Cleantech has been one of the few bright spots in terms of venture capital investment in 2008. According to The Cleantech Group, a market research and financial services firm, Q3 brought a record-level of $2.6B invested across 158 companies located in North America, Europe, China and India. That’s a 37% increase over the same period last year, and a 17% increase over Q2.

While the category is growing, cleantech investment has been dominated by capital-intensive projects like clean power generation and biofuels. With the economic downturn in full effect and funding being harder to come by, there is a significant opportunity for companies at the intersection of software and cleantech. Software is attractive due to its capital efficiency and scalability. Here are a few categories and companies that I have run across:

	Energy Management – Customers can save hard dollars by adopting solutions that help better manage and monitor energy consumption. Energy efficiency in data centers, PC power management, efficient HVAC systems, lighting management, smart homes, demand response and facilities management are all key areas primed for growth. Companies in this segment include Verdiem, 1E, BigFix, EnergyHub, Adura, Positive Energy and Faronics.
	Carbon Management – Measuring, managing and analyzing CO2 emissions are increasingly garnering customer attention and budgets. Compliance is at the forefront of spurring demand, but not far behind are reputation risk, reduced costs through automation and climate change leadership. This segment is getting crowded fast with north of 20 companies, including Clear Standards, Planet Metrics, Carbonetworks, Carbonops, Supply Chain Consulting, Enviance and Greenstone Carbon Management.
	Trading – The carbon trading opportunity is pegged as the world’s largest potential market. Early this year, New Carbon Finance, a market research firm, predicted that the *US* carbon trading market could be worth $1 trillion by 2020. The market is still in its infancy and riddled with regulatory challenges, but there is significant opportunity across the trading spectrum in everything from risk management to electronic trading to liquidity providers. Companies include CarbonFlow, which is working on a platform to help automate carbon credit creation, broker Cantor Fitzgerald (CantorCO2e ) and Australia-based Tradeslot. We also can’t forget about the US-based exchanges CCX and The Green Exchange. Definitely a segment worth keeping an eye on.
	Solar – Most solar startups are either hardware or services-centric and include installers and manufacturers. As adoption increases there is an opportunity to help consumers and businesses qualify their properties, analyze financial impact, automate permit processes and monitor usage. Companies include Sungevity and Energy Matters. I came across a blog post on this topic that has a good list of companies. See here for details.
	Water Conservation – The United Nations estimates that by 2025, two-thirds of the world’s population will face periodic and often severe water shortages. Software can help monitor and curb water consumption and better manage irrigation and sprinkler systems. An example is California-based HydroPoint Data Systems who builds smart irrigation systems for consumers and small businesses.
	Waste Management & E-waste Recycling – Even with the economic downturn consumers are still spending dollars on new computers, TVs, cameras, cell phones, DVD players and rapidly throwing out old ones. E-waste is one of the fastest-growing waste categories. Consumers in the US throw out roughly 100M cell phones per year and 130K computers per day. With e-waste piling up, there is an opportunity for software to help consumers and large enterprises be smart about recycling, waste management, health & safety, compliance and asset recovery. Companies include Kashless, Soft-Pak, AllMax, Solution Foundry and CellForCash.

This list is by no means exhaustive. The category itself is nascent and it is yet to be determined if these companies can build sustainable businesses over the long haul. It is an exciting time to be a startup tasked with the added mission of making the planet a better place. Feel free to send over additional categories, suggestions and/or companies that I have missed.

I had the pleasure of recently speaking with fellow Rutgers alum Dev Ittycheria. Dev is President of the $1.2B Enterprise Service Management business and a member of the executive management team at BMC Software. He was formerly CEO and co-founder of BladeLogic, a data center automation software company acquired by BMC Software for $800M earlier this year. Dev is a serial entrepreneur and was kind enough to share some of his background and experiences with me. Here are some key points from our discussion.

Entrepreneur vs. VC

Dev has the unique perspective of having spent time on both sides of the proverbial startup fence – VC and Entrepreneur. As an entrepreneur, he co-founded and was CEO of Applica, one of the first venture-backed application services companies (a precursor to what people call cloud computing), which was acquired by Breakaway Solutions. Dev also spent time as an Entrepreneur-In-Residence (EIR) at Bessemer Venture Partners. He joined Bessemer in 2001 after taking Breakaway public a few years earlier. As an EIR, he had three options – start another company, work on new investment opportunities for the firm, or lead an existing portfolio company. He chose starting a new venture and teamed up with a former colleague Vijay Manwani, also an EIR at Battery Ventures. They raised $6M from Bessemer and Battery in September 2001, five days before 9/11, and launched BladeLogic. The rest is history.

