Start-ups starting to feel economic pain

I spoke this week with Justin Perreault, a general partner of Commonwealth Capital Ventures in Waltham, Mass., about how enterprise IT start-ups are holding up against the tough economy. His investments include enterprise mobility outfit Antenna Software and security firm Ounce Labs. Here's a condensed version of our conversation.

We've seen in recent weeks how the economy is battering public tech companies. How about privately held enterprise IT start-ups?

We figured it would start showing up in the results of our private companies as early as the fourth quarter of last year and of course it didn't. Really through three quarters of this year -- even though the headlines have gotten increasingly gloomy -- we've seen our portfolio companies selling into the enterprise hold up better than we would have expected. But I will say that in this quarter finally we're seeing some cracks beginning to appear and larger projects getting pushed out or delayed as everyone's gotten increasingly nervous about the overall economy. Our expectation is that, because this is all hitting during the '09 budgeting and planning part of the year, it will really show up in a huge way in the first half of '09 and like everyone else we're hoping whatever recession we have will be as short as possible and start to see some recovery later in the year. In addition to that, it's been an interesting dynamic because so many of the CEOs running our companies lived through the crash and downturn in 2000 and 2001, and the aftermath, and generally they're all being extremely proactive about managing expenses and cutting staff where they feel they should and they're getting ahead of it much more quickly than the last time around. Hopefully that's a recipe for the companies managing through the downturn and coming out the other side a little bit quicker.

What kinds of companies are doing best?

Virtualization technology is probably holding up the best. There's just such a hard dollar ROI attached to it. There's very little slowdown in terms of people's appetite for those kinds of projects, though going through the purchasing and approvals cycle is taking a little longer…. To my surprise, I've seen much more interest in desktop virtualization from some large companies than I would have expected at an earlier stage.

Another area that is holding up quite well is enterprise mobility. [Some companies got into this market early and] the capability of the networks and BlackBerries and other smartphones just wasn't there at the time, and the adoption wasn't either. But as time has gone by bandwidth has grown, data plans are cheaper, the BlackBerries and other devices are more capable and you've kind of gotten by the tipping point where it's perceived as just good IT strategy but also economical to be thinking about deploying apps on the BlackBerry, which is still the main device for enterprise stuff.

Where do we go from here?

Everyone is a little apprehensive about '09 but the best thing for early-stage companies to do in this environment is to control the burn rate, try to make progress on what customers want in a tough environment and that should strengthen them for when the economy turns. We're about halfway through investing in our last venture fund that we raised in '07 and we're actively looking for new investments. But at the same time, we're looking for companies with experienced people who can make progress without burning too much capital since it could take longer prospectively to grow a company than it has in the last few years.