Venture capitalists are widely reported to have pulled back from the high-tech sector in the wake of the dotcom crash and subsequent travails of the marketplace. Nevertheless, VCs appear to be sticking with business software vendors. In the second quarter of this year, they invested a disclosed $7.39bn in 990 deals, according to data from AMR Research, PricewaterhouseCoopers and the National Venture Capital Association. And while those numbers were down from the $7.5bn and 977 deals reported in this year's first quarter, they were essentially on par with activity during the same period of 2007. The average deal size remained steady, at $7.46m, although it was slightly below the 2007 full-year average of $7.71m, says AMR's Jeffrey Freyermuth in a recent report. In dollar terms, the top five investment targets were software, industry/energy, biotech, medical devices and equipment, and media and entertainment. The software sector led all categories, accounting for $1.25bn and 219 deals. That's good news for an industry that has been marked by consolidation and disappointing earnings reports, not to mention growing economic turmoil. "With that said, AMR Research continues to be encouraged by the strong venture capital appetite for the software sector," writes Freyermuth. "Venture capitalists are still funding new deals, so there doesn't appear to be a shortage of opportunities for innovative companies. This is a good sign, given the weak appetite for software IPOs [initial public offerings] in the current environment."
System management vendors continued to attract the lion's share of VC money aimed at the software sector, although Freyermuth notes the emergence of three additional categories: suite vendors, best-of-breed vendors and "market disrupters." The last category refers to large vendors that already offer elements of the IT management suite. Those three up-and-coming areas "pose the biggest threat to the status quo," Freyermuth says. Vendors, meanwhile, must address new market challenges caused by companies' move toward global operations. IT organizations require tools "that can help manage an increasingly distributed organization and infrastructure." At the same time, he says, increased regulatory and industry scrutiny of corporate behavior on a global scale has elevated IT risk "to burning-issue status."
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