Key Success Factors

BladeLogic was a success on many different levels, but there were a few that stand out. First, focused execution was critical. BladeLogic was very focused on a particular segment of infrastructure software – the server change and configuration management market. Next was a rapid and iterative development process that allowed the company to obtain customer input early and often. That was critical to deeply understanding customers’ needs and problems and making sure their products solved the most pressing problems. The last and arguably most important was the sales team. BladeLogic decided to go to market via a direct sales channel and spent a great deal of time hiring and developing the best sales force they could. A strong sales force is a competitive advantage unto itself.

Software vs. Services

As a software product company it’s easy to fall into the services trap. One-off consulting engagements can improve your short-term cash flow, but can distract the company from its overall strategy. This becomes particularly challenging as you sell to large customers who typically demand “whole solutions” and pull small software companies in many directions. At BladeLogic, the key was a disciplined product management strategy that never lost sight of the company’s strategic goals.

Advice for Entrepreneurs

These economic times are extremely challenging for all companies, particularly software startups. If you are an entrepreneur or launching a new company in this environment focus on doing three things:

1. Solve a genuine pain point for the customer. There is a big difference between building products that are “pain killers” versus “vitamins”. With IT budgets tightening vitamins won’t find dollars. You’ll find out rather quickly which camp you fall into.
2. Work on building a *great* team, not just a good one. If you are an enterprise software company, focus on developing the best sales and development teams possible. These two functions are the engines for driving your business forward and will be extremely important to surviving the downturn.
3. Build a defensible technology advantage. Your competition, which will be typically larger and better capitalized, will attempt to bankrupt your company by under-pricing their equivalent products. If you have a true defensible technology advantage that customers care about that strategy simply won’t work. Furthermore, make sure your product roadmap focuses on building features that customers will pay for, not something they wish for, but will not spend any more money on.

Update : I’ve reposted some of my findings in the spreadsheet below. Let’s just say Google Finance isn’t the most reliable.

How are public SaaS companies faring in this economic environment?

Here are some stats that I put together based on Q2 ‘08 earnings data from ten SaaS companies, including SalesForce.com, DealerTrack, NetSuite, Taleo, Omniture, Vocus, Salary.com, Kenexa, Concur and Constant Contact:

• Median Quarterly Revenue Growth : 6.5%
• Median Yearly Revenue Growth : 39.4%
• Median Gross Margin : 69.0%
• Median Operating Margin : -0.9%

Year-over-year revenue growth was rather strong across these SaaS companies. Profitability is another story, but that’s a topic for a separate post. You can see some of the underlying data here.

Now, let’s take a closer look at three earnings announcements from last quarter:

We can’t start a SaaS discussion without first looking at poster child Salesforce.com. Salesforce.com had a good second quarter with revenues of $263M, which was 49% year-over-year growth, and put the company at a $1B+ run rate (a SaaS first). The earnings translated to $53M in operating cash during the quarter, an increase of 53% year-over-year. No major changes on expenses. SG&A and R&D were at 64% and 9% of total revenue, respectively.

Salesforce.com added 4,100 net new customers bringing the total to 47,700. Not only did the customer numbers increase, but so did contract sizes. Of note, Dell signed the largest deal in company history, a three-year global contract. This is a bit surprising given the macro environment today, but increasingly larger customers are requesting these types of deals. Revenue diversification across customer size, geography, industry and services mix also continues to be a top priority for the company. International business now represents 28% of revenue, up from 24% a year ago. Overall, a rather rosy picture for the company in a tough economic period.

Taleo also had a good quarter overall. The company recorded revenues of $38.8M, representing 25% year-over-year growth. Software accounted for 80% of total revenue, 21% growth from a year ago. On the expense side, R&D and sales and marketing costs were flat. Sales and marketing came in at 30% of total revenue. Both R&D and G&A were approximately 19%.

The company added 25 new enterprise customers and 10 enterprise deals with a first-year pricing greater than $250K. Taleo also continued to focus on expanding its international customer base. International revenue came in at 13% of total revenue, representing year-over-year growth of 83%. Last, the company completed a major acquisition of Florida-based Vurv, a direct competitor. The acquisition was partially funded with approximately $44M in cash relating to the proceeds and repayment of $9M in debt.

