Business Software Ready for the Next Big Thing

In a recent post on Sandhill.com, I argued that as the current wave of SaaS, Open Source, and Vertical Market start ups mature, it will take a major breakthrough on the order of client/server computing or web technology to keep the business software start up engine humming.

Your probably thinking that you've heard this all before. Back in 2001 and 2002, people were predicting the end of business software only to have the sector come roaring back as SaaS, Open Source, and vertical market companies filled the gap. Here is why this time is different.

Consider what happens to technology markets as they mature. In the early stages, the market is dominated by horizontal products that are customized to a specific customer's needs through professional services. As the market starts to mature, the dimensions of competition change to meet the needs of the late adopters. To maintain growth, companies must lower costs to be able to profitably serve this price-sensitive customer group and they must tailor their solution to meet the unique needs of smaller and smaller unserved niches (simplification and specialization).

When viewed through this perspective, the SaaS, Open Source, and vertical market investing wave can be seen as the mature phase of the business automation boom that started in the early 1990's with companies like Siebel, Documentum, and Remedy. When this current wave slows down, there is no obvious successor on the horizon (What comes after the mature phase?). Therefore, short of a major breakthrough, business software investing will slow.

By how much? Our prediction is that business software investing could slow by as much as 30%. Topline Strategy's analysis of business software investments from Q3 2006 found that 59% of all business software investments were SaaS/Open Source/Vertical Market companies offering simplification and specialization as their primary benefits while 41% were companies were offering solutions based on new technologies (such as video over IP and mobile computing). We expect, short of a major breakthrough, that investing in companies based on new innovations will remain steady. However, investing in simplification/specialization plays could fall by half. To get a closer look at the data, you can download a list of all the Q3 business software investments here.

If this post seems like all doom and gloom, it isn't. While we expect business software investing to fall, we expect consumer and mobile investing to continue to soar, more than picking up the slack.