The year ahead: VCs will back innovators with an enterprise focus

Venture capital investments in 2007 will be aimed at enterprise-focused start-ups with products that push the innovation of wireless devices and services, security, open source and virtualization, industry experts say.

While consumer-focused start-ups have stolen quite a bit of attention from investors over the past few years with new offerings in hot areas such as wireless entertainment and video on demand, there is still plenty of money to be made investing in start-ups that target enterprise customers, according to venture capitalists.

But maybe not as much as there used to be.

“It you think about innovation in enterprise technology, it’s been deflationary; open source and the software-as-a-service business models are providing more technology at the same or lower price,” says Peter Chung, managing partner with Summit Partners. “It’s an environment where the prices are generally falling, you’ve really got to have something that’s innovative to build a business.”

In the wireless arena, investors see the evolution of the smart phone as a big trend in 2007. It’s also an area where IT departments will become more involved, says Rich Redelfs, general partner with Foundation Capital.

“I’m hearing more that large companies are dictating [mobile phone] platforms, where historically the cell phone choice was up to the user,” Redelfs says. This is because employees are beginning to want the same kind of access to corporate applications and data that they can get from their BlackBerry.

IT departments may be willing to grant such access to mobile phone users, but won’t want to port applications over and over for each type of phone in use, so standardization will happen, Redelfs says.

At the same time, mobile phone users will begin to have more services available to them – be they consumer or enterprise users – from sources other than their carriers as more of the capabilities available to a PC’s Web browser move to the tiny cell phone screen, says Dan Gordon, director of research with Valhalla Partners.

“There will be more capabilities available to cell phone users that don’t come from the carriers … it’s the evolution of the Walled Garden,” says Gordon, referring to the limited services traditionally available from mobile service providers.

Backing security

While enterprise security has been a safe place for venture capitalists to put their money for most of this decade, there are areas that smack of overfunding and those products – including firewall, antivirus, antispam, and others -- are becoming commodities.

But there’s still plenty of innovation to be had regarding security, investors say.

“There are still some sectors where we think opportunity is in front of us,” Summit Partners’ Chung says. He offers the example of a portfolio company called SafeBoot that has technology for encrypting hard drives on mobile devices – a much-needed precaution in this year of lost laptops that have led to data theft. “Security is still an ever-present opportunity, even if it is relatively well-known and overfunded.”