NEW YORK – Ross Cockrell, general partner at Austin Ventures (AV), said Web services is the closest thing we have to a new new thing these days. The big question is whether the communications advances proposed by Web services companies will be “tectonic or incremental.”
The foundling idea of Web services still exists as several sets of programming standards and protocols. Ideally, one of these standards will emerge as a platform across which computers will communicate with each other and automatically execute processes.
In the venture space, the current action unfolds in the competition to create the basic infrastructure and development tools for these applications. While some venture capitalists avoid the space entirely, this initiative does have supporters.
“The largest software company on the planet has repositioned itself around this idea,” Cockrell said. Microsoft Corp. labeled their effort “.net,” while Sun Microsystems Inc. added their Sun ONE program. Oracle Corp., IBM Corp., BEA Systems Inc. and others have also weighed in. The big boys want the technology to run on their architecture.
Raising a start-up in that environment is like catching a tiger by the tail. The big companies give venture efforts legitimacy, but their interest also brings elements of risk.
“When any start-up gets in the space, you have to ask yourself the Microsoft question,” said Giri Sekhar, principal at FA Technology Ventures. To some extent, the destiny of the start-up is not entirely in its own hands; Microsoft can wipe it out with a simple announcement.
However, this may be the last interesting Internet play.
“You want to be the arms dealers to the people who require the Internet as part of their business,” said John Halvey, partner at Milbank, Tweed, Hadley & McCloy LLP. “Notwithstanding the technology downturn, it’s not like the Internet is going away.”
A recent white paper from start-up Grand Central Networks Inc. called the sector the third wave of Internet development. First, email connected people, then the Web brought information into the equation. And now, Web services will connect applications and processes.
The paper points out that the idea has not been evangelized by dotcoms but by the monoliths of the computer industry. They’re betting that completely different applications will be able to interact seamlessly all the time.
For example, your PDA will schedule a tee time for you, squeeze it into your calendar and email your foursome. A customer order will trigger an entire chain of processes including legacy applications.
Ray Rothrock, managing general partner of Venrock Associates, said his firm will soon host a seminar for its portfolio companies to cover the subject and will help them orient their businesses to take advantage of any changes.
Cockrell said AV has placed small bets on a couple companies, including Perceptant. The company develops applications on the .net development platform, focusing on the financial services vertical. He thinks many of these companies will focus on particular verticals.
He said that many VCs call this stuff “technology in search of a problem.” Today, fewer investors want to fund the noble quest of better, faster, cheaper. VCs want to fund companies that solve a problem specific enough that it will generate revenue – today.
Sekhar said, “I haven’t been thinking about [infrastructure] as a blanket group lately.” FA Tech has been more interested in investments with a clear proposition for return.
Rothrock expects revenue to begin trickling into these companies in 2002, but he doesn’t expect roaring business until the following year. Cockrell said it might even be 2004 before the sector moves to the mainstream.
However, the VC game places long wagers, and the companies quietly getting founded today should not expect legitimacy for a few years anyway. Web services companies have one distinct advantage over other start-ups: Very few of them got funded before 2001. So, at least their valuations and capitalization schemes have been more inline with current paradigms.
The Web services industry will have to answer several questions as it develops, such as how the major software companies will leave the door open for start-ups to enter the space. Applications may need to investigate new revenue models. To some extent, the competition between the major software companies is a handicap, but theoretically this technology allows programs written in every language on every system to interact.
Mark Patton, vice president at Mellon Ventures Inc., has invested in other infrastructure plays, but personally not Web services. Generally, he said infrastructure investors favor companies with compelling proprietary technology that addresses mission critical business functions.
“Everybody has felt the slowdown [in IT spending],” he said. “Certain sectors have held up better and are better poised for the rebound.” For example, he thinks customers have always considered data recovery and security as priorities, but the recent troubles in Manhattan’s financial district following terrorist attacks last month may have reinforced that need.
IT managers saw examples of companies who had protected their data to various degrees. Following Sept. 11, some companies immediately went back to work, such as the New York Board of Trade which had a duplicate exchange in Queens, N.Y. On the contrary, the Bank of New York could not tell its customers their account information for a full week.
This incident at the World Trade Center may have further exacerbated IT spending. “With Boeing laying off 30,000 people, how much do you think they want to spend on IT,” Cockrell said.
However, with supporters like Microsoft and with fortunate timing, this may end up as the new new thing. But with down rounds still outpacing initial public offerings, nobody wants to write a sensational bestseller about anything just yet.