In the late '90s, a chief information officer was a software startup's best
friend, happy to lay out millions of dollars to upgrade old systems and
applications. But now that technology change has slowed almost to a standstill
and budgets are tight, savvy startups aren't bothering with the CIO. Instead,
they're paying a visit to the chief financial officer, whose focus is squarely
on improving what's already in place, eking out cost savings, and maybe
even uncovering new revenue.
"We're hearing that the dollars funding application buys are coming
out of expense reductions, as opposed to capital budgets," says Bill
McAleer, managing director with the VC firm Voyager Capital. And Dave
Power, a general partner at Charles River Ventures, says that one large
financial services company has told him it will only fund the initial
implementation of a new software purchase. After that, the application
must generate sufficient cost savings to pay for any new features and
The good news is that CFOs are still making a few software purchases,
particularly for applications that help free up cash by minimizing inventory
on hand and reducing expenses. VCs have rallied around later-stage software
companies that are managing to grow their revenue (modestly, but hey,
at least they've got sales); about three-quarters of the $1 billion invested
in software in second quarter 2002 went to follow-on rounds, according
to a PricewaterhouseCoopers Moneytree survey.
Tighter purse strings have prompted software companies to change how
they sell their products to businesses. They're appealing to the balance
sheet by positioning their software as a tool for boosting the bottom
line. Aceva, based in San Mateo, California, raised more than $50 million
in three rounds in 1999 and 2000. Though it originally hosted a broad
financial applications platform for customers, it changed its model last
year to focus on accounts-receivable software that reduces the time it
takes to collect on outstanding invoices by several weeks.
VCs are paying plenty of attention to startups that can save money for
CFOs. Captura, based in Kirkland, Washington, which raised $47 million
from Oak Investment Partners, the Sprout Group, and others for its expense-management
software, racked up 70 customers before it was snapped up (at a discount
of only about $15 million) by the publicly traded competitor Concur Technologies
(Nasdaq: CNQR) in July.
In February, Nextance raised a $9 million second round from El Dorado
Ventures and Onset Ventures. Director Charles Beeler, a general partner
at El Dorado Ventures, says CFOs are keen on contract-management software
like Nextance's because it saves money by creating contracts more quickly,
and it uncovers new revenue by tracking licensee payments and flagging
those that are overdue.
And though demand for supply-chain software has slowed considerably,
VCs say some large companies are still willing to buy such applications
to manage inventory. Recent funding winners in this category include Valdero
(a $15.5 million second round from Trinity Ventures, Integral Capital
Partners, and others in January), Exemplary Software (a $12 million second
round led by Clearstone Venture Partners in April), and SeeCommerce (a
$27 million fifth round led by Amerindo Investment Advisors last spring).
All three companies have landed new customers in the last six months,
based in part on their ability to minimize inventory. Valdero has signed
up Juniper Networks and Advanced Fibre Communications in the struggling
telecom space, while SeeCommerce added retailers Sears, Roebuck and Circuit
City to its roster.
In addition to supply-chain software from providers like SeeCommerce,
retail companies are also ponying up for so-called profit-optimization
software, which helps sellers set prices on the spot, according to demand
and other data. Several companies in this sector, including ProfitLogic
and Metreo, have raised later-stage rounds this year, as they ramp up
sales and marketing.
By bringing down costs and driving up revenue incrementally, these companies
could all help their customers get through the short-term market fluctuations.
And in theory, by streamlining the way those clients' CFOs do business,
they'll pave the way for the next wave of software companies, whose more
ambitious products promise to hit the market in 2003 or later. Perhaps
CFOs will have enough cash saved up by then to make those purchases.