Cleantech Venture Investing Still in its Infancy

On Monday, Topline Strategy be releasing our new report on the trends in Cleantech venture investing. When I first started on this report, I was expecting to find the dotcom bubble 2.0. With all of the hype and reports of phenomenal growth in Cleantech, I didn't see any reason to suspect anything different.

What I found was quite surprising - Quarter over quarter, Cleantech investing for the last four quarters, Q2 2006 to Q1 2007 was basically flat. Furthermore, with just a couple of exceptions, the leading VC firms have been just dipping their collective toes in the water.

What does this mean? From a venture capital perspective, we have barely left the starting gate of a 30 year project to build a sustainable economy and that this project is so different than what VCs have become accustom to in high tech and life sciences that it is going to take a while for them to figure it out.

Our report, chock full of data on who is investing how much in what, provides an in depth analysis of what makes Cleantech different and what VCs will need to do to be successful in the space. While the report will be formally released on Monday, you can download it now from our site.

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.

Consumer Investing Continues to Roll

Tomorrow, we will be releasing our Q3 Follow the Money report. Follow the Money is Topline Strategy’s quarterly analysis of venture capital investment in information technology. As opposed to the traditional venture trend analysis that categorizes companies based on technology (software, computers, etc.), our analysis is organized around the customers companies are looking to serve (businesses, consumers, OEMs, carriers), business models (Open Source, SaaS, advertising, transactions) and go to market strategies. By understanding investments on these new dimensions, we are able to quantify collective decisions, identify investment patterns, and discover insights in ways never before possible.

The major finding of this quarter’s report is the continued growth in the funding of consumer-oriented businesses and the strong leading indicators that point to the segment continuing to gather steam in the coming quarters – the surge in first round investments, the durability of the market even as investment in social networking cools, and the continued growth in Internet advertising.

The strength of the consumer segment comes as the signs point to a softening in the investment climate for business technology products, the largest segment of IT investing.

You can download the entire report at http://followthemoney.toplinestrategy.com.