NetSuite posted solid top-line results for the second quarter. The company’s revenue grew 43% year-over-year to $36.6M. Non-GAAP net loss for the second quarter was $900K, a 34% improvement year-over-year. Cash flow from operations for Q2 was negative $1.8M as compared to positive $1.5M from the previous quarter. This was primarily due to tax liabilities as a result of the OpenAir acquisition. For expenses, product development was 10.6% of total revenue, an increase of 8% mainly due to the additional headcount from the OpenAir acquisition. Sales and marketing was 51%, an increase of also 8% over Q1 as the company is hiring salespeople aggressively along with increasing marketing spend. G&A was 12.6% of revenue for the quarter.

NetSuite has done a good job increasing the average selling price per customer. In Q2, NetSuite added more than 400 new customers with an average annual contract value for new sales at $30K, up from $20K a year ago. International business also increased to 20% of total revenue for the quarter.

Research firm Datamonitor released its annual survey of IT spending this week and predicted that 50% of organizations will be freezing their 2009 IT budgets with another 13% anticipating cuts. Given the turmoil with the nation’s economy and troubled financial markets this didn’t come as a surprise to anyone.

So, how does this affect SaaS companies selling into the enterprise? Let’s take a look at a few key factors and see how SaaS companies stack up.

• Pricing – This is top of mind for most customers today. Customers don’t want, and now are unable to sign, multi-million dollar deals. If that’s your model, then expect longer sales cycles. SaaS solutions have an advantage here since typically they have lower upfront pricing with a recurring revenue stream (e.g. monthly) spread out over the life of the contract. The exception are those SaaS vendors that require multi-year multi-million dollar contracts. From a customer’s view, they fall in the category with the traditional software players and will struggle.
• Criticality – If it isn’t clear whether your solution is a “need-to-have” or “nice-to-have” you’ll quickly find out. Customers will only open their wallets to vendors that help them drive the top line, reduce the bottom line or have significant strategic importance. That’s it. While this isn’t specific to SaaS companies, I thought I’d mention since *most* SaaS solutions aren’t deemed “mission critical” (e.g. CRM). Most customers are still skittish with moving their core systems and data to SaaS. In time, hopefully this will change. Companies like NetSuite are paving the way.
• Flexibility – Customers don’t want to be locked into software. Period. There was an interview a month or so back given by Lawson Software’s CEO, Harry Debes, where he predicted the downfall of SaaS in 2 years time and mentioned this point.
  

  It isn’t about locking people in. People lock themselves in! They see the software, like it, and want it. This is true of all professional software. The cost of moving is too high. As long as it’s working, people are happy to stick with one product.

  I disagree. This is traditional software thinking and it blows my mind. Those days are long gone. Application migration costs are lowering. Vendors who provide significant value, but don’t hold their customers hostage will succeed. The SaaS pay-as-you-go approach is ideal and resonates with many customers.

• Delivery – Customers want to get up and running quickly. SaaS deployment times are typically much lower, especially with single instance multi-tenant approaches. More often than not a customer’s needs will change over time so it’s important to get the software in the hands of the customer as soon as possible.
• Costs – SaaS companies are at a disadvantage here. They have high upfront costs with lower revenues. Customer breakeven is further away. So, if you are a SaaS company keep a close eye on your bottom line and remember cash is king. One benefit is that a SaaS company will have a more transparent and predictable recurring revenue stream. Use that advantage and plan accordingly.

In a future post, I’ll cover SaaS economics and how several public SaaS companies are faring.

I’ve been thinking about Virtualization Management for a while so I thought it would be a good time for a blog post, especially since my blogging pace has steadily declined to a crawl.

Virtualization has been all the buzz these days in the enterprise. Gartner expects the number of virtual machines to grow from less than 5 million in 2007 to about 660 million by 2011. What’s the big driver behind this growth? Well, there are a bunch of reasons, but mainly virtualization lets companies stretch their hardware resources and ride the backs of increasing processor power. The days of having one machine running on one piece of hardware are over.

With the proliferation of virtualization comes significant management challenges. Virtual environments increase configuration, monitoring and deployment complexity for administrators. Traditional software for managing standalone machines comes up short in a virtualized environment. Combating “virtual sprawl” has turned into an overhead nightmare. The big platform players, namely Microsoft, VMware and XenSource (acquired by Citrix for $500M in ‘07) offer some built-in management capabilities, but can’t cut it as environment diversity increases. There are functionality gaps across patch, discovery and inventory management. I’ve included a chart from virtualization news site, virtualization.info, to give you an idea of the numerous market segments within virtualization management.

