VC Whispers
Back to the Bottom Line


October 3, 2002
2002 Red Herring
By Julie Landry





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 fees.

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.

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