Venture capitalists invested $5.3 billion in privately held companies in the second quarter of 2009 — the lowest amount invested since 1997 — but several pre-IPO Software-as-a-Service (SaaS) companies are garnering these limited funds and quite a bit of buzz.
In fact, VCs invested more cash last quarter in health care startups than in technology firms for the first time in six quarters ($2.2 billion vs. $1.9 billion), according to the latest Dow Jones VentureSource report. The report highlights just how tightfisted these firms have become in these dreary economic times.
In their quest to find the next Salesforce.com (NYSE: CRM) or Omniture (NASDAQ: OMTR), which last week was acquired by Adobe for $1.8 billion, venture capitalists appear willing to kiss a lot of frogs to find their next cash king.
With the enterprise software market dominated by just a handful of vendors — IBM, Microsoft, Oracle and SAP — and IT budgets decimated by the current global economic meltdown, venture capitalists are increasingly turning their attention to upstart SaaS providers to beef up their portfolios.
“The high go-to-market cost structure of an enterprise software company has made the enterprise software market a relatively uninteresting area for venture capitalists,” Bruce Cleveland, a partner at Menlo Park, Calif.-based InterWest Partners, wrote on his VC firm’s blog. “Software as a Service companies may be poised to change this as they aggressively seek funding from VC firms.”
Workday, a Pleasanton, Calif.-based provider of on-demand payroll, human capital and financial management applications, received the second-largest cash infusion among privately held companies, pocketing $77 million from investors Greylock Partners and New Enterprise Associates.
Workday wasn’t alone. Appfolio, an online provider of property management software, received $8 million funding last quarter while Apptio, which sells SaaS-based financial management software, and Zendesk, an on-demand provider of help desk system software, garnered $14 million and $6 million, respectively.
OpSource, which develops SaaS and Web-based apps for on-demand companies, got another $4 million in cash.
And just this week Marketo, a San Mateo, Calif.-based provider on-demand marketing automation applications, announced the close of Series C financing (value undisclosed) and bolstered its creditability by adding Citrix Systems CMO Wes Wasson to its board of directors.
None of this comes as a surprise to those tracking the increasingly selective VC market, which saw venture capitalists spend almost $3 billion more on new companies ($8.3 billion) in the year-ago quarter than they did this time around.
“As the venture capital industry’s rebound gains traction, we’re seeing a new landscape emerging,” said Jessica Canning, director of global research for Dow Jones VentureSource. “Investments in cloud computing, software-as-a-service, on-demand and smartphone technologies have been growing in size and number since Q2 2009 and we suspect that this is only the beginning as IT undergoes a seismic shift in computing.”
Through the first half of 2009, VCs invested a total of $9.27 billion in startups, with information technology companies collecting $3.61 billion. Last year, VCs spent a total of $30.5 billion and IT companies received $12.3 billion of that total.
