So, just how has the global economic contraction affected technology entrepreneurs and innovators financially? More precisely, what affect has it had on the ability of those same entrepreneurs to get funding? You may find the answer both predictable and surprising at the same time. For this post, we narrowed the analysis to funding by both VC and PE firms of software product companies in the Medical, Telecom (Mobile inclusive), Consumer and Enterprise domains. We defined Consumer as Gaming, eTailing, Media and Entertainment, Travel and Hospitality, Social Media, Education and Training. For Enterprise, we focused mainly on BI, Logistics, Fraud Detection, Lending Management, Payment Processing and Wealth Investment products. The majority of funded product companies are headquartered in the US. We used a number of data sources, both paid and freely available on the Web.
Alright… so what was predictable? One point is that the actual dollar amount of the investments in individual software product companies shrank. This becomes apparent when you categorize the investment amounts. Looking at the week of June 6-12, 2008, 53% of the companies funded in the domains mentioned above received less than $10M. Fast forward to January 9-15, 2009, and 82% of software product companies received less than $10M. Similarly, 13% of software product companies received $20M in funding in the same June 2008 week, while in January the number was only 6%. In fact, a full 45% of the January investments in the below $10M category received a relatively paltry $5M or less. The take-away: software product start-ups are getting less money from investors in early 2009 than they were in the summer of 2008. Predictable.
Now, let’s look at what was somewhat surprising: that there are software product start-ups getting funding at all in January 2009! Given the economic contraction, you might think that the VC and PE crowd, or at least some of them, would sit things out for a bit. Not so. In fact, the total invested in the product companies mentioned above was about $238M in the earlier June 2008 period (before the worst of the financial contraction), and it jumped to nearly $256M in the January 9-15, 2009 period.
From January 9-15, 2009, 82% of the thirty-three software product start-ups analyzed received up to $10M each; 12% received between $10-$20M each; and6% saw investments greater than $20M. That is thirty-three total companies. Compare that to the earlier June period reviewed (before the worst of the world economic meltdown) when twenty-six companies were funded the week of June 6-12.
In fact, the actual volume of companies funded weekly in the Telecom, Medical, Consumer and Enterprise software product domains stayed fairly constant over the nine month period from June 2008 – January 2009, with only a few blips. The week of June 6-12 saw twenty-six companies receive funding. The week of September 5-11 saw only fourteen companies get funding, while the number jumped to twenty companies during October 3-9. The second week of November saw forty companies receive funding! Even the second week of December logged twenty-eight company fundings. There were a total of thirty-three separately funded companies during the January 9-15 week. The data for those weeks looks like this:
- From January 9-15, 2009, 82% of the thirty-three companies analyzed in the above-mentioned software product domains received up to $10M each; 12% received between $10-$20M each; and 6% saw investments greater than $20M.
- From June 6-12, 2008, 53% of the companies analyzed received up to $10M each; 34% received between $10M-$20M; and 13% received greater than $20M.
- From October 3-9, 2008, 67% of the companies analyzed received $10M each; 16% received $10M-$20M each; and 17% received more than $20M.
What does it all mean? One explanation lies in the kinds of companies getting money. Software product start-ups (i.e., companies that are building products, either license-based or on-demand, linked to revenue) are getting money because they are focused on generating revenue, not reducing costs. While reducing costs in today’s economic climate is important, driving top line revenue is critical. We’ll continue to track funding in the weeks to come and report back on related trends.
If you’d like to know more about the software product start-ups profiled, you can visit their websites. These companies include Rightscale, Kosmix, Mobicious, Pelikan, Logictree, Jacknyfe, Nexeon Medical Systems, Savings.com, Digini, Nimsoft and Miserware.
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