Several startups recognize the big opportunity. Companies like LeoStream, VKernel, Embotics, Enomaly , ManageIQ, Ceedo and Vizioncore are a few that come to mind.

As complexity increases, enterprises large and small will need better tools to manage virtual environments across storage, applications and the desktop. The big platform players have taken notice and the race is on.

One of the most exciting developments within Business Intelligence (BI) software is the emergence of Software-as-a-Service (SaaS) or On-Demand solutions. More and more vendors are offering their software via an on-demand model. SaaS has touched virtually every category of BI, including but not limited to analytics, dashboards, data mining and data warehousing. Customers want shorter deployment times, lower implementation fees and flexible solutions. They are sick of broken promises and expensive software installations with unattainable ROIs. At the same time, vendors gain predictable cash flows, greater visibility into how customers are using the software and one platform to support. Of course, SaaS doesn’t come without its challenges. Overwhelmingly the biggest concerns are around data, namely security, integration and quality.

According to Gartner, the BI platform market will continue to grow at a solid pace during the next five years, with software revenue experiencing a compound annual growth rate of 9.5% through 2010. Gartner also estimates the worldwide total software revenue for SaaS within the enterprise software markets to surpass $5.1 billion in 2007 with strong growth through 2011 to $11.5 billion.

There has been a flurry of activity in the BI space over the last few months, including further consolidation and investment. We’ve seen two big-time acquisitions. In October, SAP announced they will acquire Business Objects for approximately $6.8 billion. Not to be outdone, IBM announced in November that they plan on acquiring Cognos for $5 billion. Investors are also starting to take notice of SaaS players. LucidEra raised $15 million, Oco $10 million, Seatab $9 million and the list goes on and on.

In 2008, we will continue to see the adoption of SaaS BI solutions in both the Enterprise and SMB markets. The SMB market is a natural target for SaaS solution providers due to their inherent cost and resource constraints. Vertical-focused solutions will also continue to thrive as domain-specific intelligence remains a key customer requirement.

I’ve highlighted a short list of vendors offering SaaS solutions.

LucidEra, Oco, Seatab Software, Dimensional Insight, OnDemandIQ, SharpAnalytics, Host Analytics, Qliktech , Visual Mining

If you are a customer using a SaaS BI solution or a SaaS BI provider, I’d love to hear about your experience thus far. Feel free to contact me.

Why isn’t B2B or Enterprise Software free and ad-supported? Historially, there has been a number of reasons. First, the number of end users is likely to be smaller within the enterprise. Second, enterprise software is much more costly. You need to build the product, hire sales people and support the product. We’ll explore this further in another post. Third, some of your enterprise customers might take issue with you monetizing employee behaviors and potentially distracting workers on their watch. Data ownership and privacy are issues as well.

Nevertheless, could it work? Of course, and I’m anxious to see someone try. One such company using this business model is Texas-based SpiceWorks. The company has network monitoring software. The software is completely free and ad-supported. They are targeting the SMB marketplace, which is a great place to start because it’s a huge market and price sensitive. Last count, they have around 120,000 users. It’s no surprise the heavyweights are experimenting with this model as well. Microsoft has an ad-supported version of its Office Live service and Google the same with Google Apps.

All the arguments against why ad-supported software won’t work don’t hold up against the huge potential cost savings. Enterprise software is very expensive and typical large-scale contracts can cost millions (for a solution that probably doesn’t work, but that’s topic for another post). Consumers and enterprises are also more comfortable with online advertising nowadays. The freemium model is an obvious choice to start with. The enterprise is ripe is for innovation and new business models are just the starting point.

I’d love to hear thoughts on this topic and other companies experimenting with similar business models in the Enterprise Software arena. Feel free to contact me with ideas and feedback.

This is an introductory post on electronic signature or e-signature software. I’d like to preface this post by saying that I have not spoken to many entrepreneurs in this space, and would be happy to include comments/interviews for a follow-up post concerning business models, market challenges, industry-specific solutions and a detailed technology review.

Let’s start with a brief history. In 2000, the ESIGN (Electronic Signatures in Global and National Commerce Act) legislation was passed. This legislation essentially gave legal recognition to e-signatures and online contracts. Adoption was slow going for a few years following the legislation probably due to the required paradigm shift in consumer behavior and immaturity of technology.

