Rent-an-app firms are hot targets for investors

One of the hot topics in the venture community these days is the way the Internet is changing how companies will deploy new applications in the future. In a kind of "Back to the Future" movement, what used to be called outsourcing of applications in the old mainframe world is now called netsourcing. Enterprises that abandoned outsourcing in favor of internally developed applications or large enterprise resource planning software suites now are looking into netsourcing, using application service providers (ASP) for even mission-critical applications.

This "rent-an-app" approach has created opportunities for venture-backed firms that provide application-hosting services. Rather than investing a lot of money in packaged software companies, the venture community is putting its cash into ASPs. Mayfield Fund has invested in several ASP start-ups. One, Instill (www.instill.com), provides e-business services for the food service industry. Another, Intira (www.intira.com), provides IT and networking services through its own data broadband network and utilities managed by its Service Management Center. Other start-ups are adding Web hosting as an alternative to conventional sales processes. Amplitude Software (www.amplitude.com) has a hosted version of its resource scheduling and calendaring applications. MarketSoft (www.marketsoft.com) offers a hosted version of its marketing automation software.

A number of venture-backed ASPs have focused their services on small and midsize businesses that do not have the resources to run expensive enterprise software suites. Firms that fall into this category include Corio (www.corio.com), eCompany (www.ecompany.com) in accounting and Agillion (www.agillion.com) in customer relationship management.

Small businesses, however, are not the only candidates for hosted applications. Enterprise network managers know the pain and expense of buying and implementing enterprise-scale applications. The appeal of letting someone else manage the applications and absorb the problem of upgrades and changes is real. That is why firms such as Oracle and Ariba are moving to a hosted service model.

There are a number of issues to examine when considering using an ASP. One is time-to-market. The time saved by being able to add an application by going online may translate into a competitive advantage that needs to be figured in when considering the cost of using an ASP. The Web site performance of an ASP is also an issue. How secure is the site? What is the quality of service? What are the traffic loads? Another consideration is whether you want the ASP to host the application on its servers or to have the application hosted on an on-site server but managed by the ASP.

Whether the Internet application involves connectivity or services that would normally have been handled within an enterprise, netsourcing is becoming a viable choice that you should evaluate seriously.