Where the money is: VCs pour cash into software startups

The bloom seems to be off social tech, and startups focused on apps -- from games to ERP -- are the new darlings for investors

Think there's nothing new under the sun when it comes to file management and database software? What about that old warhorse, ERP? You may consider those segments passé, but the venture capital community disagrees. In the first quarter of 2012, just under $147 million and $118.6 million in venture capital money flowed respectively to startups in those areas.

The renewed interest by VCs in database and file management startups is part of a larger revival in funding for software. In each of the last five quarters, venture money for software startups has increased when compared to the same quarter in the previous year, according to data compiled by the National Venture Capital Association and PricewaterhouseCoopers.

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Of the $5.8 billion invested in startups last quarter, $1.6 billion (about 28 percent of the total) went to software. What's behind the money rush? Two major factors, says Mike Gualtieri, a principal analyst at Forrester Research, are (1) the need for companies to move faster to satisfy consumers who are increasingly willing to abandon known brands and (2) the ever-growing demand for mobile services. "Increased consumer choice and voice [meaning employees' increased advocacy for what they want] require more flexible internal IT systems."

Not surprising, that flow of money is creating a flood of jobs. As I reported a few months ago, more than 14,000 jobs are waiting to be filled at startups, including thousands for software engineers and developers.

Social media investments fall off the cliff
Software was not riding a tide that floated everyone's boat in the quarter -- just the opposite, in fact. Overall venture funding was off by some 18 percent (depending on whose stats you use) when looked at by capital raised, while the number of deals was down by 9 percent year over year.

"The declines were pretty evenly spread across industries, so there weren't any big winners or big losers in the quarter, but there were some surprises. Investment in consumer Internet companies fell after two exceptional investment years, while the IT industry fared well thanks to strong interest in software startups," says Jessica Canning, global research director for Dow Jones VentureSource.

In fact, it appears that interest by VCs in consumer Internet companies fell off a cliff, dropping by about 75 percent to $375 million, VentureSource found. The sector includes areas that have been smoking hot, such as social media, entertainment, and shopping aggregators. "I see some people looking at the enterprise space again, probably as a reaction to areas like social being overcapitalized," says Bob Ackerman, managing director at Allegis Capital, which invests heavily in enterprise companies. (Ackerman made his comments to reporters from ReadWriteWeb.com.)

Facebook's disappointing IPO is another prominent sign that Wall Street and Silicon Valley's Sand Hill Road (ground zero for the VCs) are finally becoming more skeptical about the long-term earnings prospects for social media. That's not to say the sector will collapse, of course. But if the money people decide to back off on social, we may well see more money flowing to other technology segments, including enterprise-oriented software and services.

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