Angel Outlook on Software
Anthony Rommens
02-Jul-06
It is a most exciting time for investing in software as the entire sector is poised for growth and now even big business has its targets set in areas that business angels traditionally invest. IBM recently announced to spend above $1 Billion over the next three years in software seed funding. Microsoft has indicated its plans to spend $1.1 Billion (2007 budget) to not only develop new programs but aggressively buy new software firms. Venture Capitalists also have recently completed huge funding deals and are active after years of being on hiatus. This is fantastic news for Business Angel Investors because there will be many more players besides the usual VC firms to grow equity value and harvest investments. A good question is what types of software investments are attractive to all these potential ‘buy out’ players?
The online world is continuing to develop and there is an evolving momentum of the World Wide Web from a collection of websites to a full fledged computing platform serving web applications to connected users. There is continued growth towards web server based software for computers, mobile phones, handheld devices and other high tech developed consumer goods. Thus the most scalable investments involve Web Application Development, Web Security, Wireless Local Area Network and Data Storage. Individual PC installed and user updated software will be on the decline and demand for Unix and related services will also continue to decrease over time.
Consumers drive the market and they ultimately seek the most universal and compatible software that can be used across many applications and internet platforms. Customer minds about the internet and software will change from today’s thoughts of just ‘going online’ to gather information from “Web Brochure” sites and occasional shopping to ‘always being connected online for everything’. We have already seen the beginning of networked Gaming, downloadable TV Video and Computer Telephony in the past year.
New online software development companies are now delivering products at ever increasing accelerated rates and in super competitive environments. For very small investment amounts, early stage software firms can launch new online products within months of conception. However, they are faced with tremendous challenges of navigating the much user (and competitor) scrutinized world of web blogs, portals, forums, review sites, and other online collaboration tools.
Online infrastructure will continue to be made up of HTML, XML, J2EE, SQL and Web services such as SOAP, WSDL, and UDDI. Relevant ‘open source’ (open to configuration) software will be lead by Linux OS, Apache (Application Server), My SQL (DBMS) and PHP (Scripting Language).
Software in the near future will be more and more website based and delivered entirely online via remote server. End users will no longer have to install or update the programs on local PC hard drives because this will be performed by the software application supplier. These web based applications will have the look and feel of those running on a local computer. The revenue model will be geared toward subscribers who pay for all or just the part of the software that they use (perhaps on a monthly basis).
To obtain a clearer picture of what these new types of software will be like, check out Google Beta products (start at http://labs.google.com). In the past year Google has launched online Gmail (email service), Gtalk (computer telephony & online chat), Google Calendar (online shared calendar), Google Spreadsheet (Excel compatible) and soon Google Word Processing (Word compatible) all which may be shared by multiple users who have internet access. Microsoft also has released “Office Live”, a group of products and services for small business. Soon Microsoft Office will be delivered online via subscription through the web and not on a local computer hard drive.
If anyone has doubts about the future of Web-based computing then they need to look no further than in the physical world where Yahoo, Microsoft and other corporations have been busy driving up property prices in areas where they intend to build new Internet data centers. These are buildings and facilities that will contain vast servers that comprise of computers and gear to handle the future increased flow of Internet traffic that will result from the massive development of online software. There already exists a shortage of facilities equipped to store, manage, process and transmit data. Currently, there is a busy sales market for businesses supplying data center equipment, services and properly infrastructured land.
Over the next few years, there will also be a trend in businesses using ‘disposable software’ created from standardised changeable platforms. This type of software will be programmed quickly to provide immediate management solutions for business problems in the easiest fashion, then as the software becomes obsolete it is simply discarded (much like ‘Power Point’ presentations that we use today). No maintenance and no ongoing enhancements will be involved. Examples of different kinds of vendors for this first wave disposable software are: Microsoft CRM, SAP/Top Tier, Salesforce. com and Red Hat software.
Standards will ultimately be driven by customers and Middleware (connects multiple computing platforms using Web technologies) such as IBM’s WebSphere will also help provide a development and deployment environment for Web publishing and transaction intensive, e-business applications for businesses.
Over the next decade, not only the minds of users will have changed regarding software but demographics will as well. There will be a generational shift of users over the next ten years as no one under 40 years old will remember a world without personal computers. Computer applications will need to be networked in everywhere and everything for the future. Downloadable media will replace current hardware and ultimately its software content focus should end up being more about the ‘art form’ and less about the technology.
There are many varying investment opportunities in software development given all of these platforms and ideas. The basics of angel investing however still holds regardless of how software and technology changes. Finding a winning entrepreneur team always remains key to high returns on any angel investment.
It may be best to spread risk by investing in several projects; better to do ten smaller deals rather than betting on just one large investment. Proprietary software developed from established programming platforms often allows for this sort of ‘portfolio’ investing. Investors must make sure however when investing that the Intellectual property belongs to the company and not the entrepreneur. Under special last resort circumstances, investors should also be prepared to offer further funding amounts (do not let the entrepreneur know it is available) in case sales targets are not met or development expenses are larger than expected. Besides finding someone who possesses obvious expertise in technology, the path to success is to always to “bet on the jockey and not the horse”. An experienced entrepreneur on their 4th or 5th successful company is most preferred but almost impossible to locate.
Key characteristics in great software entrepreneurs are to look for team builders with management experience who have good natural ability to work with others. It is always better to invest in an “A Team” with a “B product” rather than vice versa because the better team can always improve the product. It also may be obvious but being knowledgable, passionate, enthusiastic, motivated, and possessing integrity are all key factors to a good leading entrepreneur personality. It is most important to understand the entrepreneur well enough to know exactly how far he/she can or will take a software company as this can greatly affect a Business Angel’s ability to obtain substantial returns on the investment. Investors do not need ‘lifestyle entrepreneurs’ who are just happy with a good job. Invested companies need to attain explosive growth and investors must be free to both ‘attract’ and ‘sell’ to larger players in order to obtain substantial returns.
Great opportunities abound by finding key people to ‘invest in’ and also in following proper future trends in software and related services. Incredible business concepts are out there waiting to be discovered and success is eager to be nurtured! Good luck in your software investments!
