of big data).
As we look
into 2013, we also take into account the following observations from 2012:
SaaS alone is not sufficient to make a private
company interesting for venture funding. Maybe with a few industry-specific
exceptions, most applications today are developed to run in a cloud
environment. So SaaS has become
table-stakes. Perhaps this is a sign of
the model’s maturation
process. To be interesting for an investment
that has the potential of “venture returns,” a company developing application software
needs to utilize a variety of appropriate technologies, e.g., single instance multi-tenancy,
cloud delivery, big data analytics, social, etc., to solve an important problem
for which a buyer (corporate or consumer) would be willing to pay significant
amounts to have it solved. We are seeing
venture investors transitioning from being SaaS technology-centric, to becoming
problem-centric as they consider investment opportunities.
Enterprise SaaS is emerging as a
separate category. The SaaS model
proliferated enough where we can no longer treat it in a monolithic way. I think that it is time that we start differentiating
enterprise SaaS from SaaS
applications aimed at smaller companies.
Enterprise SaaS applications are sold by hybrid teams that consist of field
and inside sales personnel. These teams use
novel technology-driven demand generation methods and sales models, e.g.,
freemium, to achieve their goal. Enterprise
SaaS is characterized by sales cycles that are similar to other forms of
enterprise software. Such applications
are often available in private, public and hybrid cloud configurations, and are
licensed in multi-year contracts.
Security is the biggest impediment to
the broad adoption of enterprise SaaS and big data solutions. All CIOs I have spoken with list enterprise
data security as their top issue in moving more of the applications and IT
workloads to the cloud, as well as in adopting new applications, including
social, mobile and cloud-based big data applications. This issue is even more central in regulated
industries such as financial services, insurance, utilities where customer data
needs to be moved to the cloud. We
expect that this concern will continue to drive CIOs to adopt hybrid and
private clouds. Interestingly enough,
uptime is no longer as big of an issue as it was as late as last year. CIOs have come to accept that like every
system, cloud computing systems will also have issues and breakdowns.
With the increasing use of mobile
devices, mobile application development may become a big issue during
2013. The magnitude of the issue will
depend on how many mobile applications corporations will need to develop on
their own, and how many of their existing enterprise applications will need to
be accessed via mobile devices.
Based on the number of big data startups
that have been established and funded in this area we expect 2013 to be the
year when the big data bubble will burst but also the year that we could see a
small number of acquisitions of big data infrastructure companies by large data
management incumbents such as IBM, Oracle and Microsoft.
these trends and observations I expect that during 2013 we will continue to
focus on investments in companies that develop:
Solutions for customer understanding, mcommerce particularly as it impacts industries such as retailing, travel and financial
enablement and Internet monetization using cloud computing, mobile, social and
big data analytics technologies. All these solutions emphasize the increasing role of the CMO in setting a big part of the corporate application strategy.
Data security solutions for cloud and mobile environments that will add to our already extensive security portfolio