On its best days, the venture business offers a glimpse of tomorrow — a look at how things will be when our kids grow up. The chance to help those new technologies and markets take shape is one of the reasons I became an investor, and that drive has only intensified with time and experience. But as most good VCs will attest, predicting what will happen is not actually that difficult; it’s predicting when that keeps us up at night.
The VC who times the market right wins, with some of the greatest venture returns stemming from early bets on major technology shifts like Software-as-a-Service (SaaS), deduplication, virtual machines, data visualization, etc. Yet “timing the market right” isn’t just about getting in early. The best bets in a sector will factor in the length of the journey (i.e. adoption curve), and the probable delays, roadblocks, and even detours that will be encountered along the way. Even the fastest-growing, most pivotal, industry-defining technologies rarely get adopted as quickly as people predict.
Take Platform-as-a-Service (PaaS), for instance. In 2011, Gartner declared it to be the “Year of PaaS” and predicted that by 2015, there would be several comprehensive PaaS vendors with consolidated service suites combining everything from application (aPaaS) to integration (iPaaS) to knowledge (kPaaS). PaaS adoption and consolidation were expected to mirror that of the traditional application infrastructure market’s consolidation around a few technology standards (e.g., SQL, Java EE, .NET, XML, and HTTP) and end-to-end vendors (e.g. Microsoft, IBM, and Oracle).
Yet as 2015 comes to a close, the PaaS market is still immature and highly fragmented, claiming just a fraction of revenue across all public cloud services. PaaS revenue for 2015 is projected to be about $3.8 billion, compared to $31.6 billion in SaaS revenue, and $15.9 billion for Infrastructure-as-a-Service (IaaS). The flash-based storage market is a similar story, accounting for less than 10 percent of the $26.5 billion storage market today despite much higher projections made just a few years ago amid significant hype.
Perhaps counterintuitively, the private capital pouring into these sectors is part of the problem. It’s well known that too many venture dollars chasing too many deals leads to an overcrowded, undifferentiated marketplace. (See: marketing technologies, cloud security, cloud orchestration — and lookout, HR-focused SaaS is next!) The resulting spikes in real estate costs, heightened competition for talent, outsized marketing spend, etc. drag down gross margins and ultimately, venture fund returns. Layered atop all of this is another variable, one that gets far less airtime but may be an even greater drag on outcome: the rate of adoption. The enterprise adoption curve is always a steep slope, and never more so than when too much private capital muddies the waters, widening the gap between vision and reality for adoption of these technologies in any meaningful way.
But when the path to the “future” seems to stretch interminably, it can be very valuable to train your focus on the journey — that is, look closely at how you can get from today to the future, or how you can work alongside or in conjunction with existing technologies to bring about change. It may seem like a short-term focus, but that would be discounting the probability that the companies that bridge the gap can not only become successful businesses but may ultimately become the market leaders.
As an investor, I see opportunity in these gaps between sector projections and performance, and they make me even more determined to chart the course and to link what exists out there today to what may (or may not) exist in the future. Call it connecting “now” to “new.” One way to foster this is to invest in technologies that bridge that gap between what we have currently and where we think the market is going.
This is particularly true when it comes to selling to the enterprise: As much as they would like to, enterprise IT organizations just don’t move that quickly. We host many CIO events and hold countless meetings every year with IT executives, and they always appear eager to embrace change and lead the charge in adopting the newest technologies. Yet while they do want to hear what is coming down the pike, that enthusiasm rarely equates to action, at least in the near term (I have my share of investments that fit in this category, namely in the area of software-defined-networking). According to Gartner, CIOs today still allocate 60-70 percent of all IT spend on day-to-day maintenance of the existing business, which effectively “[starves] innovation and the investments necessary to grow or transform” the enterprise.
A contributing factor may be that CIOs, while inherently risk averse, tend to change jobs fairly often. A recent Janco Associates global report pegs the average CIO tenure to be about 4-5 years. Thus, while CIOs are quick to explore new technologies and demonstrate to senior leadership that they are pursuing ambitious new ideas, the pursuit rarely correlates to a loosening of the purse strings — only a rare few CIOs will push their organization to make a big leap forward. Instead, they are more likely to step into another position, leaving the seeds of innovation scattered but unsown.
This unvirtuous cycle is compounded by the pressure placed on C-level execs from within organizations to keep abreast of what is going on in the outside world, spurring them to attend even more meetings that don’t result in actual sales. This fuels an illusory demand scenario in which large financings raise the profile of a particular category, compelling CIOs to meet with companies, and creating the expectation that they are likely to buy. Meanwhile, the actual state of buying behavior remains unchanged.
The only way to break the cycle is to dive headlong into the bottleneck and find ways to move technology forward and build new businesses. We’re doing it today — bridging the gaps between the now and the new — across numerous strongholds within the enterprise, such as connecting existing applications to cloud technologies or bridging legacy videoconferencing to modern devices or having a single-pane-of-glass for managing on-premises and cloud systems. Innovation is happening further and further upstream. For now, there is abundant capital for far more players to enter the fray than will ultimately succeed. But if you can find the ones who’ve planned for the journey and the many hurdles that lie ahead, the future may be closer than it seems.
Pete Sonsini is a General Partner with NEA, where he co-heads the firm’s enterprise software practice group.
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