Fast forward to today. Adoption has been growing steadily and is rapidly approaching a tipping point. EchoSign, a leading vendor in the space, boasts 200 enterprise customers and over 80,000 users of their software. DocuSign also said it has processed more than three million online signatures since it was founded four years ago and is on track for transactions to increase 400% this year.

That being said, there still is plenty of room for growth. The market is relatively fragmented with no clear leader. Opportunities exist for pure platform plays and vertical-niche solutions.

Most contracts today are negotiated via email (or some other communication mechanism) until both parties have agreed on the terms. Final execution almost always takes place when each party prints out a hardcopy, signs it and faxes it to the other party. The process is generally cumbersome and disorganized. With recent advances in web technologies (e.g. AJAX, Flash) low cost solutions can be deployed faster and cheaper than their predecessors. At the same time, the success of the sector will ultimately come down to return-on-investment (ROI) and convenience. Companies recognize ROI through increased efficiency leading to higher processing volumes and cost savings on a per unit basis.

A significant challenge for the e-signature market is still security and fraud prevention. Consumers and companies want to feel comfortable that ample measures are in place to prevent abuse, especially for high cost transactions such as closing on a new home. I’m not sure we’re there yet, but are definitely heading in the right direction with bundling of audit trails, authentication and encryption.

I’ve listed a few e-signature companies below and would love to hear from entrepreneurs in the space, e-signature software users and any others folks that I have missed.

DocuSign, EchoSign, Topaz Systems, Interlink Electronics, Sertifi, Silanis, Encomia, eSign Systems, ARX, CIC

Google announced a few days ago that they acquired Postini for $625 million in cash. Positini offers communications security as a hosted service (e.g. email, instant messaging). They have over ten million users across 35,000 businesses and block over a billion spam messages per day.

Postini was a likely 2007 IPO candidate so the acquisition was a bit unexpected (even with their partnership with Google). More importantly, it set the foundation for Google to battle Microsoft for corporate email. Google has Gmail for web-based email and now has Postini to address spam. They are also probably working on a rich internet application (RIA) version to overtake Outlook. They spent a lot of money on the acquisition demonstrating its importance to Google’s strategy.

I’ve listed below relevant Google acquisitions over the last several years. As you can see, email is only the beginning. They are coming for the entire enterprise.

Postini – Communications Security ($625m)
GrandCentral – VOIP ($45m)
Zenter – Presentation Software
GreenBorder Technologies – Desktop enterprise security
Marratech – Videoconferencing
Tonic Systems – Presentation
Xunlei – Network File Sharing
JotSpot – Website apps (wikis)
Upstartle – Word Processing (Writely)
Reqwireless – Web browser and mobile email
2Web Technologies – Web-based Spreadsheets
Neotonic Software – CRM

For this post, I thought I’d cover one of the biggest headaches in corporate IT environments today – data. Data is the lifeblood of software products and services. Without consistent, reliable data applications are useless. I’m sure most of you have heard the saying “Garbage In Garbage Out”. Data is often over-looked because it’s “not sexy” and considered tedious or boring.

For a typical enterprise, the data lifecycle includes:

1) Sourcing the data

Who provides you with data? Do you manually enter it? Do you pay for feeds through data providers? Bloomberg is an example of a market data provider for the Financial Services industry. What are the SLAs (service level agreements) around receiving your data? What will happen when the data you require doesn’t arrive in time? Do you have processes in place to handle incorrect data?

2) Cleansing/Transforming the data

Chances are you need to “cleanse” the data. Typically, this is required to store the data in your systems and can include reconciliation, validation and transformation.

3) Distributing the data

Who are the end users of the data? How will they access the data? Will it be via third-party applications (e.g. reporting system)? Will the data be published to other constituents throughout your organization? What happens when there are disagreements on interpretations of the data? Is there a clear definition of the data your are distributing?

4) Maintaining the data

Now that you have “clean” data, how do you keep it that way? How do you prevent “data decay”? This is a tough problem to solve. Maintaining high quality requires significant effort and people, as well as, accountability.

Why am I talking about data? For two reasons. First, maintaining accurate data is a problem that almost all organizations struggle with, in one form or another. Secondly, I’m hoping to spark discussion and debate around innovation in this area. What can we do better? Can we use some newer web technologies to address some of these issues? Comments/ideas?