While some of the most successful consumer Internet companies are capturing the headlines today, more than 70% of venture exits in the last two years valued at over $500 million have been in the enterprise sector.
These exits have also outperformed their consumer brethren post-IPO. Of the top 10 largest IPOs in the last two years, all the enterprise companies in that bracket are trading above their offering prices; only one of the consumer companies (LinkedIn) is doing so. The average growth company in the enterprise sector is healthier than it was several years ago, driven by capital efficiency in R&D and sales, and more profitability at scale.
[ REVIEW: How recent dot-com IPOs have fared
Why the wealth of activity in enterprise sectors? The answer lies in two exponential changes these companies are taking advantage of: the massive expansion of computing power and the growth of big data. These are not new trends, but we are on the steep part of both curves and it is making the cycle of innovation/obsolescence shorter than it has ever been before. This is creating great opportunities (at Menlo Ventures, for example, half of our investments are in enterprise technologies), but also big challenges.
Computing power and the cloud
The first major challenge results from Moore's Law, which states that processing power doubles every two years. We're climbing an incredible ramp in computing power that has changed the game for young enterprise technology companies.
In the past, developing a new network switch or storage subsystem required a company to develop its own chips to push performance higher, at enormous financial cost and technical risk. Today, commodity components have so much power, the trick is not faster processing, but higher efficiency and utilization. This means that value creation is occurring in software, not hardware, even if the product that is shipped is a physical device.
In fact, no one really cares much what the underlying physical infrastructure is -- put it in the cloud! -- as long is it works. Cloud computing is a platform shift as important as the move to three-tier Web architecture and to the client-server model. Interesting new companies are now virtualizing the network (Pluribus) and storage layers (Coraid, Tintri) of the data center just like VMware did with computing. With so much raw resource available "on tap," we will surely see more disruptive software companies replacing an older generation of applications.
Companies like Salesforce, Workday, Jive, Dropbox and Carbonite are just the beginning. Security, as one example, is a sector that is still immature in the cloud and one in which we expect to see many exciting startups in the next few years.
[ IN DEPTH: Five key takeaways from Workday's IPO filing ]
The growth in data is the other phenomenal, exponential wave we are riding. Five exabytes of data are now created every 10 minutes, compared to every two days just two years ago, Google's Eric Schmidt was quoted as saying in 2010. Five exabytes is 5 billion gigabytes, an amount equal to the data crated from the beginning of human evolution until 2003.
Technologies like Hadoop, developed and made available as open source from Yahoo, Google, Facebook and Amazon, are becoming a new layer of commercial infrastructure to cheaply and efficiently store, search, and analyze information in volumes and at speeds never before imagined.
We will see many new investment opportunities in vertical analytic applications. For example, Menlo Ventures portfolio companies like Comprehend Systems, DataXu, eXelate and ParAccel are using "big data" for applications in clinical trials, online advertising and financial analysis and seeing huge demand for the new capabilities they offer.
I cannot remember another time in 16 years in venture capital when there were so many disruptive technologies coming to maturity at the same time. Certainly, these profound shifts in computing technologies do not happen often, but it does seem like they are occurring on a more rapid cycle.
If this is true, then there will continue to be an abundance of opportunity for emerging growth companies. But it also means they'll need to develop difficult, defensible technology very efficiently, and grow to scale and profitability more rapidly than ever before.