What the enterprise startup surge really means

The billions are flowing again -- by some estimates, at twice the investment rate in enterprise startups we saw last year. Could this actually be a sign of maturity?

It finally happened. Earlier this month, Dow Jones VentureSource reported venture capital investment in the first half of 2014 surpassed that of 1999. Other evidence of a venture surge comes courtesy of the PricewaterhouseCoopers Money Tree; the Q2 report isn't out yet, but the Q1 2014 report shows a 57 percent jump over Q1 2013.

A report from TechCrunch (based on data collected via CrunchBase) gets more specific: a cool $5.4 billion went into enterprise tech startups in the first half of the year, just shy of the $5.5 billion invested in all of 2013.

A doubling of investment year over year is enough to induce bubblephobia in anyone. But it comes with an interesting caveat: As enterprise startup investments rose dramatically, the number of companies receiving that money actually dropped, and much of that money is going into later rounds of funding.

This trend in enterprise venture capital could actually be a sign of maturity rather than overreach. On balance, VCs are cannier about technology than they were 15 years ago. Plus, everyone knows that many of the best enterprise software startups need little in the way of early-stage funding thanks to the cloud and open source. Often, they hold off raising capital as long as they can until they get enough customers to show they're real. When and if they need it, they go for the big round.

The shift to bigger bets on a smaller number of companies may also indicate that Silicon Valley is getting more serious about building companies instead of merely flipping startups to IBM or Oracle or Red Hat or VMware.

Sure, most enterprise startups are acquisition plays. But a fascinating question remains: Which of the enterprise startups may actually become strong, independent firms, the new household names of enterprise tech? Are some of these big rounds helping to groom them for that purpose, rather than simply dressing them up for acquisition?

Take Cloudera as an example: After taking $740 million from Intel, this leading Hadoop player is estimated to be worth more than $4 billion and occupies the sweetest territory in big data. Pure Storage has a valuation topping $3 billion; MongoDB stands at more than $1.2 billion. Other promising companies in the billion-dollar club include Hortonworks, New Relic, and Nutanix. Then there are hot early-stage startups like Docker that seem destined to conquer the enterprise no matter how much money they've raised.

The quantity and quality of new enterprise tech spouting from startups is unprecedented -- and to gain traction, those same enterprise startups are delivering cloud and open source solutions at a fraction of the cost commanded by old-fashioned big iron and commercially licensed software. At the same time, the days of the big, monolithic enterprise spend are also fading. More and more is being spent on cloud and mobile technology outside IT organizations at lower cost.

It's possible that none of the new names in enterprise tech rise to the same level of recognition historically enjoyed by HP, IBM, Microsoft, or Oracle. The glory days of the tech titans could be over. Instead, we'll have more players that deliver more targeted technology solutions for the enterprise that, thanks to the cloud and agile development, adapt more quickly to customer needs. Follow the money, and you can catch a glimmer of what that new lineup may look like.

This article, "What the enterprise startup surge really means," originally appeared at InfoWorld.com. Read more of Eric Knorr's Modernizing IT blog. And for the latest business technology news, follow InfoWorld on Twitter.

Copyright © 2014 IDG Communications, Inc.

How to choose a low-code development platform