Last week I went to a software startup pre-release party in the SOMA district of San Francisco. It was a hot ticket -- maybe 250 people in attendance, an open bar, and a bouncer to turn away those who lacked the proper QR code.
The startup's CEO strutted across the stage in a manner eerily similar to the posturing I witnessed during the dot-com boom 15 years ago. Instinctively, having lived through the endless parties and subsequent bust that made me consider leaving the Bay Area forever, I found this flashback alarming. It wasn't the first time I'd had this feeling. For example, the opening of GitHub's new SOMA digs, complete with a full-scale replica of the Oval Office and a ribbon cutting by San Francisco mayor Ed Lee, also gave me the chills.
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For a reality check, I turned to PricewaterhouseCoopers' MoneyTree and discovered that in 1999 VCs invested $10.3 billion in software ... and in 2013, nearly $11 billion. Gulp. Now, adjust those 1999 dollars for inflation and they'd be worth more than $14 billion today -- plus, 1999 also saw many more billions pour into other categories related to the dot-com boom, such as "media and entertainment" and "consumer products and services." So we're not at '99 levels yet, just headed there: 2013's $11 billion represented a whopping 28 percent rise from the $8.6 billion invested in software by VCs in 2012.
How much should we worry about bubble trouble? Let's break it down, because there are important distinctions to be made between then and now.
Remember "the new economy"? Even now, I get a funny feeling in the pit of my stomach remembering that phrase. The nimbleness of the Web was going to change everything; the Nasdaq (like housing values years later) was never going to go down. Just stick "dot com" on the end of something and it would bury its brick-and-mortar analog. Meanwhile, investment bankers were pumping and dumping dot-coms at a furious rate.
It's completely different now, beginning with the obvious: Nobody invests big money in "websites." In tech, software startups are where the action is, the bulk of those being cloud or mobile or open source software plays (sometimes all three). There are exceptions, but business plans are much more serious and road maps to profitability much more detailed. Whether the revenue goals for these new companies are realistic is another question, but hey, that's why venture capital is risky business.
Turning to enterprise
The shift in VC funding to enterprise has been dramatic. According to the research firm CBInsights, in 2011, based on the top 50 deals of the year, less than a third of VC money went to enterprise and the rest to consumer; a mere two years later, in 2013, the reverse was true.
This does not seem to be shotgun investment, at least compared to the days of dot-com excess. You have to give credit to the average enterprise startup for focusing on an actual business problem -- or, in many cases, a technology problem. Last year, for example, I attended an Andreessen Horowitz event featuring a panel of D-to-D (developer-to-developer) CEOs, all of whom delivered SaaS solutions to programmers.
Both SaaS and open source offer the opportunity to sneak into the enterprise under the radar of those who hold the IT purse strings. In some cases these offerings add entirely new functionality; in others, they replace licensed software with less costly and/or superior solutions. But can SaaS or open source ever hope to extract the fat revenue streams savored by licensed enterprise software vendors such as Oracle or Microsoft? Even at scale, it's hard to imagine, despite the recent valuation of the open source NoSQL vendor MongoDB at $1.2 billion.