2005 Outlook: Software –

For more than a quarter of century, Gerry Langeler has started and grown tech companies. He was co-founder of the EDA software company Mentor Graphics Corp., and he has served as a board member for a range of startups, such as enterprise software developers, wireless communications providers, retailers and medical device makers. A general partner at OVP Venture Partners in Portland, Ore., Langeler says software investors will need to keep their eye on lots of issues this year, from outsourcing development to Canada to corporate spending (or lack thereof) for security.

Q First, take a look back at 2004. What happened in software?

A It was a return to normal.

What do you mean?

Back in 1999, any kind of software was getting done. Then it became a pariah in 2000 and 2001. Hardly any deals were getting done. But it’s coming back in multiple markets.

So what’s going to be the major software trend?

A I don’t see one major trend. But there are a few areas of interest, such as bioinformatics, Linux and security.

None of these are new. In fact, you had a bioinformatics company in your portfolio (Rosetta Inpharmatics, which was acquired by Merck). What’s happening in this sector?

There’s a movement of biotech coming out of chemistry and going into the computer. Gene research has developed tons of data. The amount makes your head spin. We need software to analyze all this data.

Can you make money on a bioinformatics deal?

The model is more like software, rather than biotech. We’re not going to be putting $100 million into a bioinformatics company. There’s a capital efficiency in bioinformatics, making it an attractive buy. Invest in it like software and have the impact of a biotech company.

What about Linux? Hearing you mention that area is funny because I can’t imagine there’s a lot of money to be made there.

True, the jury is still out on the question of whether we’ll be able to make money on it. For Linux, you’re dealing with open source software, and the problem is getting people to pay for it. We’re looking at backing a company now that we think will be able to get consumers to pay for the software.

In security, where will the focus be?

The focus has been on Windows. We haven’t seen much done with Linux security. It’s not that Linux is more secure, because it isn’t, but a lot of people just haven’t found Linux security interesting enough to go after.

What else should we look for in 2005?

Canada. When it comes to outsourcing, India is talked about as is the Philippines and other Asian countries. But Canada is looking interesting. It has the same time zone, for one thing. And the cost of software engineering, though not as low as it is in India, is notably less in Canada than here. It will be interesting to see if Canada, especially Vancouver, emerges as an alternative for software development.